<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-10252
---------------------
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE
(State or other jurisdiction of 59-2101668
incorporation or organization) (I.R.S. Employer Identification No.)
865 SW 78TH AVENUE, SUITE 100,
PLANTATION, FLORIDA 33324
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(954) 233-8746
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 24,
1999 was approximately $48,400,000.
As of September 24, 1999, the Company had outstanding 75,400,430 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Amendment No. 2 to Registration Statement on Form S-3, filed on July 16,
1999 (File No. 333-75749).
Proxy Statement on Form DEF 14A, No. 99642501, dated June 4, 1999.
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<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation and Employment Agreements............ 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 32
</TABLE>
i
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
22
<PAGE> 4
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) THE FOLLOWING IS A LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL
REPORT.
1. All financial statements See Index to Consolidated Financial
Statements
2. Exhibits
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(i) Plan of Merger between Florida Immunological Institute, Inc. and
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to the
Company's registration statement on Form S-2, dated October 24, 1986, as
amended File No. 33-9714 ("1986 Form S-2"), Part II, Item 16, 2.1)
(ii) Articles of Merger of Florida Immunological Institute into
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to
1986 Form S-2, Part II, Item 16, 2.2)
(3) (i) Articles of Incorporation and By-Laws (incorporated by reference to
the Company's (ii) Amended Certificate of Incorporation (incorporated by
reference to 1986 Form S-2, Part II, Item 16, 4.2)
(4) Instruments defining the rights of security holders, including
indentures
(i) Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part II, Item 16, 4.4)
(ii) Specimen Certificate for Unit (Series A Preferred Stock and Class
A Warrant) (incorporated by reference to 1986 Form S-2, Part II, Item 15,
4.5)
(iii) Omitted
(iv) Omitted
(v) Omitted
(vi) Omitted
(vii) Omitted
(viii) Form of three years 8.5% Convertible Subordinated Debenture
(incorporated by reference to the Company's Current Report on Form 8-K
dated November 17, 1993)
(ix) Form of Stock Option Agreement dated November 19, 1993, issued to
Messrs. Dennis W. Healey and Peter D. Fischbein (incorporated by reference
to the Company's Current Report on Form 8-K dated November 17, 1993)
(x) 1995 Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8 filed June 9, 1995)
(xi) Certificate of Designation of Series B Preferred Stock
(incorporated by reference to the Company's Current Report on Form 8-K
dated June 7, 1996)
(10) Material contracts
(i) Research Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, File No. 2-89390, dated February 10, 1984
("Medicore's S-1"), Part II, Item 16(a) (10) (xxxiii))
(ii) License Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, Part II, Item 16 (a) (10) (xxxiv))
33
<PAGE> 5
(iii) Omitted
(iv) Royalty Agreement between the Company and Medicore, Inc. dated
November 7, 1986 (incorporated by reference to the November 1986 Form 8-K,
Item 7(c)(i))
(v) Amendment to Royalty Agreement between the Company and Medicore,
Inc. dated November 21, 1989 (incorporated by reference to the Company's
Current Report on Form 8-K dated December 6, 1989, Item 7(c) (i))
(vi) Promissory Note from the Company to Medicore, Inc. dated August
6, 1991 (incorporated by reference to the Company's 1991 Form 10-K, Part
IV, Item 10(a) (10) (xx))
(vii) Loan Agreement between the Company and Medicore, Inc. dated
January 31, 1991 (incorporated by reference to the Company's Current Report
of Form 8-K dated February 26, 1991, Item 79c) (ii))
(viii) Amendment to Loan Agreement between the Company and Medicore,
Inc. dated August 6, 1991 (incorporated by reference to the Company's 1991
Form 10-K, Part IV, Item 14(a) (10) (xxi))
(ix) Florida Real Estate Mortgage and Security Agreement from the
Company to Medicore, Inc. dated August 6, 1991 (incorporated by reference
to the Company's 1991 Form 10-K, Part IV, Item 14(a) (10) (xxii))
(x) Omitted
(xi) Omitted
(xii) Promissory Note to Equitable Bank dated August 2, 1991
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the second quarter ended June 30, 1991 ("June, 1991 Form 10-Q"), Part
II, Item 6(a) (28) (i))
(xiii) Mortgage and Security Agreement issued to the Equitable Bank
dated August 2, 1991 (incorporated by reference to the Company's June, 1991
Form 10-Q, Part II, Item 6(a) (28) (ii))
(xiv) Acquisition Agreement between the Company and Medicore, Inc.
dated August 2, 1991 (incorporated by reference to the Company's 1991 Form
10-K, Part II, Item 14(a) (10) (xxiii))
(xv) Lease between the Company and Medicore, Inc. dated December 8,
1992 (incorporated by reference to the Company's Current Report on Form
8-K, dated January 21, 1993 ("January 1993 Form 8-K"), Item 7(c) (10) (i))
(xvi) Addendum to Lease between the Company and Medicore, Inc. dated
January 15, 1993 (incorporated by reference to the Company's January 1993
Form 8-K, Item 7(c) (10) (ii))
(xvii) Agreement for Sale of Stock between the Company and Cytoferon
Corp. dated February 5, 1993 (incorporated by reference to the Company's
Current Report on Form 8-K dated February 11, 1993 Item 7(c) (28))
(xviii) Addendum to Agreement for Sale of Stock between the Company
and Cytoferon Corp. dated May 4, 1993 (incorporated by reference to the
Company's Current Report on Form 8-K dated May 5, 1993, Item 7(c) (28) (i))
(xix) Amendment No. 2 to the Royalty Agreement between the Company and
Medicore, Inc. dated May 11, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a) (10) (xix))
(xx) Note and Mortgage Modification Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xx))
34
<PAGE> 6
(xxi) Amendment No. 2 to the Loan Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxi))
(xxii) Amendment to Acquisition Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxii))
(xxiii) Marketing and Management Services Agreement between the
Company and Cytoferon Corp. dated August 18, 1993 (incorporated by
reference to the Company's June 30, 1993 Form 10-K, Part IV, Item
14(a)(10)(xxiii))
(xxiv) Agreement for Sale of Stock between Cytoferon and the Company
dated November 19, 1993 (incorporated by reference to the Company's June
30, 1994 Form 10-K, Part IV, Item 14(a)(10)(xxiv))
(xxv) Employment Agreement between Gerald Smith and the Company dated
November 19, 1993 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxv)) as amended by modified Employment
Agreement dated December 15, 1994 (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxv))
(xxvi) Common Stock Purchase Warrant Agreement between Northlea
Partners Ltd. and the Company dated January 6, 1994 (incorporated by
reference to the Company's June 30, 1994 Form 10-K, Part IV, Item
14(a)(10)(xxvi))
(xxvii) Management Consulting Agreement between the Company, Medvest,
Inc. and Dr. John Abeles dated January 6, 1994 (incorporated by reference
to the Company's Current Report on Form 8-K, dated November 17, 1993)
(xxviii) Employment Agreement between Dennis W. Healey and the Company
dated April 8, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part IV, Item 14(a)(10) (xxvii) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 SB-2, Part II, Item 27(10)(xxvii))
(xxix) Promissory Note between the Company and Gerald Smith dated
April 18, 1994 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxviii))
(xxx) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part V, Item 14(a)(10) (xxix)) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 Form SB-2, Part II, Item 27(10)(xxix))
(xxxi) Placement Agent Agreement and Common Stock Purchase Warrant
issued to Laidlaw Equities, Inc. and designees (incorporated by reference
to the Company's 1995 Form SB-2, Part II, Item 27(10)(xxxi))
(xxxii) Amendment No. 1 to Agreement for Sale of Stock with Cytoferon
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxii))
(xxxiii) Modified Sale of Stock and Stock Option Agreement with Peter
D. Fischbein incorporated by reference to the Company's 1995 Form SB-2,
Part II, Item 27(10)(xxxiii))
(xxxiv) Agreement with Moty Hermon (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxxiv))
(xxxv) Agreement with University of Nebraska-Medical Center
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxv))
(xxxvi) License and Manufacturing Agreement with Common Services
Agency (incorporated by reference to the Company's 1995 Form SB-2, Part II,
Item 27(10)(xxxvi))
35
<PAGE> 7
(xxxvii) Agreed Motion for Consent Final Order and Settlement
Agreement dated August 29, 1995 (incorporated by reference to the Company's
June 30, 1995 Form 10-KSB)
(xxxviii) Agreement and Plan of Reorganization dated November 8, 1995
and Amendment thereto (incorporated by reference to the Company's
Post-Effective Amendment No. 1 to Registration Statement on Form SB-2)
(xxxix) Securities Purchase Agreement dated June 7, 1996 (incorporated
by references to the Company's current report on Form 8-K dated June 7,
1996).
(xl) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1996 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996)
(xli) Stock Option Agreement between the Company and Fred D. Hirt
dated August 2, 1996 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996)
(xlii) Form of Private Securities Subscription Agreement dated
November 27, 1996 and related Registration Rights Agreement and Common
Stock Purchase Warrant (incorporated by reference to the Company's Current
Report on Form 8-K dated February 14, 1997)
(xliii) Private Securities Subscription Agreement dated February 3,1
997 and related Regulation Rights Agreement, Common Stock Purchase Warrant
and related agreements (incorporated by reference to the Company's Current
Report on Form 8-K dated February 14, 1997)
(xliv) Securities Purchase Agreement dated as of December 31, 1996 and
related Registration Rights Agreement (incorporated by reference to the
Company's Current Report on Form 8-K dated March 6, 1997)
(xlv) Employment Agreement between Gerald Smith and the Company dated
March 1, 1997 (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997)
(xlvi) Employment Agreement between Dennis W. Healey and the Company
dated March 1, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(xlvii) Employment Agreement between Robert C. Rech and the Company
dated May 19, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(xlviii) 11 month 10% Promissory Note dated July 1, 1997 (incorporated
by reference to the Company's Current Report on Form 8-K dated August 28,
1997)
(xlix) Employment Agreement between Robert H. Zeiger and the Company
dated August 1, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(l) Certificate of Designations, Preferences and Rights of the Series
F Convertible Preferred Shares (incorporated by reference to the Company's
Current Report on Form 8-K dated August 28, 1997)
(li) Certificate of Designations, Preferences and Rights of 10%
Cumulative Convertible Preferred Stock, Series G (incorporated by reference
to the Company's Current Report on Form 8-K dated August 28, 1997)
(lii) Series F Convertible Preferred Stock Exchange Agreement, dated
July 23, 1997 (incorporated by reference to the Company's Current Report on
Form 8-K dated August 28, 1997)
(liii) Series G Convertible Preferred Stock Exchange Agreement, dated
August 27, 1997 (incorporated by reference to the Company's Current Report
on Form 8-K dated August 28, 1997)
36
<PAGE> 8
(liv) 10% Promissory Note to Clearwater Fund IV, Ltd. (incorporated by
reference to the Company's current Report on Form 8-K dated September 22,
1997, Item 7 (c)1)
(lv) Omitted.
(lvi) Series H Convertible Preferred Stock, Form of Subscription
Agreement dated February 17, 1998 and related Registration Agreement and
Common Stock Purchase Warrants (incorporated by reference to the Company's
Registration Statement on Form S-3 dated April 17, 1998)
(lvii) Series I Convertible Preferred Stock, Form of Subscription
Agreement dated April 2, 1998 and related Registration Rights Agreement and
Common Stock Purchase Warrants (incorporated by reference to the Company's
Registration Statement on Form S-3 dated April 17, 1998)
(lviii) Cooperation and Supply Agreement between the Company, Viragen
Deutschland GmbH and German Red Cross dated March 19, 1998 (incorporated by
reference to the Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998, except for related exhibits filed herein) (Certain portions
of this exhibit have been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission)
(lix) Buffycoat Supply Agreement between America's Blood Centers and
the Company dated July 15, 1998 (incorporated by reference to the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998) (Certain
portions of this exhibit have been redacted pursuant to a Confidentiality
Request submitted to the Securities and Exchange Commission)
(lx) Agreement between the Company and the American Red Cross dated
August 18, 1998 (incorporated by reference to the Company's Annual Report
on Form 10-K/A for the year ended June 30, 1998, except for related
exhibits filed herein) (Certain portions of this exhibit have been redacted
pursuant to a Confidentiality Request submitted to the Securities and
Exchange Commission)
(lxi) Strategic Alliance Agreement between the Company and
Inflammatics, Inc. and Inflammatics Inc. Series A Convertible Preferred
Stock Purchase Agreement (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998)
(lxii) Common Stock Private Equity Line Subscription Agreement,
Registration Rights Agreement, Private Placement Agreement, Placement Agent
Warrant and Investor Warrant dated September 22, 1998 (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
(lxiii) Gerald Smith Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxiv) Gerald Smith Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxv) Dennis W. Healey Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxvi) Dennis W. Healey Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxvii) Southern Health SDN. BHD Option to Purchase Master License
dated March 23, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998). (Certain portions
of this exhibit have been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission).
37
<PAGE> 9
(lxviii) Placement Agreement, Placement Agent Warrant and Investor
Warrant dated September 22, 1998 (incorporated by reference to Viragen's
Annual Report on Form 10-K for the year ended June 30, 1998)
(lxiv) Purchase Agreement between the Registrant, the Isosceles Fund
and Cefeo Investments Limited dated March 17, 1999 (incorporated by
reference to Viragen's Amemdment No. 1 to Registration Statement on Form
S-3 filed on June 21, 1999, File No. 333-75749).
(lxv) 8% Redeemable Convertible Promissory Note to the Isosceles Fund
dated March 17, 1999. (incorporated by reference to Viragen's Form S-3
registration statement filed April 6, 1999, File No. 333-75749).
(lxvi) 8% Redeemable Convertible Promissory Note to Cefeo Investments
Limited dated March 17, 1999. (incorporated by reference to Viragen's Form
S-3 registration statement filed April 6, 1999, File No. 333-75749).
(lxvii) Common Stock Purchase Warrant issued to the Isosceles Fund
dated March 17, 1999. (incorporated by reference to Viragen's Form S-3
registration statement filed April 6, 1999, File No. 333-75749).
(lxviii) Supply and Distribution Agreement between the Company and the
Adamjee Group of Companies dated November 16, 1998 (incorporated by
reference to the Viragen (Europe) Ltd. Annual Report on Form 10-K for the
year ended June 30, 1999).
(lxix) Employment Agreement between the Company and Gerald Smith dated
March 1, 1999 (incorporated by reference to Viragen's Annual Report on Form
10-K for the year ended June 30, 1999).
(lxx) Employment Agreement between the Company and Dennis W. Healey
dated March 1, 1999 (incorporated by reference to Viragen's Annual Report
on Form 10-K for the year ended June 30, 1999).
(lxxi) Memorandum of Agreement between the Isoceles Fund and the
Company dated March 17, 1999 (incorporated by reference to Viragen's Annual
Report on Form 10-K for the year ended June 30, 1999).
(lxxii) Letter of Intent between the Company and Drogson Healthcare
dated July 2, 1999 (incorporated by reference to the Viragen (Europe) Ltd.
Annual Report on Form 10-K for the year ended June 30, 1999).
(21) Subsidiaries of the registrant (incorporated by reference to
Viragen's Annual Report on Form 10-K for the year ended June 30,
1999).
(23) Consent of Independent Certified Public Accountants.
(27) Financial Data Schedule (for Securities and Exchange Commission use
only) (incorporated by reference to Viragen's Annual Report on Form
10-K for the year ended June 30, 1999).
(b) Reports on Form 8-K filed during the fourth quarter
None
38
<PAGE> 10
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 Officer
Dated: December 21, 1999
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
---- ----- ----
<S> <C> <C>
/s/ GERALD SMITH Chairman of the Board of Directors, December 21, 1999
- --------------------------------------------------- Principal Executive Officer and
Gerald Smith President
/s/ ROBERT H. ZEIGER Vice Chairman of the Board December 21, 1999
- ---------------------------------------------------
Robert H. Zeiger
/s/ CARL N. SINGER Director and Chairman of the December 21, 1999
- --------------------------------------------------- Executive Committee
Carl N. Singer
/s/ DENNIS W. HEALEY Executive Vice President, Treasurer, December 21, 1999
- --------------------------------------------------- Principal Financial Officer and
Dennis W. Healey Director
/s/ CHARLES J. SIMONS Director and Chairman of the Audit, December 21, 1999
- --------------------------------------------------- Finance and Compensation Committee
Charles J. Simons
/s/ PETER D. FISCHBEIN Director December 21, 1999
- ---------------------------------------------------
Peter D. Fischbein
/s/ SIDNEY DWORKIN Director December 21, 1999
- ---------------------------------------------------
Sidney Dworkin
/s/ ROBERT C. SALISBURY Director December 21, 1999
- ---------------------------------------------------
Robert C. Salisbury
/s/ JOSE I. ORTEGA Controller and Principal Accounting December 21, 1999
- --------------------------------------------------- Officer
Jose I. Ortega
</TABLE>
39
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FORM 10-K/A -- ITEM 8
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, 1999 and 1998....... F-3
Consolidated statements of operations -- Years ended June
30, 1999, 1998 and 1997................................... F-4
Consolidated statements of stockholders' equity - Years
ended June 30, 1999, 1998 and 1997........................ F-5
Consolidated statements of cash flows -- Years ended June30,
1999, 1998 and 1997....................................... F-8
Notes to consolidated financial statements.................. F-10
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
elated instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 12
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that Viragen Inc. and subsidiaries will continue as a going concern. As
discussed in Note A to the consolidated financial statements, the Company has
incurred recurring operating losses and has an accumulated deficit of
approximately $51 million at June 30, 1999. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 17, 1999
F-2
<PAGE> 13
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,055,587 $ 2,708,317
Marketable securities, available-for-sale................. -- 6,105,076
Prepaid expenses.......................................... 254,057 206,995
Other current assets...................................... 306,433 530,950
------------ ------------
Total Current Assets................................ 1,616,077 9,551,338
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements........................... 3,492,585 3,538,926
Equipment and furniture................................... 5,556,106 5,311,327
Construction in progress.................................. 309,431 48,655
------------ ------------
9,358,122 8,898,908
Less accumulated depreciation............................. (3,337,807) (2,744,827)
------------ ------------
6,020,315 6,154,081
INVESTMENT IN UNCONSOLIDATED COMPANY........................ 671,744 --
DEPOSITS AND OTHER ASSETS................................... 221,218 189,806
------------ ------------
$ 8,529,354 $ 15,895,225
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,132,323 $ 829,661
8% Convertible promissory notes........................... 1,929,877 --
Accrued expenses and other liabilities.................... 702,209 708,005
Current portion of long-term debt......................... 142,109 171,277
------------ ------------
Total Current Liabilities........................... 3,906,518 1,708,943
ROYALTIES PAYABLE........................................... 107,866 107,866
DEFERRED INCOME............................................. -- 200,000
LONG-TERM DEBT, less current portion........................ 231,107 280,094
MINORITY INTEREST........................................... 326,684 525,936
CONVERTIBLE SERIES H cumulative preferred stock, $1.00 par
value. Authorized 500 shares; issued and outstanding 500
shares at June 30, 1998................................... -- 5,146,851
CONVERTIBLE SERIES I cumulative preferred stock, $1.00 par
value. Authorized 200 shares; issued and outstanding 11
and 200 shares at June 30, 1999 and 1998, respectively.... 120,920 2,039,014
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative preferred stock, $1.00
par value
Authorized 375,000 shares; issued and outstanding 2,650
shares. Liquidation preference value: $10 per share,
aggregating $26,500.................................... 2,650 2,650
Common stock, $.01 par value. Authorized 75,000,000 shares;
issued 69,913,762 and 53,416,912 shares at June 30, 1999
and 1998, respectively, of which 845,277 and 606,277
shares are held as treasury stock at June 30, 1999 and
1998, respectively........................................ 699,135 534,168
Capital in excess of par value.............................. 55,353,205 45,686,143
Treasury stock, at cost..................................... (1,277,613) (996,541)
Retained deficit............................................ (50,521,028) (39,624,889)
Accumulated other comprehensive income...................... 46,752 284,990
Notes due from directors.................................... (466,842) --
------------ ------------
Total Stockholders' Equity.......................... 3,836,259 5,886,521
------------ ------------
$ 8,529,354 $ 15,895,225
============ ============
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-3
<PAGE> 14
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income
Interest and other income.......................... $ 374,064 $ 1,143,112 $ 1,403,610
------------ ------------ ------------
374,064 1,143,112 1,403,610
Cost and Expenses
Research and development costs..................... 5,152,748 4,222,332 2,360,416
Selling, general and administrative expenses....... 5,528,410 5,580,213 4,049,086
Equity in losses of unconsolidated company......... 757,256 -- --
Interest expense................................... 574,375 590,867 30,713
------------ ------------ ------------
12,012,789 10,393,412 6,440,215
------------ ------------ ------------
Loss before minority interest........................ (11,638,725) (9,250,300) (5,036,605)
Minority interest in loss of consolidated
subsidiaries....................................... 987,893 1,394,164 261,360
------------ ------------ ------------
NET LOSS........................................ (10,650,832) (7,856,136) (4,775,245)
Deduct required dividends on convertible preferred
stock, Series A.................................... 2,650 2,823 20,760
Deduct required dividends on convertible preferred
stock, Series B.................................... -- -- 4,441,676
Deduct required dividends on convertible preferred
stock, Series C.................................... -- -- 844,960
Deduct required dividends on convertible preferred
stock, Series D.................................... -- 169,221 3,619,407
Deduct required dividends on convertible preferred
stock, Series E.................................... -- 127,918 971,936
Deduct required dividends on convertible preferred
stock, Series F.................................... -- 524,416 --
Deduct required dividends on convertible preferred
stock, Series G.................................... -- 708,139 --
Deduct required dividends on convertible preferred
stock, Series H.................................... 676,498 733,681 --
Deduct required dividends on convertible preferred
stock, Series I.................................... 322,774 232,154 --
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK.................... $(11,652,754) $(10,354,488) $(14,673,984)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE, after
deduction for required dividends on convertible
preferred stock.................................... $ (0.19) $ (0.21) $ (0.37)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES..... 60,109,133 50,502,503 39,134,631
============ ============ ============
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-4
<PAGE> 15
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK PAR VALUE
--------- --------- --------- --------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996........... $2,650 $15,000 $ -- $ -- $ -- $ -- $378,959 $38,618,391
Exercise of common stock options
and warrants..................... 5,183 378,654
Exercise of Viragen (Europe) Ltd.
warrants......................... 697,464
Exercise of Viragen U.S.A., Inc.
options.......................... (4,128)
Compensation expense on common
stock options.................... 450,300
Additional issuance costs for
series B preferred stock......... (24,996)
Sale of series C preferred stock,
net of issuance costs............ 5,000 4,735,923
Sale of series D preferred stock,
net of issuance costs............ 15,000 14,035,349
Sale of series E preferred stock,
net of issuance costs............ 5,000 4,676,744
Dividends on preferred stock, paid
in common stock.................. 235 35,039
Forgiveness of officer note.......
Loan to Director..................
Interest income on director
loan.............................
Cash dividends on preferred
stock............................
Conversion of series B preferred
stock............................ (7,555) 42,163 (34,608)
Conversion of series C preferred
stock............................ (4,026) 11,636 (2,548,739)
Conversion of series D preferred
stock............................ (3,800) 24,425 (20,625)
Exercise of cash-out option on
conversion of series D preferred
stock............................ (1,000) (999,000)
Purchase of treasury stock........
Issuance of treasury stock for
settlement of litigation.........
Foreign currency translation
adjustment.......................
Unrealized loss on marketable
securities, available-for-sale...
Net loss..........................
------ ------- ------- ------- ------ ------ -------- -----------
Balance at June 30, 1997.......... $2,650 $ 7,445 $ 974 $10,200 $5,000 $ -- $462,601 $59,995,768
<CAPTION>
ACCUMULATED
OTHER NOTES DUE
TREASURY RETAINED COMPREHENSIVE FROM
STOCK DEFICIT INCOME DIRECTORS
--------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Balance at July 1, 1996........... $ -- $(21,782,872) $ 43,057 $ --
Exercise of common stock options
and warrants..................... (12,500)
Exercise of Viragen (Europe) Ltd.
warrants.........................
Exercise of Viragen U.S.A., Inc.
options..........................
Compensation expense on common
stock options....................
Additional issuance costs for
series B preferred stock.........
Sale of series C preferred stock,
net of issuance costs............
Sale of series D preferred stock,
net of issuance costs............
Sale of series E preferred stock,
net of issuance costs............
Dividends on preferred stock, paid
in common stock.................. (37,086)
Forgiveness of officer note....... 12,500
Loan to Director.................. (100,000)
Interest income on director
loan............................. (1,417)
Cash dividends on preferred
stock............................ (1,095,257)
Conversion of series B preferred
stock............................
Conversion of series C preferred
stock............................
Conversion of series D preferred
stock............................
Exercise of cash-out option on
conversion of series D preferred
stock............................ (112,164)
Purchase of treasury stock........ (987,395)
Issuance of treasury stock for
settlement of litigation......... 288,245
Foreign currency translation
adjustment....................... 230,412
Unrealized loss on marketable
securities, available-for-sale... (10,612)
Net loss.......................... (4,775,245)
--------- ------------ -------- ---------
Balance at June 30, 1997.......... $(699,150) $(27,802,624) $262,857 $(101,417)
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-5
<PAGE> 16
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK PAR VALUE
--------- --------- --------- --------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997.......... $2,650 $ 7,445 $ 974 $10,200 $5,000 $ -- $462,601 $59,995,768
Exercise of common stock options
and warrants..................... 2,305 115,583
Compensation expense on stock
options and warrants............. 57,530
Cost of issuance of series H
preferred stock, net............. (374,520)
Cost of issuance of series I
preferred stock, net............. (159,689)
Exchange of series B preferred
stock for a promissory note...... (7,445) (7,437,555)
Purchase of treasury stock........
Conversion of series C preferred
stock............................ (974) 2,814 (554,881)
Conversion of series D preferred
stock............................ (2,250) 13,903 (11,653)
Conversion of series E preferred
stock............................ (1,000) 5,060 (4,060)
Exchange of series D preferred
stock for series F preferred
stock............................ (7,950) 7,950
Exchange of series E preferred
stock for series G preferred
stock............................ (4,000) (3,996,000)
Conversion of series F preferred
stock............................ (5,500) 43,377 (37,877)
Exercise of cash-out option on
conversion of series F preferred
stock............................ (2,450) (2,447,550)
Conversion of series G preferred
stock............................ 3,511 454,489
Cash dividends on preferred
stock............................
Dividends on preferred stock, paid
in common stock.................. 597 86,558
Accretion of series H and Series I
preferred stock..................
Redemption of series G preferred
stock............................
Interest income on director
loan.............................
Bad debt expense on director
loan.............................
Foreign currency translation
adjustment.......................
Unrealized gain on marketable
securities, available-for-sale...
Net loss..........................
------ ------- ------- ------- ------ ------ -------- -----------
Balance at June 30, 1998.......... $2,650 $ -- $ -- $ -- $ -- $ -- $534,168 $45,686,143
<CAPTION>
ACCUMULATED
OTHER NOTES DUE
TREASURY RETAINED COMPREHENSIVE FROM
STOCK DEFICIT INCOME DIRECTORS
--------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1997.......... $(699,150) $(27,802,624) $262,857 $(101,417)
Exercise of common stock options
and warrants.....................
Compensation expense on stock
options and warrants.............
Cost of issuance of series H
preferred stock, net.............
Cost of issuance of series I
preferred stock, net.............
Exchange of series B preferred
stock for a promissory note...... (2,247,748)
Purchase of treasury stock........ (297,391)
Conversion of series C preferred
stock............................
Conversion of series D preferred
stock............................
Conversion of series E preferred
stock............................
Exchange of series D preferred
stock for series F preferred
stock............................
Exchange of series E preferred
stock for series G preferred
stock............................
Conversion of series F preferred
stock............................
Exercise of cash-out option on
conversion of series F preferred
stock............................ (294,000)
Conversion of series G preferred
stock............................
Cash dividends on preferred
stock............................ (521,725)
Dividends on preferred stock, paid
in common stock.................. (91,732)
Accretion of series H and Series I
preferred stock.................. (185,865)
Redemption of series G preferred
stock............................ (625,059)
Interest income on director
loan............................. (8,500)
Bad debt expense on director
loan............................. 109,917
Foreign currency translation
adjustment....................... 13,612
Unrealized gain on marketable
securities, available-for-sale... 8,521
Net loss.......................... (7,856,136)
--------- ------------ -------- ---------
Balance at June 30, 1998.......... $(996,541) $(39,624,889) $284,990 $ --
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-6
<PAGE> 17
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL IN
STOCK, STOCK, STOCK, STOCK, STOCK, STOCK, COMMON EXCESS OF
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F STOCK PAR VALUE
--------- --------- --------- --------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998........ $2,650 $ -- $ -- $ -- $ -- $ -- $534,168 $45,686,143
Consulting fees paid with common
stock.......................... 250 12,250
Compensation expense on common
stock options and warrants..... 369,647
Exercise of commons stock
options and warrants........... 3,285 250,204
Sale of detachable warrants on
8% convertible promissory
notes.......................... 344,854
Cost of warrants issued to
finders on 8% convertible
promissory notes............... 24,078
Private placement of common
stock.......................... 27,500 1,347,500
Purchase of treasury stock......
Exercise of common stock
options........................ 11,600 592,900
Accrued interest income on
directors' notes...............
Capitalized cost of warrants
issued for investment in
unconsolidated company......... 329,000
Capital contribution to Viragen
(Europe) Ltd. ................. (788,641)
Common stock issued on
conversion of preferred stock,
series H....................... 82,556 4,917,444
Common stock issued on
conversion of preferred stock,
series I....................... 32,718 1,857,282
Dividend on preferred stock,
series A.......................
Accretion of series H and series
I preferred stock..............
Accretion paid in common
stock.......................... 7,058 410,544
Foreign currency translation
adjustment.....................
Unrealized gain on marketable
securities,
available-for-sale.............
Net loss........................
------ ------- ------- ------- ------ ------ -------- -----------
Balance at June 30, 1999........ $2,650 $ -- -$-...... $ -- $ -- $ -- $699,135 $55,353,205
====== ======= ======= ======= ====== ====== ======== ===========
<CAPTION>
ACCUMULATED
OTHER NOTES DUE
TREASURY RETAINED COMPREHENSIVE FROM
STOCK DEFICIT INCOME DIRECTORS
----------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1998........ $ (996,541) $(39,624,889) $284,990 $ --
Consulting fees paid with common
stock..........................
Compensation expense on common
stock options and warrants.....
Exercise of commons stock
options and warrants...........
Sale of detachable warrants on
8% convertible promissory
notes..........................
Cost of warrants issued to
finders on 8% convertible
promissory notes...............
Private placement of common
stock..........................
Purchase of treasury stock...... (281,072)
Exercise of common stock
options........................ (459,500)
Accrued interest income on
directors' notes............... (7,342)
Capitalized cost of warrants
issued for investment in
unconsolidated company.........
Capital contribution to Viragen
(Europe) Ltd. .................
Common stock issued on
conversion of preferred stock,
series H.......................
Common stock issued on
conversion of preferred stock,
series I.......................
Dividend on preferred stock,
series A....................... (2,650)
Accretion of series H and series
I preferred stock.............. (242,657)
Accretion paid in common
stock..........................
Foreign currency translation
adjustment..................... (240,329)
Unrealized gain on marketable
securities,
available-for-sale............. 2,091
Net loss........................ (10,650,832)
----------- ------------ -------- ---------
Balance at June 30, 1999........ $(1,277,613) $(50,521,028) $ 46,752 $(466,842)
=========== ============ ======== =========
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-7
<PAGE> 18
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss.................................................... $(10,650,832) $ (7,856,136) $ (4,775,245)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 635,692 506,934 281,920
Amortization of discount on 8% convertible promissory
notes................................................. 274,731 -- --
Issuance of treasury stock for expenses................. -- -- 288,245
Consulting fees paid with common stock.................. 12,500 -- --
Compensation expense on stock options................... 369,647 57,530 450,300
Officers and directors notes forgiven on stock
purchases............................................. -- -- 12,500
Minority interest in loss of subsidiary................. (987,893) (1,394,164) (261,360)
Accrued interest income on notes due from directors..... (7,342) (8,500) (1,417)
Bad debt expense........................................ 24,630 109,917 --
Increase (decrease) relating to operating activities from:
Prepaid expenses........................................ (37,566) 73,097 (149,804)
Other current assets.................................... 344,887 198,022 (501,277)
Investment in unconsolidated company.................... 757,256 -- --
Deposits and other assets............................... 215,977 19,705 (26,932)
Accounts payable........................................ 302,662 (601,550) 1,121,172
Accrued expenses and other liabilities.................. (9,783) 133,663 49,053
Deferred income......................................... (200,000) 200,000 --
------------ ------------ ------------
Net cash used in operating activities.............. (8,955,434) (8,561,482) (3,512,845)
INVESTING ACTIVITIES
Sale of marketable securities, available-for-sale......... 6,108,504 27,347,892 8,915,872
Purchase of marketable securities, available-for-sale..... -- (14,897,903) (27,468,100)
Investment in unconsolidated company...................... (1,100,000) -- --
Additions to property, plant and equipment, net........... (497,117) (1,622,817) (4,482,166)
------------ ------------ ------------
Net cash provided by (used in) investing
activities....................................... 4,511,387 10,827,172 (23,034,394)
FINANCING ACTIVITIES
Proceeds from sale of 8% convertible promissory notes,
net..................................................... 1,516,966 -- --
Proceeds from sale of detachable warrants with 8%
convertible promissory notes............................ 344,854 -- --
Proceeds from private placement........................... 1,375,000 -- --
Payments on long-term debt................................ (168,977) (43,374) (682,176)
Proceeds from long-term debt.............................. -- -- 166,000
Proceeds from sale of preferred stock series B, C, D and
E, net.................................................. -- -- 23,448,020
Proceeds from sale of preferred stock series H and I,
net..................................................... -- 6,465,791 --
Proceeds from exercise of options and warrants............ 253,489 117,888 371,337
Preferred dividends paid to preferred stock series A, B,
D,E, F and G............................................ -- (664,702) (914,764)
Payments on promissory note............................... -- (9,720,241) --
Refund of capital investment to preferred stock series C
investors............................................... -- (1,391,198) (1,702,971)
Exercise of cash-out option on conversion of preferred
stock series D.......................................... -- -- (1,111,556)
Exercise of cash-out option on conversion of preferred
stock series F.......................................... -- (2,744,000) --
Redemption of redeemable preferred stock series G......... -- (4,167,059) --
Purchase of treasury stock................................ (281,072) (297,391) (987,395)
Loan to director.......................................... -- -- (100,000)
Proceeds from exercise of subsidiaries' options and
warrants................................................ -- -- 1,254,574
------------ ------------ ------------
Net cash provided by (used in) financing
activities....................................... 3,040,260 (12,444,286) 19,741,069
Effect of exchange rate fluctuations on cash....... (248,943) 13,612 230,412
------------ ------------ ------------
Decrease in cash.......................................... (1,652,730) (10,164,984) (6,575,758)
Cash and cash equivalents at beginning of period.......... 2,708,317 12,873,301 19,449,059
------------ ------------ ------------
Cash and cash equivalents at end of period................ $ 1,055,587 $ 2,708,317 $ 12,873,301
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................... $ 299,644 $ 580,271 $ 31,172
Income taxes paid....................................... -- -- 13,840
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-8
<PAGE> 19
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
During the years ended June 30, 1999, 1998 and 1997, the Company had the
following non-cash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Preferred dividends paid in common stock.................... $ -- $ 91,732 $ 35,274
Accretion paid in common stock.............................. 417,602 -- --
Conversion of preferred stock into common shares............ 6,890,000 467,724 78,224
Conversion of preferred stock series B principal and accrued
dividends to a short-term note payable.................... -- 9,720,241 --
Modification of preferred stock series D terms into
preferred stock
series F.................................................. -- 7,950 --
Modification of preferred stock series E terms into
redeemable preferred stock series G....................... -- 4,000,000 --
Purchase of insurance with notes payable.................... 94,627 210,147 --
Issuance of treasury stock for expenses..................... -- -- 288,245
Sale of common stock with promissory notes.................. 604,500 -- --
Equipment acquired through capital leases................... 4,809 -- --
Contribution of intercompany balances as capital to Viragen
(Europe) Ltd. ............................................ (788,641) -- --
Capitalized cost of warrants issued for investment in
unconsolidated company.................................... 329,000 -- --
Cost of warrants issued to finders on 8% convertible
notes..................................................... 24,078 -- --
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-9
<PAGE> 20
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation: Viragen, Inc. and its subsidiaries
are engaged in the research, development and manufacture of immunological
products for commercial application. The consolidated financial statements
include the parent company and all subsidiaries, including those operating
outside the U.S. All significant transactions among our businesses have been
eliminated. We made certain reclassifications to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Costs related to this transaction include finders fees
and warrants issued. These costs are being amortized in proportion to the losses
incurred by Inflammatics as compared to our initial cash contribution to
Inflammatics.
In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, and asset valuation
allowances. We are also subject to risks and uncertainties that may cause actual
results to differ from estimated results including changes in the health care
environment, competition, foreign exchange and legislation.
During fiscal 1999 Viragen incurred a loss of $10,650,832 and had negative
operating cash flow of $8,955,434. As a result, our accumulated deficit
increased to $50,521,028. These operating results were caused by a lack of
regulatory approval for the sale of our products. Management has plans to
increase working capital by its efforts related to obtaining additional capital
funding. Viragen's ability to continue as a going concern is dependent on the
availability of additional capital funding, regulatory approval of our
pharmaceutical products, and adequate downsizing to operate at a reduced level
of expense. Management plans to continue to pursue available funding and adjust
operating expenses accordingly. The Company's financial statements have been
prepared assuming it will continue as a going concern and do not reflect any
costs or charges that could result from this uncertainty.
Cash and Cash Equivalents: Cash equivalents include demand deposits,
certificates of deposit and time deposits with maturity periods of three months
or less when purchased.
Marketable Securities, Available-for-Sale: Viragen invests in debt
securities, rated A or better, issued by the U.S. Treasury, other U.S.
government agencies and corporations. These investments are classified as
current assets, in accordance with ARB No. 43, at their fair market value based
upon published quotations. Amortized cost of the investment in marketable
securities, available-for-sale totaled $6,108,503 at June 30, 1998. Realized
gains and losses are computed based on the cost of securities sold using the
specific identification method.
Financial Instruments: The carrying amount of financial instruments
including cash and cash equivalents, marketable securities, and accounts payable
approximate fair value as of June 30, 1999. The Company's long-term unsecured
note with the Scottish Regional Development Authority approximates fair value as
it had been recently negotiated at June 30, 1997.
F-10
<PAGE> 21
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Current Assets: Other current assets consisted of the following at
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Notes receivable......................................... $171,123 $ 55,222
VAT tax refund receivable................................ 119,352 256,504
Other current assets..................................... 15,958 219,224
-------- --------
$306,433 $530,950
======== ========
</TABLE>
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. The estimated
useful lives used for financial reporting purposes are:
<TABLE>
<S> <C>
Building and improvements..................... 15-39 years
Equipment and furniture....................... 5-10 years
</TABLE>
Convertible Debt Issued with Stock Purchase Warrants: Viragen accounts for
convertible debt issued with stock purchase warrants in accordance with APB
14 -- "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants." At June 30, 1999, the $2,000,000 principal in convertible notes is
being off-set by $70,123 in unamortized discount from the issuance of detachable
warrants.
Accrued Expenses and Other Liabilities: Accrued expenses and other
liabilities consisted of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued salaries............................................ $ 24,317 $150,389
Accrued rent expense........................................ 122,213 97,163
Accrued accounting fees..................................... 114,940 80,000
Accrued legal fees.......................................... 36,077 77,243
Other accrued expenses...................................... 404,622 303,210
-------- --------
$702,209 $708,005
======== ========
</TABLE>
Deferred Income: Viragen had deferred the recognition of income from an
option fee until the period in which it is was earned.
Sale of Stock by Subsidiaries: Viragen accounts for sales of stock by its
subsidiaries as capital transactions for financial reporting purposes.
Foreign Currency Translation: For foreign operations, local currencies are
considered their functional currencies. Viragen translates assets and
liabilities to their U.S. dollar equivalents at rates in effect at the balance
sheet date and record translation adjustments in stockholders' equity. Statement
of operations accounts are translated at average rates for the period.
Transaction adjustments, which are not material, are recorded in results of
operations.
Research and Development Costs: Viragen accounts for research and
development costs in accordance with SFAS No. 2 -- "Accounting for Research and
Development Costs." Accordingly, all research and development costs are expensed
as incurred.
Stock Based Compensation: Viragen accounts for stock-based compensation
plans under the provisions of APB 25 -- "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense for stock option
grants where the exercise price equals or exceeds fair market value at date of
grant.
F-11
<PAGE> 22
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provided supplemental disclosures as required by the provisions of
SFAS 123 -- "Accounting for Stock-Based Compensation."
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 financial
accounting and tax basis of assets and liabilities.
Loss Per Common Share: Loss per common share has been computed based on the
weighted average number of shares outstanding during each period, in accordance
with SFAS 128 -- "Earnings per Common Share." The effect of convertible debt and
equity securities, warrants, and options are antidilutive. As a result, diluted
loss per share data does not include the assumed conversion of these instruments
and has been presented jointly with basic loss per share. Loss attributable to
common stock reflects adjustments for cumulative preferred dividends, as well as
embedded dividends arising from discounted conversion terms on convertible
preferred stocks and related warrants.
Embedded dividends included in loss attributable to common stock during
each fiscal year presented are:
<TABLE>
<CAPTION>
PREFERRED STOCK 1999 1998 1997
- --------------- -------- -------- ----------
<S> <C> <C> <C>
Series A...................................... $ -- $ -- $ --
Series B...................................... -- -- 3,683,731
Series C...................................... -- -- 844,960
Series D...................................... -- -- 3,292,683
Series E...................................... -- -- 882,353
Series F...................................... -- -- --
Series G...................................... -- -- --
Series H...................................... 510,731 586,830 --
Series I...................................... 245,884 193,140 --
</TABLE>
Comprehensive Loss. In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130 -- "Reporting Comprehensive Income." Viragen's SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The adoption of SFAS No. 130 had no impact
on Viragen's net loss or stockholders' equity. Viragen's comprehensive loss for
fiscal years 1999, 1998, and 1997 totaled $10,889,070, $7,834,003 and
$4,555,445, respectively.
Recent Pronouncements: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging
Activities" which is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement amends SFAS
No. 52 -- "Foreign Currency Translation", and supersedes SFAS No. 80 --
"Accounting for Future Contracts", No. 105 -- "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk", No. 107 -- "Disclosures about Fair Value of
Financial Instruments". Viragen plans to adopt SFAS No. 133 in fiscal 2000.
Management believes that the impact of SFAS No. 133 will not be significant
to Viragen.
NOTE B -- REDEEMABLE PREFERRED STOCK
Series G
In September 1997, Viragen concluded an exchange agreement whereby 4,000 of
the outstanding shares of the series E preferred stock were exchanged for a like
number of series G preferred shares. The terms of the series G preferred stock
provided that commencing in September 1997, the holder was limited to converting
F-12
<PAGE> 23
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
667 preferred shares, or $667,000 in principal, per month over a 6 month period.
The provisions further provided that we were required to redeem $667,000 per
month less the number of series G preferred shares converted during the
preceding calendar month. In addition, the holder was restricted from converting
into common stock if the market price of our common stock was less than $2.50,
subject to adjustment, at the date of the conversion notice. In consideration
for the restrictions on conversion, management agreed to increase the dividend
rate from 5% for the series E preferred stock to 10% for the series G preferred
stock.
The monthly redemption amount of the series G preferred stock was
calculated by dividing the number of shares to be redeemed by the preferential
conversion rate of 85%. As a result, the maximum aggregate redemption could have
totaled $4,705,882, if all 4,000 shares of series G preferred stock were
redeemed by the holder. This cash redemption amount would have been reduced to
account for conversions of the preferred shares during the redemption period.
All shares of series G preferred stock were redeemed for cash or converted into
common stock by February 28, 1998.
Series H and Series I
During the third and fourth fiscal quarters of 1998, Viragen closed $7
million of financing replacing a portion of the funds used to redeem previous
preferred stock issuances. In February 1998, we received net proceeds of
approximately $4,625,000 from the sale of 500 shares of series H convertible
preferred stock with an aggregate stated value of $5 million. In April 1998,
Viragen received net proceeds of approximately $1,840,000 from the sale of 200
shares of series I convertible preferred stock. We incorporated certain
restrictions as part of the series H and series I preferred stock designations
which, in the opinion of management, would facilitate a more orderly market
relative to the underlying shares of our common stock. The series H and series I
preferred stock bear no dividends although, upon liquidation or conversion, an
8% accretion factor is included in the calculation for purposes of determining
the liquidation and conversion amount.
Neither the series H preferred stock nor the series I preferred stock
issuances were convertible until August 19, 1998, the six month anniversary of
the Series H closing. The conversion price is the lower of (1) $1.59 per share,
and (2) the variable conversion price which is equal to 82% of the market price
at the date of conversion. Management retained the right to redeem both
issuances of preferred stock at various prices upon receipt of a notice of
conversion.
In addition, the right of conversion was further limited to a maximum of
15% of the aggregate principal amount of the series H and series I preferred
stock issued to each holder for each one month period cumulatively to a maximum
of not in excess of 25% for any month in the event the holder has converted
less than 15% in any of the preceding months.
The series H preferred stock and series I preferred stock have certain
events of default which include bankruptcy or the failure of the Company to (1)
remain qualified for trading; (2) convert preferred shares to common stock; and
(3) maintain an effective registration statement. Upon the occurrence of an
event of default, the holders of the series H preferred sock and series I
preferred stock have the right to redeem all or any portion of the then
outstanding amount. The amount outstanding is calculated as the greater of 1.3
times the value of the preferred stock for which demand is being made plus the
accreted but unpaid amounts, calculated at 8%, earned on the preferred stock
plus liquidated damages and other cash payments then due or the product of the
highest price at which Viragen's common stock is traded on the date of an event
of default divided by the conversion price as of that date and the amount being
redeemed. Since the 8% accretion is due upon mandatory redemption, the Company
has increased the carrying amount of the Series H Preferred Stock and Series I
Preferred Stock by this amount.
Pursuant to the terms of the subscription agreements, the holders of the
series H and series I preferred stock also received Nine Month warrants, Twelve
Month warrants and Fifteen Month warrants to purchase
F-13
<PAGE> 24
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock of Viragen. The number of warrants and exercise price
were to be determine at future dates during fiscal 1999.
During fiscal 1999, Viragen allocated the warrants reserved for the series
H and I investors, as follows:
<TABLE>
<CAPTION>
H INVESTORS I INVESTORS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Investor warrants reserved at June 30, 1998........... 1,948,052 779,221 2,727,273
Less warrants allocated to investors during fiscal
1999:
Nine Month warrants (exercise
price = $0.80/share)........................... 352,627 166,273 518,900
Twelve Month warrants (exercise
price = $0.59/share)........................... 193,221 114,406 307,627
Fifteen Month warrants (exercise
price = $0.39/share)........................... -- 56,410 56,410
--------- ------- ---------
Investor warrants cancelled during fiscal 1999........ 1,402,204 442,132 1,844,336
========= ======= =========
</TABLE>
The Nine Month, Twelve Month, and Fifteen Month warrants are exercisable
through February 17, 2003.
The series H and series I placement agent received a commission of $490,000
for the placement of the series H preferred stock and H warrants and series I
preferred stock and I warrants. In addition, the placement agent received
placement agent warrants to purchase an aggregate of 402,052 shares of common
stock, which were subsequently transferred to affiliates and employees of the
placement agent. The placement agent warrants entitle the holders thereof to
exercise those warrants at an exercise price of $1.684 per share at any time
between the date of their respective issuances and February 19, 2003; provided
that if the date of exercise occurs after February 19, 1999, the exercise price
of the placement agent warrants will be the lesser $1.684 per share or the
lowest reset price as calculated on each one year anniversary of the date of
issuance during the warrant term.
NOTE C -- CAPITAL STOCK
PREFERRED STOCK
Series A
The series A preferred stock provides for a 10% cumulative dividend,
payable at the option of Viragen, 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. Management 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, at
$11.00 per share for a period of five years from that date, and then at $10.00
per share.
Series B
On June 7, 1996, Viragen entered into a securities purchase agreement with
GFL Performance Ltd., GFL Advantage Fund Ltd. and Proton Global Asset
Management, LDC pursuant to which they acquired 15,000 shares of 5% cumulative
convertible preferred stock, series B for $15 million.
In connection with the sale and issuance of the series B preferred stock,
we issued warrants to purchase 225,000 shares of common stock at $10.59 per
share for a period of 3 years from date of issuance. Viragen also paid
approximately $900,000 in cash fees to certain finders and an investor
representative who participated in the transaction plus certain additional
expenses. These costs were netted against the proceeds of the sale. All of the
warrants expired on June 6, 1999.
The series B preferred stock provided for a cash dividend equal to 5% of
the stated value of the series B preferred stock, although management had the
option to utilize shares of common stock, under certain conditions, to satisfy
the dividend requirement. The investors had the right to convert the series B
preferred
F-14
<PAGE> 25
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock into shares of common stock at a conversion price equal to the lesser of
76.8% of the average market price of Viragen's common stock, as described in the
securities purchase agreement, prior to the conversion date, or $8.74. In July
1997, the unconverted series B preferred stock was exchanged for a promissory
note in the amount of $9,720,241. The note provided for interest at 10% per
annum with principal and interest payable over nine monthly installments
commencing in October 1997.
The note could be prepaid without penalty and was not convertible into
common stock. The principal value of the note was comprised of the following
components:
<TABLE>
<S> <C>
Principal balance........................................... $7,445,000
Beneficial conversion feature (($7.445
million/76.81%) minus $7.445 million)..................... $2,247,748
Preferred dividends earned (6/8/97 -- 7/1/97)............... $ 27,493
</TABLE>
The note was paid-in-full in April 1998.
Series C
In December 1996, Viragen issued 5,000 shares of its series C convertible
preferred stock in consideration for $4,740,923, net of issuance costs totaling
$259,077. The purchases were made by Strome Hedgecap Limited, Strome Offshore
Limited, Strome Partners, L.P. and Strome Susskind Hedgecap, L.P., pursuant to
separate securities purchase agreements. In addition, warrants to purchase an
aggregate of 214,593 shares of common stock, exercisable at $2.00 per share on
or prior to December 9, 1999, were issued to the purchasers of the series C
preferred stock.
The terms of the series C preferred stock provided that up to 25% of the
series C preferred stock could be converted into common stock on or after 10
days from the date the registration statement registering the underlying shares
was deemed effective by the Securities and Exchange Commission. Thereafter 25%
could be converted on or after the 30th, 60th and 90th day on a cumulative
basis. The preferred stock was convertible into a number of common shares
determined by dividing the stated value of the series C preferred stock, or
$1,000 per share, by the closing price of Viragen's common stock over the five
day period preceding notice of conversion. The conversion price could not be
less than $3.46 nor more than $7.00. In the event the conversion price fell
below $3.46, the difference between $3.46 and the conversion price would be paid
to the holder in cash. Any shares of series C preferred stock which were
outstanding on December 5, 1997 would be automatically converted into shares of
common stock based on the conversion price at that time in accordance with the
above procedures.
In July 1997, the holders of the series C preferred stock agreed to modify
their conversion price and limit conversions of their remaining 974 shares over
a two month period. The modified conversion price was the lower of (1) $2.20 per
share or (2) the average closing price of Viragen's common stock over the five
day period ending the day prior to the notice of conversion. The terms
addressing conversions below $3.46 contained in the original agreement were not
modified. As a result, we were committed to refund a minimum of $354,694 to the
series C purchasers, upon conversion of the remaining series C preferred stock.
The refund amount would increase if conversions occurred below $2.20. All shares
of series C preferred stock were converted into common stock by December 31,
1997. During fiscal 1998, we paid $1,391,198 in capital refunds to the series C
purchasers. Of the total refunds, $553,041 were related to conversions,
occurring under the modified terms, during fiscal 1998. The balance of $838,157
related to conversions, under the original terms, during the end of fiscal 1997.
Series D and Series F
In February 1997, Viragen issued 15,000 shares of its 6% series D
convertible preferred stock to P.R.I.F., L.P. in consideration for $14,050,349,
net of issuance costs totaling $949,651. The series D preferred sock was
convertible into a number of shares of common stock determined by dividing the
five day trading average price
F-15
<PAGE> 26
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of our common stock prior to conversion, discounted by 18%, into the stated
value of the preferred shares being converted. In connection with the issuance
of the series D preferred stock, we also issued 375,000 common stock purchase
warrants, exercisable at $6.00 per share. All of the warrants expired on June
30, 1998.
In September 1997, we concluded an exchange agreement whereby the series D
preferred stock were exchanged for series F preferred shares. The series F
preferred stock provided for a restriction on the holder limiting conversion
during any two week period to 800 preferred shares, or $800,000 in principal.
The terms also provided management with a cash-out option at the face amount
being converted plus 12%. In consideration for the holder of the series D
preferred stock agreeing to a limitation on future conversions, we agreed to
increase the dividend rate from 6% for the series D preferred stock to 10% for
the series F preferred stock. All shares of series F preferred stock were
redeemed for cash or converted into common stock by March 31, 1998. During
fiscal 1998, Viragen paid $2,744,000 to the series F holder upon exercise of the
cash-out option on conversions.
Series E
In February 1997, Viragen also issued 5,000 shares of its 5% series E
convertible preferred stock in consideration for $4,681,744, net of issuance
costs totaling $318,256. Dividends on the series E preferred stock accrued from
the date of issuance and were payable quarterly commencing April 1, 1997.
Dividends were payable in cash or, at management's option and subject to certain
other conditions, in shares of common stock.
The series E preferred stock was convertible into shares of common stock
commencing May 11, 1997 at a conversion price of the lesser of (1) the average
market price for the five trading days prior to the notice of conversion
multiplied by 85%, subject to adjustment, or (2) $7.00, subject to adjustment.
COMMON STOCK
During May 1999, Viragen completed a private placement for the sale of
2,750,000 shares of common stock. The common shares were sold to three
accredited investors at $0.50 per share. Viragen received proceeds of $1,375,000
from the sale of these shares.
At our 1998 annual stockholders' meeting, which was concluded on July 19,
1999, the stockholders approved the following proposals:
(1) authorization for up to a 1-for-8 reverse stock split; and
(2) an increase in the number of authorized common shares, if the board of
directors did not effect the reverse split.
On August 13, 1999, the board of directors elected to increase the
authorized common shares up to 125,000,000 shares.
OPTIONS AND WARRANTS
Under Viragen's 1995 stock option plan, 4,000,000 shares of common stock
were reserved for issuance to officers, directors, employees and consultants of
Viragen for stock options designated as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. Options granted under the
1995 stock option plan have various vest dates and all options granted have
five-year terms from the vesting date.
Viragen's 1997 incentive stock option plan, adopted during February 1997,
authorized the grant of options to management personnel, directors and employees
for up to 3,000,000 shares of common stock. In April 1998, the 1997 stock option
plan was amended increasing the number of common shares authorized to 4,000,000
shares. Options granted under the plan have various vest dates and all options
granted have 5 year terms from the vesting date.
F-16
<PAGE> 27
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1997, we granted a total of 2,941,500 options to purchase
Viragen common stock. Of these, 1,750,000 were granted to our officers and
directors. The options vested immediately and are exercisable for a period of
five years. The exercise price on these options is $3.22, which was market price
at the date of grant.
During fiscal 1997, Viragen also granted options to an officer and an
employee, with exercise prices below market price. The total options granted
were for 400,000 shares. The Company recognized an expense of $381,500 related
to the granting of these options.
During fiscal 1997, we granted 120,000 options that were not part of the
above stock option plan to an employee. The options vested immediately and have
a 5 year term from that date.
Viragen issued 518,229 shares of common stock upon the conversion and
exercise of stock options and warrants during fiscal 1997. Proceeds from these
issuances totaled $371,337.
During fiscal 1998, management granted a total of 367,500 options to
employees. The options vest over various dates and are exercisable for five
years from the vesting dates. The exercise prices of these options, which
represent the market price at the date of grant, range from $1.50 to $2.50 per
share. Viragen also granted 50,000 options to a director. The options vested
immediately and are exercisable at $1.19 per share, which was the market price
at the date of grant, for a period of five years.
Viragen also issued 32,000 warrants during fiscal 1998 to a consultant as
compensation for services provided. The warrants are exercisable at $1.00 per
share for a period of five years.
During fiscal 1998, we issued 230,565 shares of common stock upon the
exercise of options and warrants. Viragen received $117,888 upon exercise of
these options and warrants.
During fiscal 1999, Viragen granted an aggregate of 85,000 options to one
officer and two directors. The options have exercise prices ranging between
$0.41 and $1.81, which represented market price on the date of grant. These
options vest over various dates and are exercisable for five years from the
vesting dates. Three employees were also granted a total of 9,000 options with
exercise prices ranging between $1.75 and $1.87. The options, which vest over
various dates, are exercisable for five years from the vesting dates.
Viragen issued 1,245,000 common stock warrants to consultants during fiscal
1999. The warrants were issued as compensation for services provided to the
company during the year. The warrants vest over various dates, subject to
performance provisions, and have exercise prices ranging from $0.50 to $11.00.
During fiscal 1999, Viragen issued 1,488,473 shares of commons stock from
the exercise of options and warrants. We received $253,489 in cash and $602,000
was secured by promissory notes and related pledge and escrow agreements.
At June 30, 1999, 35,000 shares and 926,000 shares remain available under
the 1995 and the 1997 stock option plans, respectively.
STOCK BASED COMPENSATION
Viragen has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 -- "Accounting
for Stock-Based Compensation" requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, Viragen
recognized compensation expense in the amount of $172,000, $-0-and $450,000 in
1999, 1998 and 1997, respectively, because the exercise price of a portion of
the company's employee stock options was less than the market price of the
underlying stock on the date of grant. During 1999, 1998 and 1997, we recognized
approximately $199,000, $58,000 and $-0- in compensation expense on warrants
granted to consultants pursuant to SFAS 123, respectively.
F-17
<PAGE> 28
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if we had accounted for our
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: dividend
yield of zero percent for all periods; expected life of the option of 3 years;
risk-free interest rates within a range of 5.60% to 6.00%; and a volatility
factor of the expected market price of Viragen's common stock of .77, .75 and
.64 for 1999, 1998 and 1997, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Viragen's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and warrants.
Based on calculations using a Black-Scholes option pricing model, the
weighted average grant date fair value of options was $0.57, $1.10 and $1.51 in
fiscal 1999, 1998 and 1997, respectively. The pro forma impact on Viragen's net
loss per share had compensation cost been recorded as determined under the fair
value method is shown below.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Pro forma net loss............................. $(11,122,679) $(8,897,455) $(8,267,089)
Pro forma loss attributable to common stock.... (12,124,601) (11,395,807) (18,165,828)
Pro forma loss per common share................ (0.20) (0.23) (0.46)
</TABLE>
A summary of Viragen's stock option activity, and related information for
the years ended June 30, follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1996................... 5,135,000 $0.74 4,313,333 $0.63
Granted with exercise prices equal to
market................................... 2,559,500 3.02
Granted with exercise prices less than
market................................... 400,000 2.07
Exercised................................... (199,000) 0.50
Canceled.................................... -- --
---------- -----
Outstanding at June 30, 1997.................. 7,895,500 1.59 6,443,167 1.51
Granted..................................... 417,500 2.08
Exercised................................... (100,000) 0.50
Canceled.................................... -- --
---------- -----
Outstanding at June 30, 1998................ 8,213,000 1.62 7,379,500 1.54
Granted..................................... 94,000 1.00
Exercised................................... (1,210,000) 0.54
Canceled.................................... (33,500) 2.21
---------- -----
Outstanding at June 30, 1999.................. 7,063,500 $1.79 6,896,500 $1.79
========== =====
</TABLE>
F-18
<PAGE> 29
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING WEIGHTED NUMBER AVERAGE
OF CONTRACTUAL AVERAGE OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS PRICE
- ------------------------ ---------- ----------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.30-$0.50....................................... 1,985,000 1.34 $0.50 1,967,500 $0.50
$0.75-$1.00....................................... 1,430,000 2.10 0.95 1,430,000 0.95
$1.50-$2.50....................................... 1,202,000 4.30 1.95 1,052,500 1.91
$2.75-$4.13....................................... 2,434,500 2.61 3.25 2,434,500 3.25
$7.13............................................. 12,000 3.59 7.13 12,000 7.13
--------- --------- -----
$0.30-$7.13....................................... 7,063,500 2.44 $1.79 6,896,500 $1.79
========= ========= =====
</TABLE>
A summary of Viragen's warrant activity, excluding warrants issued in
conjunction with the series B, C, D, H and I preferred stock offerings and the
convertible notes and related information for the years ended June 30, follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE WARRANTS AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1996................... 1,083,550 $0.99 970,217 $0.86
Granted..................................... 12,000 2.22
Exercised................................... (319,229) 0.93
Canceled.................................... (30,000) 5.12
---------- -----
Outstanding at June 30, 1997.................. 746,321 0.87 734,321 0.84
Granted..................................... 32,000 1.00
Exercised................................... (130,565) 0.52
Canceled.................................... (12,500) 0.80
---------- -----
Outstanding at June 30, 1998.................. 635,256 1.06 635,256 1.06
Granted..................................... 1,500,000 3.67
Exercised................................... -- --
Canceled.................................... (305,000) 1.26
---------- -----
Outstanding at June 30, 1999.................. 1,830,256 $3.12 405,256 $1.26
========== =====
</TABLE>
The following table summarizes information about stock warrants outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING WEIGHTED NUMBER AVERAGE
OF CONTRACTUAL AVERAGE OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS PRICE
- ------------------------ ---------- ----------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.50-$0.80....................................... 816,256 1.42 $0.51 291,256 $0.53
$1.00............................................. 252,000 4.13 1.00 52,000 1.00
$1.78-$2.22....................................... 262,000 4.09 1.80 12,000 2.22
$5.50-$7.50....................................... 150,000 14.13 6.83 50,000 5.50
$9.00-$11.00...................................... 350,000 14.13 10.14 -- --
--------- ---------
$0.50-$11.00...................................... 1,830,256 5.65 $3.12 405,256 $1.26
========= =========
</TABLE>
The weighted-average fair value of each Viragen warrant granted in fiscal
1999, 1998 and 1997 was $1.00, $1.52 and $1.05, respectively.
F-19
<PAGE> 30
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Viragen's majority owned subsidiary, Viragen (Europe) Ltd., has also
granted stock options to one of its officers. The fair value of Viragen (Europe)
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: dividend yield of zero
percent for all periods; risk-free interest rates of 6.09% for 1998; volatility
factor of the expected market price of Viragen (Europe)'s common stock of .723
for 1998; and an expected life of the options of 3 years. The weighted average
fair value of each Viragen (Europe) option granted in fiscal 1998 was $2.97.
A summary of Viragen (Europe)'s stock option activity, and related
information for the years ended June 30, follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1996................... 50,000 $7.00 -- $ --
Granted..................................... -- --
Exercised................................... -- --
Canceled.................................... -- --
----------
Outstanding at June 30, 1997.................. 50,000 7.00 50,000 7.00
Granted..................................... 75,000 5.72
Exercised................................... -- --
Canceled.................................... -- --
----------
Outstanding at June 30, 1998.................. 125,000 6.23 50,000 7.00
Granted..................................... -- --
Exercised................................... -- --
Canceled.................................... -- --
----------
Outstanding at June 30, 1999.................. 125,000 $6.23 87,500 $6.45
==========
</TABLE>
The weighted average remaining contractual life of Viragen (Europe) options
outstanding as of June 30, 1999 is 4.11 years.
Viragen's majority owned subsidiary, Viragen U.S.A., Inc., has also granted
stock options to certain officers and employees. The fair value of Viragen
U.S.A. options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for options
granted: dividend yield of zero percent for all periods; risk-free interest
rates of 5.75% and 6.00% for 1998 and 1997, respectively; volatility factors of
.765 and .640 for 1998 and 1997, respectively; and an expected life of the
option of 3 years and .01 year for 1998 and 1997, respectively.
The weighted average fair value of each Viragen U.S.A. option granted in
fiscal 1998 and 1997 was $0.05 and $0.22, respectively.
F-20
<PAGE> 31
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen U.S.A.'s stock option activity, and related
information for the years ended June 30 follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1996................... -- $ -- -- $ --
Granted below market price.................. 320,000 0.01
Exercised................................... (320,000) 0.01
Canceled.................................... -- --
----------
Outstanding at June 30, 1997.................. -- -- -- --
Granted..................................... 125,000 0.22
Exercised................................... -- --
Canceled.................................... -- --
----------
Outstanding at June 30, 1998.................. 125,000 0.22 -- --
Granted..................................... -- --
Exercised................................... -- --
Canceled.................................... -- --
----------
Outstanding at June 30, 1999.................. 125,000 $0.22 50,000 $0.22
==========
</TABLE>
The weighted average remaining contractual life of options outstanding at
June 30, 1999, is 5.42 years.
COMMON SHARES RESERVED
Shares of our common stock reserved at June 30, 1999 for possible future
issuance are as follows:
<TABLE>
<S> <C>
Convertible preferred stock, series A....................... 11,289
Convertible preferred stock, series I....................... 220,000
8% Convertible notes........................................ 5,210,412
Warrants -- consultants (exercisable through August 2013)... 1,554,000
Employee option plans (exercisable through August 2005)..... 646,500
Officers and directors options (exercisable through October
2004)..................................................... 6,417,000
Warrants -- debt and equity offerings (exercisable through
March 2004)............................................... 2,584,743
</TABLE>
NOTE D -- INVESTMENT IN UNCONSOLIDATED COMPANY
In August 1998, Viragen entered into a strategic alliance concurrent with
the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company headquartered in Philadelphia, PA. Inflammatics is focused
on the development of therapeutic drugs for autoimmune disorders. Its lead
product is LeukoVAX, an immunomodulating leukocyte preparation currently in Food
and Drug Administration Phase I/II clinical trials for rheumatoid arthritis.
Under the terms of the Inflammatics agreement, Viragen made an initial
investment in the form of series A convertible preferred stock of Inflammatics
for $1 million and warrants to purchase 250,000 shares of common stock at prices
ranging between $1.00 and $1.78 per share. Viragen further obtained two options
to acquire an additional 70% equity position in Inflammatics through two
additional fundings to be made at our option. The first additional funding,
subject to management's evaluation of the Phase I/II clinical trial results,
provides for the issuance of 1,000,000 shares of common stock, the issuance of
300,000 commons stock purchase warrants exercisable at $1.00 through August 14,
2003, and the underwriting of Phase III clinical trials, in exchange for an
additional 36.3% equity interest. Preliminary estimates for the funding of Phase
III clinical trials of LeukoVAX range between $6.0 million and $10.0 million.
The second additional funding,
F-21
<PAGE> 32
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject to management's further evaluation of clinical trial results, provides
for the issuance of an additional 2,000,000 shares of commons stock in exchange
for an additional 33.3% equity interest.
The investment in Inflammatics was capitalized at $1,429,000, which
consisted of the $1,000,000 paid to Inflammatics, a $100,000 finders fee paid to
Sumitomo Bank, and $329,000 in costs associated with the warrants issued, which
were valued using a Black-Scholes valuation model.
Viragen recognized approximately $757,000 in losses related to its
investment in Inflammatics, Inc. during the fiscal year ended June 30, 1999.
This loss reflects 100% of the losses incurred by Inflammatics associated with
the clinical testing of LeukoVAX. The loss also includes the amortization of the
capitalized finders fees and warrant costs. These costs are being amortized in
proportion to the losses incurred by Inflammatics as compared to our initial
cash capital contribution to Inflammatics.
NOTE E -- CONVERTIBLE NOTES WITH DETACHABLE WARRANTS
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was subsequently amended on
June 16, 1999. Under the purchase agreement, we issued Isosceles and Cefeo 8%
convertible promissory notes in the aggregate principal amount of $2,000,000
with detachable warrants to purchase 932,039 shares of our commons stock.
Viragen received $1,861,820 from the issuance of the convertible notes and
detachable warrants. The proceeds were net of $138,180 paid as finders' fees. As
required by APB Opinion No. 14 -- "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants", we valued the detachable warrants using a
Black-Scholes valuation model. The model valued the detachable warrants at
$344,854, which was recorded as a discount on principal.
Subsequent to June 30, 1999, one-half of the principal balance, which
accrued interest at a rate of 8% annually, and accrued interest on the related
principal converted automatically into 2,049,534 shares of our common stock on
July 7, 1999. In addition, the remaining one-half of the principal balance and
accrued interest on the notes converted automatically into 2,062,685 shares of
our common stock on August 6, 1999. The conversion price was $0.50 per common
share.
In addition to the shares issued on conversion of the notes, the note
holders were entitled to receive additional shares of our common stock 30 days
after each one-half of the notes converted into shares of our common stock, as
required by a re-set provision. The purpose of this arrangement was to make sure
that the note holders had a return of at least 20% on the shares received on the
conversion of the first half of the notes and at least a 22% return on the
conversion on the remaining half of the notes. The number of additional shares
to which the note holders were entitled was calculated by dividing $0.644 by the
lowest closing bid price of our common stock during the ten consecutive trading
days preceding each re-set date.
On August 6, 1999, Isosceles and Cefeo received an aggregate amount of
546,990 additional common shares, based on the first re-set calculation. These
shares were issued using a future price of $0.61 per share. On September 5,
1999, Isosceles and Cefeo received an aggregate amount of 551,203 additional
common shares, based on the second re-set calculation. These shares were issued
using a future price of $0.62 per share. Viragen will recognize approximately
$700,000 in interest expense during the first quarter of fiscal 2000, as a
result of issuing these additional shares.
The warrants issued to Isosceles and Cefeo to purchase an aggregate of
932,039 shares of our common stock are exercisable until March 17, 2004 with an
exercise price of $.50 per share. However, we must reduce the exercise price of
the warrants if we sell shares of our common stock, grant options or adjust the
F-22
<PAGE> 33
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise prices of options or issue other securities convertible into our common
stock at prices less than $.50 per common share.
We also issued warrants to purchase an aggregate of up to 155,339 shares of
our common stock at $.773 per share to certain parties in consideration for
introducing Viragen to Isosceles and Cefeo. The warrants issued are exercisable
currently until March 17, 2004. As we did not pre-pay the notes issued to
Isosceles and Cefeo before July 7, 1999, one-half of these warrants were
returned to Viragen.
Events of default, on our obligations to the investors, include: default
under the promissory notes, failure to maintain effectiveness of our
registration under the Securities Act of 1933, delisting our stock from NASDAQ
(which has occurred), and failure to have our registration statement become
effective by July 7, 1999 (which has occurred).
The sum of the penalties depends on the period that we are in
non-compliance. As of September 17, 1999, we have incurred approximately
$140,000 in penalty fees. The penalty amount will continue to increase $40,000
per month, until the related registration statement becomes effective.
The investors have the right to force redemption of their common shares,
because the related registration statement is not yet effective and the stock
has been delisted from NASDAQ. The redemption value, if elected by the
investors, would exceed the initial investment of $2 million. The redemption
value is the greater of: $2 million and related interest plus a premium of 15%;
or market value of the shares to be redeemed, on the date the investors elect
redemption.
NOTE F -- LONG-TERM DEBT
Long-term debt at June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Notes payable resulting from purchase of insurance. Notes
range in term up to 36 months, with interest rates ranging
from 7.00% to 10.75%...................................... $ 187,170 $ 207,272
Unsecured loan from Scotland Regional Development Authority.
Payable quarterly over 20 years, with an effective
interest rate of 11.00%. Note matures on August 28,
2017...................................................... 139,852 162,906
Capital lease obligations resulting from acquisition of
equipment, with a cost totaling $217,939 capitalized from
three to five years....................................... 46,194 81,193
--------- ---------
373,216 451,371
Less current portion........................................ (142,109) (171,277)
--------- ---------
$ 231,107 $ 280,094
========= =========
</TABLE>
Scheduled maturities of long-term debt at June 30, 1999 are: 2000 --
$142,109; 2001 -- $76,907; 2002 -- $37,985; 2003 -- $7,879; and 2004 and
thereafter -- $108,336.
F-23
<PAGE> 34
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES
Viragen, Inc. and its majority-owned subsidiaries, as defined by the
Internal Revenue Code, file consolidated federal and state income tax returns.
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
Viragen's deferred tax liabilities and assets as of June 30, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation................................ $ 137,000 $ 118,000
Other..................................................... 21,000 21,000
----------- ----------
Total deferred tax liabilities.................... 158,000 139,000
Deferred tax assets Net operating loss carry forwards....... 11,782,000 9,875,000
Research and development credit........................... 622,000 478,000
Deferred compensation..................................... 205,000 --
Other..................................................... 308,000 249,000
----------- ----------
Total deferred tax assets......................... 12,917,000 10,602,000
Valuation allowance for deferred tax assets............... 12,759,000 10,463,000
----------- ----------
158,000 139,000
----------- ----------
Net deferred taxes..................................... $ -- $ --
=========== ==========
</TABLE>
The change in the valuation allowance was a net increase of $2,296,000 for
the year ended June 30, 1999.
Viragen has undergone two ownership changes, as defined by Internal Revenue
Code Section 382, which will cause the utilization of the net operating losses
and tax credits to be limited. The effects of these limitations have not been
calculated at this time.
Viragen has net operating loss carryforwards, with expiration dates, as
follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION
------ ----------
<C> <S> <C>
$ 270,000 .................................................... 2000
2,870,000 .................................................... 2001 -- 2003
3,120,000 .................................................... 2004 -- 2006
25,051,000 .................................................... 2007 -- 2019
- -----------
$31,311,000
===========
</TABLE>
In addition, tax credits of $622,000 and $478,000 for income tax purposes
are being carried forward that expire in years 2001 through 2014, at June 30,
1999 and 1998, respectively. For financial reporting purposes, a valuation
allowance has been recognized to offset the deferred tax assets related to these
carryforwards.
F-24
<PAGE> 35
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory
rate applied to Viragen's net loss is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit......................... (3.63)% (3.63)% (3.63)%
Non-deductible items........................................ 0.18% (2.89)% 4.46%
Change in valuation allowance............................... 34.21% 40.00% 30.68%
Other....................................................... 3.24% 0.52% 2.49%
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>
Viragen (Europe) Ltd. was included in Viragen's consolidated federal and
state income tax returns for the period December 8, 1995 through March 15, 1996,
when Viragen, Inc.'s percentage ownership of Viragen (Europe) Ltd. exceeded 80%.
Even though Viragen's ownership percentage of Viragen (Europe) exceeds 80% again
as of December 31, 1998, Viragen (Europe) may have to continue filing separate
income tax returns. Viragen (Scotland) Ltd., a wholly-owned subsidiary of
Viragen (Europe), files separate income tax returns in the United Kingdom.
Viragen (Germany) GmbH, also a wholly-owned subsidiary of Viragen (Europe),
files separate income tax returns in Germany.
Deferred tax assets of Viragen (Europe)'s U.S. operations at June 30, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Total deferred tax assets................................... $993,000 $1,164,700
Valuation allowance for deferred tax assets................. 993,000 1,164,700
-------- ----------
$ -- $ --
======== ==========
</TABLE>
At June 30, 1999, Viragen (Europe) has net operating losses totaling
approximately $2,580,000, expiring between 2000 and 2019. Viragen (Scotland) has
approximately $9,847,000 in net operating losses available to carryforward at
June 30, 1999.
For financial reporting purposes, net loss before income taxes includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
U.S..................................................... $ (6,048,656) $ (3,615,140)
Foreign................................................. (4,602,176) (4,240,996)
------------ ------------
$(10,650,832) $ (7,856,136)
============ ============
</TABLE>
NOTE H -- TRANSACTIONS WITH RELATED PARTIES
In June 1996, Viragen loaned $50,000 to a now-former employee. The
promissory note is for a term of five years with an annual interest rate of
6.48%. Interest is to be paid semi-annually with the principal balance and
unpaid interest payable on the fifth anniversary of the note. Management has
reserved approximately $25,000 of the principal balance as uncollectable at June
30, 1999. Management intends to pursue collection of this promissory note.
In November 1996, Viragen forgave a $12,500 balance due to the company by
its chief executive officer.
In April 1997, management loaned $100,000 to one of Viragen's directors.
The secured promissory note is for a term of one year with the principal and
interest payable upon maturity. The note bears interest at 8.50% per annum. In
April 1998, the director defaulted on the note. Management is unable to
ascertain the amounts,
F-25
<PAGE> 36
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if any, which could ultimately be realized on the promissory note. Accordingly,
the entire amount due under the note with related accrued interest of
approximately $10,000 was been written-off as uncollectable on June 30, 1998.
Management intends to pursue collection efforts relative to this transaction.
On July 31, 1998, we held our 1997 annual shareholders meeting. Certain
directors did not seek reelection to serve as directors of the company. In
appreciation of their past service, Viragen waived the requirement to exercise
outstanding stock options within 90 days of their last day as directors. All
outstanding stock options will expire under their normal terms. We recognized
approximately $199,000 in compensation expense upon waiving the 90-day
expiration clause.
During fiscal 1999, certain directors and former officer exercised
1,160,000 options to purchase common stock at prices ranging between $0.30 and
$1.19 per share. The options were exercised through the issuance of promissory
notes payable to Viragen with related pledge and escrow agreements. The
promissory notes bear interest at rates ranging between 5.06% and 5.47%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes pursuant to
the provisions of the pledge and escrow agreements.
NOTE I -- COST REDUCTION PLAN
During fiscal 1999, Viragen began implementing a cost-reduction plan
targeted to reduce domestic and research costs. These changes in operations
reflect our shift from developing our product in our domestic laboratories to
scale-up development and clinical research in our European facility.
SFAS No. 121 -- "Accounting for the Impairment of Long-Lived Assets"
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 then the assets' carrying amount. EITF 94-3
- -- "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity" requires restructuring costs to be accrued under
specific guidelines.
No losses or exit costs have been accrued by Viragen. We have not done so
because the criteria for recognizing losses and exit costs, as specified in SFAS
121 and EITF 94-3, have not been met.
Much of the savings to be realized from personnel reductions comes from the
elimination of positions where employment agreements have expired. Accordingly,
these individuals are not receiving severance pay. Of the remaining positions to
be eliminated, management has not yet approved any severance packages to be
offered.
Viragen is not aware of any impairment of its equipment, and accordingly,
we have not recognized any loss due to impairment on our long-lived laboratory
equipment or facility. Upon termination of research activities in our domestic
facility, equipment considered to be useful to our Scottish operations will be
transferred to our Scottish facility, where it will be used in continuing
research activity, as well as manufacturing and quality assurance operations.
Equipment identified for disposal, if any, will be sold for the highest bid.
Viragen has not yet identified any equipment for disposal, and accordingly, has
not recognized any impairment. We are currently in the process of trying to sell
the domestic research facility, but no impairment has been recorded because an
independent appraisal performed has valued the land, building and related
improvements above its net book value.
F-26
<PAGE> 37
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- LICENSE AND MANUFACTURING AGREEMENTS
Through a fifteen-year license agreement granted by Viragen, Viragen
(Europe) Ltd. and its wholly-owned subsidiary, Viragen (Scotland) Ltd., 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 for various diseases that
affect the human immune system. Pursuant to these rights, on July 20, 1995,
Viragen (Scotland) entered into a license and manufacturing agreement with the
Common Services Agency, an agency acting on behalf of the Scottish National
Blood Transfusion Service. The Transfusion Service, on behalf of Viragen
(Scotland), will manufacture and supply Viragen (Scotland)'s product to Viragen
(Scotland) for distribution in the European Union in return for certain fees. It
was considered critical to our 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. Viragen (Scotland) commenced
operations concurrent with the execution of its agreement with the Transfusion
Service. The term of the Scottish agreement is five years with two additional
five-year extension terms exercisable at the option of Viragen (Scotland).
Pursuant to the terms of the license, Viragen (Scotland) was to prepay $2
million to Viragen, within six months of the effective date, July 12, 1995.
Commencing one year from the effective date, Viragen (Scotland), is to pay to
Viragen fees, as follows: the greater of $2 million annually or 10% of gross
revenues until the sum of $18 million has been paid; 8% of gross revenues until
the sum of $25 million has been paid; and 5% of gross revenues thereafter. The
license will renew automatically for two consecutive fifteen-year terms.
Both parties modified the license deferring the initial payment until the
date when Viragen transferred the processes and technology, as defined by the
license, to Viragen (Scotland). Viragen had substantially transferred the
processes and technology to Viragen (Scotland) by the end of May 1997. At that
time, Viragen required the initial royalty payment be made. Completion of the
transfer occurred on November 1, 1997.
In April 1998, Viragen entered into an option agreement with Southern
Health SDN.DHD, a private Malaysian/Australian-based healthcare investment
group. The option agreement initially provided Southern Health the right to
acquire, through September 30, 1998, subsequently extended to March 31, 1999, an
exclusive, private-label manufacturing and distribution license covering
Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Korea, Singapore,
Australia and New Zealand, for our proprietary natural interferon production
process in exchange for an initial cash licensing fee of $20 million and a
continuing royalty of 12% of Southern Health's related revenues. Southern Health
paid a $200,000 option fee.
On March 31, 1999, the option agreement expired, without being exercised.
We recognized one-half of the fee, or $100,000, as revenue, and the balance was
refunded to Southern Health during April 1999.
NOTE K -- RESEARCH AND DEVELOPMENT AGREEMENTS
Viragen has a contract with Viragen Research Associated Limited
Partnership, for Viragen to perform the research and development with respect to
two therapeutic products for the topical treatment of herpes virus infections.
Pursuant to the contract, we assigned all of our patent rights to the processes
and topical products to Viragen Research Associated in exchange for an exclusive
worldwide licensing agreement. Viragen Research Associated is to receive 5% of
the gross revenues of topical products until it has received approximately
$900,000 and, thereafter, it is to receive 2% of the gross revenues of topical
products. Viragen is not presently pursuing the development or commercialization
of a topically applied product.
NOTE L -- ROYALTY AGREEMENT
Viragen has a royalty agreement with Medicore, Inc. that will pay Medicore
a maximum of $2,400,000 in royalties. Royalties are to be paid as follows: 5% on
the first $7 million of sales of interferon and related
F-27
<PAGE> 38
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products; 4% of the next $10 million of sales; and 3% on the next $55 million of
sales up to the maximum of $2,400,000 in royalty payments. Royalties incurred in
prior years under the agreement, totaling approximately $108,000, are included
in royalties payable. This amount will be paid as the final payment under the
royalty agreement.
NOTE M -- COMMITMENTS
In November 1996, Viragen (Scotland) Ltd. executed a five-year lease on
property located in Edinburgh, Scotland that will serve as our laboratory and
production facilities. Base monthly rental on the property is approximately
$9,975. In addition, Viragen (Scotland) may extend the term of the lease at its
option, for four five-year periods.
In November 1996, Viragen entered into a ten-year lease on property in
Plantation, Florida. This facility contains our executive and administrative
offices. Monthly rental on the property is approximately $15,700. The lease
contains provisions for two additional five-year periods at the Company's
option.
During the years ended June 30, 1999, 1998 and 1997, Viragen recognized
rent expense and related charges of $298,000, $290,000 and $47,000 for its
Plantation, Florida property lease and $195,000, $202,000 and $29,000
attributable to its Edinburgh, Scotland facility. Future minimum lease payments
on the two facilities are: 2000 -- $300,912; 2001 -- $307,255; 2002 -- $224,019;
and 2003 -- $200,913; and 2004 and thereafter -- $817,339.
Viragen has entered into employment agreements with its officers and key
employees. These agreements represent a commitment to pay an aggregate amount of
approximately $1,200,000, per year in salaries to these individuals.
NOTE N -- CONTINGENCIES
In May 1997, Viragen in the name of Viragen (Europe) (formerly Sector
Associates, Ltd.) was named as a defendant in an action brought in the United
States Bankruptcy Court, Southern District of Florida by the bankruptcy trustee.
The suit alleged that during the period from December 1993 to May 1994, prior to
Viragen's reverse acquisition of Sector, Sector received preferential transfers
of approximately $2.1 million. The suit was settled on July 8, 1998 for a total
of $25,000. The loss arising from settlement of the suit was recognized during
fiscal 1998.
In October 1997, Viragen, the company's president, and Cytoferon Corp., a
former affiliate of Viragen's president, were named as defendants in a civil
action brought in the United States District Court for the Southern District of
Florida (Case No: 97-3187-CIV-MARCUS) by a Viragen shareholder and investor in
Cytoferon Corp. The suit alleged the defendants violated federal and state
securities laws, federal and state RICO statutes, fraud, conspiracy, breach of
fiduciary duties and breach of contract. The plaintiff was seeking an
unspecified monetary judgement and the specific performance delivery of 441,368
shares of common stock. Viragen filed a motion to dismiss denying the
allegations and requesting reimbursement of its costs.
In November 1997, the plaintiff in this litigation filed a notice of
voluntary dismissal with the federal court concurrently notifying Viragen of his
intent to refile a complaint in circuit court in the state of Florida. The
plaintiff subsequently filed a complaint in the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County, Florida (Case No: 97-25587 CA30)
naming the same defendants. The suit alleges breach of contract, fraud,
violation of Florida's RICO statute and breach of fiduciary duties and seeks a
judgement similar to that of the dismissed federal suit.
In March 1998, the circuit court granted Viragen's motion to dismiss in
this matter. Subsequently, the plaintiff filed an amended complaint alleging
similar claims and seeking a judgement similar to that of the dismissed federal
and initial state of Florida suits. In April 1998, Viragen filed a motion to
dismiss the
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<PAGE> 39
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plaintiff's amended complaint which was denied by the court. Viragen denies the
allegations of the complaint and intends to vigorously defend the claims with
regard to this matter. The ultimate liability, if any, cannot be determined at
this time and no accrual for loss has been recorded.
In September 1999, the federal court recommended that Viragen receive
reimbursement for attorney's fees and expenses incurred in the federal suit
described above. Management has filed an objection claiming that the award does
not adequately cover the fees and expenses incurred defending the suit. A final
decision is pending.
NOTE O -- GEOGRAPHIC INFORMATION
In 1997, Viragen completed a manufacturing facility in Edinburgh, Scotland.
Identifiable assets in Scotland totaled $4,506,000 and $4,745,000 at June 30,
1999 and 1998, respectively. Identifiable assets represent those assets used in
the operations of the geographic area.
NOTE P -- SUBSEQUENT EVENTS
On August 10, 1999, Viragen mortgaged its Florida-based research facility
for $600,000. Interest on the promissory note is payable in twelve monthly
installments, commencing on August 10, 1999. Interest is calculated at the rate
of 1% over the prime rate per annum, as quoted by the Wall Street Journal, and
the rate is adjusted on a daily basis. The principal balance of $600,000 plus
any unpaid interest is due on July 10, 2000.
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<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-50403) pertaining to the Viragen, Inc. Amended 1997 Stock
Option Plan, (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. and (Form S-8 No. 333-18197)
pertaining to the Consulting Agreement with Girmon Investment Co., Limited and
Common Stock Purchase Option Granted to Key Employee, of our report dated
September 17, 1999, included in the Annual Report on Form 10-K of Viragen, Inc.
for the year ended June 30, 1999, with respect to the consolidated financial
statements, as amended, included in this Form 10-K/A.
/s/ Ernst & Young LLP
Miami, Florida
December 16, 1999
