<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1999
Registration No. 333-75749
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
ON FORM S-1 REGISTRATION STATEMENT
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 2836 59-2101668
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
----------------
865 S.W. 78th Avenue
Suite 100
Plantation, FL 33324
Telephone (954) 233-8746
-----------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Gerald Smith James M. Schneider, Esq.
Chairman of the Board Atlas, Pearlman, Trop & Borkson, P.A.
Viragen, Inc. Suite 1900
865 S.W. 78th Avenue, Suite 100 200 East Las Olas Boulevard
Plantation, Florida 33324 Fort Lauderdale, Florida 33301
(954) 233-8746 (954) 763-1200
</TABLE>
---------------
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [ ]
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Amount Offering Aggregate Amount of
Shares to be to be Price Per Offering Registration
Registered Registered Share(1) Price(1) Fee
- ---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C>
Common stock, $.01 par
value per share issuable upon
the conversion of 8%
redeemable convertible
promissory notes 9,912,622(2) $0.52 $ 5,155,000 $ 1,562
Common stock issuable upon
exercise of common stock
purchase warrants 932,039(3) 0.52 485,000 147
Common stock issuable upon
exercise of common stock
purchase warrants 155,339(4) 0.52 81,000 25
---------- ----------- --------
Total 11,000,000 $ 5,721,000 $ 1,734
========== =========== ========
</TABLE>
- -------------------
(1) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low sale price for our common stock, $.01
par value per share, as reported on the Nasdaq National Market System at
March 31, 1999.
(2) Includes up to an aggregate of 9,912,622 shares of our common stock issuable
upon the conversion of our 8% redeemable convertible notes convertible at the
lesser of $.644 or the lowest closing bid price of our common stock during the
10 consecutive trading days immediately preceding each conversion date of the
notes.
(3) Includes up to an aggregate of 932,039 shares of our common stock issuable
upon the exercise of warrants exercisable at the lower of $.773 or the lowest
closing bid price of our common
ii
<PAGE> 3
stock during the 10 consecutive trading days immediately preceding each
conversion date of the notes.
(4) Includes an aggregate of up to 155,339 shares of our common stock issuable
upon the exercise of warrants exercisable at $.773.
Pursuant to Rule 416 under the Securities Act of 1933, there are also
being registered an additional number of shares as may be issuable as a result
of the anti-dilution provisions of the notes and warrants, but not as a result
of pure adjustments attributable to changes in market price.
Viragen, Inc. hereby amends this registration statement on those date
or dates as may be necessary to delay its effective date until Viragen shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on the date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
iii
<PAGE> 4
Subject to Completion
______________, 1999
Selling Security Holder Offering Prospectus
Viragen, Inc.
6,220,121 shares of common stock
The selling security holders are
selling up to 6,220,121 shares of
common stock that they have acquired
or may acquire from Viragen, Inc.
OTC Bulletin Board symbol: VRGN
Recent price: $0.68 at October 6, 1999.
The selling security holders will be considered underwriters within the meaning
of the Securities Act of 1933 in connection with the sale of the shares offered.
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss. See "High Risk Factors" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ____________, 1999.
The information in our prospectus is not complete and may be changed. These
securities may not be sold nor may offers be accepted prior to the time our
prospectus is delivered in final form. Our prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in our
prospectus. This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "High Risk Factors."
OUR COMPANY
Viragen, Inc. was organized in 1980 and is in the business of
researching and developing products which help the human immune system resist
viral infections. Our primary product is a natural interferon product named
Omniferon(TM) which is produced from human white blood cells. Natural interferon
stimulates and controls the human immune system. In addition, interferon may
stem the growth of various viruses including those involved with diseases such
as hepatitis, multiple sclerosis, cancer and HIV/AIDS.
Our product has not been approved by the United States Food and Drug
Administration or the European Union regulatory authorities. Viragen intends to
seek Food and Drug Administration and European Union regulatory authority
approval for various uses of its Omniferon product in the future. This approval
requires several years of clinical trials and substantial additional funds.
Until 1993, we did not operate actively because of limited funds. As a result of
funds previously raised by us as well as funds from the current transaction, we
are concentrating our efforts in obtaining approval for our Omniferon product
initially in the European Union and eventually from the Food and Drug
Administration for the United States.
Our affiliate, Viragen (Scotland) Ltd., has entered into a license and
manufacturing agreement with the Common Services Agency of Scotland, and the
Scottish National Blood Transfusion Service. As a result of this agreement, the
Scottish National Blood Transfusion Service will help in the manufacture of
Viragen (Scotland)'s natural interferon product for exclusive distribution in
the European Union and on a non-exclusive basis worldwide. The Scottish National
Blood Transfusion Service will receive royalties and special access to our
Omniferon product. We have also entered into agreements with the American Red
Cross, America's Blood Centers and the German Red Cross for supplies of white
blood cells. These sources of white blood cells will enable us to manufacture
Omniferon in sufficient quantities to conduct planned European Union and United
States clinical trials and, subject to regulatory approvals, also provide for
commercial manufacturing in the future.
Our executive offices are located at 865 S.W. 78th Avenue, Suite 100,
Plantation, FL 33324. Our telephone number is (954) 233-8746; our facsimile
number is (954) 233-1414.
2
<PAGE> 6
THE OFFERING
Common stock offered
by selling security holders: 6,220,121 shares
Common stock to be outstanding
after the offering: 76,410,139 shares
This number excludes 10,059,154
shares of common stock reserved for
issuance upon the conversion of
preferred stock and exercise of
outstanding options and warrants
held by officers, directors,
employees and consultants.
Use of proceeds: We will not receive any of the
proceeds from sale of common stock
offered by selling security holders.
OTC Bulletin Board symbol: VRGN
High risk factors: For a discussion of risks that you
should consider before buying shares
of our common stock from selling
security holders see "High Risk
Factors."
Summary financial data:
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 374 $ 1,143 $ 1,404 $ 739 $ 722
Net loss (10,651) (7,856) (4,775) (4,672) (3,952)
Loss attributable to common stock (11,653) (10,354) (14,674) (5,570) (3,955)
Loss per average common share (0.19) (0.21) (0.37) (0.15) (0.12)
Weighted average shares outstanding 60,109 50,503 39,135 36,198 32,138
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (2,290) $ 7,842 $ 29,331 $ 18,266 $ 1,614
Total assets 8,529 15,895 37,462 20,617 3,330
Long-term debt 352 7,466 239 116 857
Stockholders' equity 3,836 5,887 32,144 17,275 1,698
</TABLE>
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<PAGE> 7
HIGH RISK FACTORS
An investment in our common stock is very risky. You should be aware
you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully read this entire prospectus and
consider the following risk factors.
We have a history of losses due to lack of sales and regulatory approval. Our
independent accountants have included a going concern explanatory paragraph in
their report
Since the organization of Viragen, Inc., we have incurred operating
losses. The net loss for our fiscal year ended June 30, 1999 was $10,650,832. At
June 30, 1999, we had a total deficit since organization of $50,521,028 and a
working capital deficit of $2,290,441.
We presently produce a single product known as Omniferon(TM), a natural
human leukocyte derived alpha interferon. However, because the United States
Food and Drug Administration and the European Union regulatory authorities have
not yet approved our natural interferon product, we cannot sell this product
and, therefore, have no current source of income from operations.
We will not be able to reduce our losses or operate profitably until we
obtain the necessary approvals to sell natural interferon. While we currently
have a 10% interest in a separate product for the treatment of rheumatoid
arthritis, sales of natural interferon are expected to be our primary source of
income. Investors must understand that our natural interferon product may never
receive the necessary approvals from regulatory authorities. In addition, even
if approval is received, we may not be able to recover sufficient profit from
the sale of natural interferon. If we do not obtain the required approvals or
profit from the sale of natural interferon or other products, Viragen most
likely will be forced to terminate its operations. In that case, those who have
invested in Viragen will likely lose their entire investment.
As a result of these conditions, our independent certified public
accountants included an explanatory paragraph in their report dated
September 17, 1999, indicating that these conditions raised substantial doubt
about our ability to continue as a going concern.
Viragen has recently been delisted from NASDAQ. If the penny stock rules become
applicable to our stock, it may become more difficult to sell our stock
On June 28, 1999, the Nasdaq Stock Market delisted our common stock
because the hearing review panel was concerned that we would not be able to
maintain a closing bid price for our common stock of at least $1.00, as well as
continue to meet Nasdaq's minimum $4 million net worth requirement. As a result,
our common stock is now traded on the OTC Bulletin Board, which is a more
limited market than the Nasdaq Stock Market. Stocks quoted in this market
generally do not have the same following as stocks traded on the Nasdaq Stock
Market. Compared to stocks included in the Nasdaq Stock Market, OTC Bulletin
Board stocks are generally not quoted in the stock market tables in local and
national newspapers. In addition, our common stock could become subject to the
penny stock rules under the Securities Exchange Act of 1934, if we do not
maintain a minimum
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<PAGE> 8
tangible net worth of at least $2 million. As of June 30, 1999, our tangible net
worth totaled $3,836,259.
The penny stock rules require broker-dealers, prior to a transaction in
a penny stock which is not exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Securities and Exchange Commission that
provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
completing the transaction and must be given to the customer in writing before
or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction
in a penny stock which is not exempt from the penny stock rules, the broker
and/or dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of purchases in our common stock and trading activity in
the secondary market for Viragen's common stock. If our common stock becomes
subject to the penny stock rules, it will be more difficult for you to sell the
common stock which may reduce the value of your investment.
Competition in pharmaceutical industry in products offered and for funding may
force us to terminate operations
Competition for investment capital and market share in the
immunological and pharmaceutical products industry is very strong. Our
competitors, which include major pharmaceutical companies, have more experience
in research, development and clinical testing of pharmaceutical and biomedical
products. Our competitors also have greater financial, marketing and human
resources than Viragen. Some of our competitors, including Hoffman-La Roche,
Inc., Shering-Plough Corporation, Biogen, Inc., Chiron Corp., and Baxter
Laboratories , already have approvals for their synthetic interferons and since
1986 have been marketing their products. These companies have received wide
acceptance from the medical community and the patient population for their
products. This will make it more difficult for us once we are able to introduce
our product. Competition is only expected to increase in the future. In
addition, technological advances made by our competitors may make synthetic
products more effective, less costly and with less harmful side effects. Viragen
may not be able to keep pace with technological advances by others, either
because we do not have sufficient resources or because we cannot achieve greater
improvements in our technology. If we are unable to compete with out larger,
more experienced competitors, we may be forced to terminate operations.
Competition for funding in the pharmaceutical industry is also intense.
As explained above, we have no source of income and may not have sufficient
sources of income or investment capital for a significant period of time, if
ever. Additional funds will be needed to conduct clinical trials so we can
receive regulatory approvals. We must obtain additional funding from outside
sources
5
<PAGE> 9
to conduct these trials. In the event we are unable to locate funding or obtain
funding on reasonable terms, we will most likely be required to terminate
operations. In that case, any investment in Viragen would be lost.
Government regulation may affect Viragen's ability to develop and distribute
natural interferon
All pharmaceutical manufacturers are subject to state and federal rules
and regulations. In particular, we must comply with the United States Food and
Drug Administration guidelines governing the productivity, testing and
marketing. European Union regulatory authorities also impose regulations. These
rules and regulations are constantly changing. These changes could extend the
period of clinical trials, involve costly compliance measures and may restrict
our ability to produce and distribute our natural interferon product based on
the results of testing. It is possible that we may never receive these
regulatory approvals for any specific illness or for the range of illnesses that
we are attempting to treat with our natural interferon product.
If patients have problems receiving third party reimbursements of our product it
will be more difficult to market our product. In addition, our marketing costs
would increase.
Our ability to successfully market our products depends in part on the
receipt of reimbursements from government health administration authorities,
private health coverage insurers and other organizations. The pricing of
products similar to those we produce or the amount of reimbursement available
from governmental agencies or third party insurers may affect our ability to
market our product or market our product at a profit. This is so because
limitations on third party reimbursements could restrict the patient population
that will make use of our product. Difficulties in getting third party payors to
allow reimbursement for our product could also require us to increase our
marketing efforts which will involve greater expenses.
Our proprietary technology and any future patents that we receive may not
provide sufficient protection to us
We intend to rely, in part, on our internally developed technology for
the efficient and safe production of natural interferon that was developed by
Viragen's scientists. We believe that this technology allows us to produce our
natural interferon more efficiently and with less possible contaminants making
it a more desirable and affordable product. Viragen recently filed two patent
applications relating to our Omniferon production technology. If in fact, we are
not successful in obtaining patents or demonstrating that our production process
is proprietary under trade secret law, we will have limited protection from
those who might copy our technology. In addition, we may be damaged if we are
accused of misappropriating a competitor's proprietary technology even if these
claims are untrue. We cannot assure you that our patent applications will be
approved, and if granted, that these patents or our other proprietary rights
will provide necessary protection to us.
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<PAGE> 10
Technology transfers by Viragen to third parties may not result in revenue to us
One of our proposed marketing strategies is to license the right to
used our technology and product manufacturing techniques to third parties, who
will in turn use them to produce natural human leukocyte alpha interferon
outside the United States. We cannot guarantee that we will be able to
successfully market the product or receive revenue from their efforts.
We may be exposed to product liability claims and our product liability
insurance may not be sufficient to cover all claims or continue to be available
to us
We may be subject to claims for personal injuries or other damages
resulting from the use of our natural interferon. In order to protect Viragen
against these claims, we maintain product liability insurance in the amount of
$1,000,000 per occurrence and $2,000,000 in total. We cannot be sure that this
insurance will be adequate to cover any liabilities that may result from the use
of our natural interferon or that we will be able to afford this form of
insurance in the future.
Our reliance on foreign third party manufacturer may disrupt operations
Viragen (Scotland) Ltd., a wholly-owned subsidiary of Viragen (Europe)
Ltd., our majority-owned subsidiary, entered into a manufacturing agreement with
the Common Services Agency of Scotland for the production of Omniferon, our
natural interferon product. Under this agreement, Viragen (Scotland) Ltd. and
the Common Services Agency of Scotland will jointly manufacture Omniferon. Our
decision to use an offshore manufacturer could expose Viragen (Scotland) to
risks involved with fluctuations in exchange rates of foreign currencies. In
addition, relying on the Common Services Agency of Scotland exposes us to all
the risks of dealing with a foreign manufacturing source. These include
governmental regulations, tariffs, import and export restrictions,
transportation, taxes and foreign health and safety regulations.
Foreign manufacturing arrangement will limit our control and may lead
to the disruption of our operations which could negatively affect our operations
and your investment in us.
We are dependent on certain key executives and their loss would be damaging to
Viragen
Our day-to-day operations are managed by Mr. Gerald Smith, our chairman
of the board and president, Mr. Dennis W. Healey, our executive vice president,
treasurer and chief financial officer, and Dr. D. Magnus Nicolson, the managing
director of Viragen (Scotland) Ltd. We have employment agreements with Messrs.
Smith, Healey and Nicolson which restrict competitive activities by them during
the term of their agreements and for a two-year period thereafter. However, the
loss of their services would have a negative effect on our ability to conduct
business. Our future success will greatly depend on our ability to attract and
retain additional skilled personnel in various phases of our operations.
Our transaction with selling security holders may cause substantial dilution to
our shareholders
We expect to issue up to 6,220,121 shares of our common stock, or 8.2%
of the issued and outstanding common stock as of September 24, 1999, to the
selling security holders in
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<PAGE> 11
connection with the notes and warrants described in this prospectus. The selling
security holders could invest additional funds in Viragen on terms virtually
identical to those described in the "Selling Security Holders" section of the
prospectus for up to an additional $7,000,000, which will include substantially
the same conversion terms and penalty provisions. However, neither we nor the
selling security holders are obligated to sell or purchase any securities in the
future. Due to the large percentage of shares of our common stock we may sell to
the selling security holders, you may experience substantial dilution of your
investment in us. In addition, sales of our shares by the selling security
holders may depress the price of our stock in the market. Future transactions
with the selling security holders or any other investors could further depress
the price of our stock. We will require additional funding to conduct
operations. This funding may not be available and will involve further dilution
to investors.
Possible payment of penalty fees to selling security holders could negatively
affect our operation
As described later on in the "Selling Security Holders" section of this
prospectus, we may be obligated to pay the selling security holders penalty fees
in excess of the amount of their investment if we default on our obligations to
the selling security holders. Triggering events 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). These penalties involve payments of many
thousands of dollars which depends on the period that we are in non-compliance.
To date, we have incurred approximately $160,000 in penalty fees. The penalty
amount will continue to increase $40,000 per month, until this registration
becomes effective. If we are required to pay the penalty fees, our ability to
finance our current and future operations could be negatively affected.
Our operations may suffer from computer problems relating to the year 2000
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the year 2000. Some older
computer systems store dates with only a two-digit year with an assumed prefix
of "19." Consequently, this limits those systems to dates between 1900 and 1999.
If not corrected, many computer systems and applications could fail to create
erroneous results by or at the year 2000.
Because we will rely heavily on computers to conduct our business, we
are subject to all the risks associated with the year 2000. We have assessed the
scope of our risks related to problems these computer systems may have related
to the year 2000 and we believe these risks have been addressed. In addition, we
are in the process of questioning our vendors and business partners about their
progress in identifying and addressing problems related to the year 2000.
However, we cannot assure you that all of these third party systems or our
computer systems will be year 2000 compliant.
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<PAGE> 12
We will require additional funding to conduct operations. The funding may not be
available and will involve further dilution to investors
Viragen will continue to require significant funding in the future to
continue its operations. In addition to the $2,000,000 received from the selling
security holders in the transaction described in this prospectus, the selling
security holders and Viragen may conclude similar arrangements for up to an
additional $7,000,000 in funding. However, neither Viragen nor the selling
security holders have the obligation to complete the financing for the
additional $7,000,000 in funding. We cannot assume that this additional
financing or any additional financing will be available. Given the large amount
of funding required by Viragen in the future, any financing will involve the
issuance of millions of shares of capital stock of Viragen and substantial
dilution to our investors.
We do not expect to pay dividends in the foreseeable future
We have never paid cash dividends on our common stock and do not expect
to pay cash dividends on our common stock any time in the near future. The
future payment of dividends directly depends upon our future earnings, capital
requirements, financial requirements and other factors to be determined by our
board of directors. For the foreseeable future, any earnings from operations
will be used to finance our growth and will not be paid to our common
stockholders in the form of dividends. Since we do not anticipate paying cash
dividends on our common stock, return on your investment, if any, will depend on
an increase in the market value of Viragen's common stock.
Possible sales of securities by current stockholders and depressive effect on
market value of our stock
As of September 24, 1999, we had 12,058,032 shares of common stock
outstanding which were "restricted securities" as that term is defined by Rule
144 under the Securities Act of 1933, as amended. As of September 24, 1999, we
had convertible preferred stock, options and warrants outstanding which if
exercised would result in 10,059,154 additional shares of our common stock
outstanding. The shares of common stock outstanding do not include shares of
common stock that may be issued on conversion of various options and warrants.
Under Rule 144, a person who holds restricted securities for a period of one
year may sell a limited number of shares to the public in ordinary brokerage
transactions. Sales under Rule 144 and sales of common stock covered by
registration statements filed by us including shares covered by this prospectus
may reduce the market price of our common stock and increase the number of our
publicly-held securities.
Use of preferred stock could be used to resist takeovers and may also cause
potential additional dilution
Our Certificate of Incorporation authorizes 1,000,000 shares of
preferred stock, of which at September 24, 1999, 2,650 shares of series A
preferred stock and 11 shares of series I preferred stock were issued and
outstanding. Our Certificate of Incorporation gives our board of directors the
authority to issue preferred stock without approval of our stockholders. We may
issue additional shares of preferred stock to raise money to finance our
operations. We may authorize issuance of
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<PAGE> 13
the preferred stock in one or more series. In addition, we may set the dividend
and liquidation preferences, voting rights, conversion privileges, redemption
terms and other privileges and rights of the shares of each authorized series.
The issuance of large blocks of preferred stock could possibly have a dilutive
effect to our existing stockholders and negatively impact our existing
stockholders' liquidation preferences. In addition, while we include preferred
stock in our capitalization to improve our financial flexibility, we could
possibly issue our preferred stock to friendly third parties to preserve control
by present management in the event we become subject to a hostile takeover that
could ultimately benefit Viragen and Viragen's stockholders.
USE OF PROCEEDS
Viragen received $1,861,820, net of finders' fees, from the sale of the
convertible notes with detachable warrants. We may receive additional proceeds
upon the exercise of the warrants. We will not, however, receive any proceeds
from the sale of shares of common stock acquired by the selling security
holders.
Proceeds received by Viragen will be used to fund operations.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Viragen's common stock traded on the NASDAQ National Market between
December 29, 1996 and June 28, 1999, under the symbol "VRGN". Our common stock
commenced trading on the over-the-counter bulletin board on June 29, 1999. The
stock symbol continues to be "VRGN". The following table sets forth the high and
low bid quotations for our common stock since July 1, 1997.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1998-1999
First quarter ended 09/30/98................................ $2.19 $1.06
Second quarter ended 12/31/98............................... 1.44 .63
Third quarter ended 03/31/99................................ .97 .38
Fourth quarter ended 06/30/99............................... 1.22 .38
1997-1998
First quarter ended 09/30/97................................ $3.00 $2.16
Second quarter ended 12/31/97............................... 2.25 1.09
Third quarter ended 03/31/98................................ 2.86 .97
Fourth quarter ended 06/30/98............................... 2.81 1.75
</TABLE>
These quotations represent prices between dealers, and do not include
retail mark-ups, markdowns or commissions, and may not necessarily represent
actual transactions.
As of October 6, 1999, we had approximately 2,700 stockholders of record.
At that date, the closing price of the common stock was $0.68 per share.
We have not paid any dividends on our common stock since incorporating in
1980. Since we have experienced losses since inception, have significant capital
requirements in the future and presently intend to retain future earnings, if
any, to finance the expansion of our business, it is not anticipated that we
will pay any cash dividends in the foreseeable future. Future dividend policy
will depend on our earnings, if any, capital requirements, expansion plans,
financial condition and other relevant factors.
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<PAGE> 14
CAPITALIZATION
The following table sets forth out capitalization as of June 30, 1999:
o on an actual basis; and
o on an as adjusted basis to reflect the issuance of 4,112,219
shares of common stock issued upon conversion of the 8%
convertible promissory notes, including related interest, at the
rate of $0.50 per common share. The re-set shares totalling
1,098,193 shares are also included
June 30, 1999
------------------------------
Actual As Adjusted
------------ ------------
Long-term debt, less current portion.......... $ 231,107 $ 231,107
Convertible series I cumulative preferred
stock, $1.00 par value. Authorized 200
shares; issued and outstanding 11 shares.... 120,920 120,920
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, $0.01 par value. Authorized
75,000,000 and 125,000,000 shares, actual and as
adjusted, respectively; issued 69,913,762
and 75,124,174 shares, actual and as adjusted,
respectively, of which 845,277 shares are held
as treasury stock........................... 699,135 751,239
Capital in excess of par value................ 55,353,205 58,054,458
Treasury stock, at cost....................... (1,277,613) (1,277,613)
Retained deficit.............................. (50,521,028) (51,218,276)
Accumulated other comprehensive income........ 46,752 46,752
Notes due from directors...................... (466,842) (466,842)
------------ ------------
Total stockholders' equity.............. 3,836,259 5,892,368
------------ ------------
Total capitalization.................... $ 4,188,286 $ 6,244,395
============ ============
The table does not reflect the possible issuance of 1,009,709 common shares,
which are issuable upon exercise of the related warrants.
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<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with selected historical consolidated
financial data of Viragen, Inc. We have prepared this information using the
audited consolidated financial statements of Viragen, Inc. for the five years
ended June 30, 1999.
When you read this selected historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and related notes in our annual reports filed with the SEC, as well
as the section of our annual reports titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Consolidated Statement of Operations Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 374 $ 1,143 $ 1,404 $ 739 $ 722
Net loss......................................... (10,651) (7,856) (4,775) (4,672) (3,952)
Loss attributable to common stock................ (11,653) (10,354) (14,674) (5,570) (3,955)
Loss per average common share.................... (0.19) (0.21) (0.37) (0.15) (0.12)
Weighted average shares outstanding.............. 60,109 50,503 39,135 36,198 32,138
</TABLE>
Consolidated Balance Sheet Data
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)........................ $(2,290) $ 7,842 $29,331 $18,266 $ 1,614
Total assets..................................... 8,529 15,895 37,462 20,617 3,330
Long-term debt................................... 352 7,466 239 116 857
Stockholders' equity............................. 3,836 5,887 32,144 17,275 1,698
</TABLE>
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report on Form S-1 that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. These include statements regarding Viragen's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include our statements regarding liquidity, anticipated cash needs
and availability, and anticipated expense levels in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" including expected
product clinical trial commencement dates, product introductions, expected
research and development expenditures and related anticipated costs. All forward
looking statements included in this document are based on information available
on this date, and we assume no obligation to update any of our forward looking
statements. You should note that actual results could differ materially from
those contained in forward looking statements. Among the factors that may cause
our actual results to differ materially are the following factors and the risks
discussed in the "High Risk Factors" section included in this prospectus.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect the our financial condition or results of operations.
Our future success depends in part upon our intellectual property,
including patents, trade secrets, know-how and continuing technological
innovation. We cannot provide assurances that any steps we take to protect our
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products. We cannot offer
any assurances that any current or future patent, if any, owned by us will not
be invalidated, circumvented or challenged, that the rights granted to us will
provide competitive advantages or that any future patent applications will be
issued within the scope of the claims sought by us, if at all. Furthermore, we
cannot assure you that others will not develop technologies that are similar or
superior to ours, duplicate our technology or design around any patents held by
us.
Viragen has incurred operational losses and operated with a negative cash
flows since its inception in December 1980. Losses have totaled $10,650,832,
$7,856,136, and $4,775,245 for the fiscal years ended June 30, 1999, 1998 and
1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 24, 1999, Viragen has limited capital to sustain its
operations. The fiscal 1999 report of independent certified public accountants
noted our financial condition raises substantial doubt as to our ability to
continue as a going concern. We are actively seeking new investment capital;
however, we cannot assure you as to the timing of any new investment, if at all.
If we are unable to attract new investment capital in the near-term, it would be
necessary for us to significantly reduce or completely suspend all operations.
Viragen had a working capital deficit of approximately $2,290,000 at June
30, 1999, a decrease in working capital of $10,133,000 from the previous year.
This decrease was due to operational losses of $10,650,832, cash disbursements
of $1,100,000 for the purchase of an equity interest in Inflammatics, Inc. and
additions to
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<PAGE> 17
property, plant and equipment of approximately $497,000 during the year. The
reductions in working capital were off-set by $1,375,000 in proceeds raised
through an equity offering.
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was 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 and warrants to
purchase shares of our common stock. At the same time we executed the purchase
agreement, we entered into a memorandum of agreement with Isosceles which gives
us the opportunity to sell Isosceles an aggregate of up to $7,000,000 of
additional notes and warrants in two tranches. Neither Viragen nor these
security holders have an obligation to complete the subsequent tranches.
One-half of the principal balance and accrued interest on the
notes automatically converted into 2,049,534 shares of our common stock on
July 7, 1999. The remaining one-half of the principal balance and accrued
interest on the notes automatically converted on August 6, 1999 into 2,062,685
shares of our common stock. The conversion price on both conversions was the
lesser of $0.50 or the lowest closing bid price of our common stock during the
ten consecutive trading days immediately preceding each of the conversion dates.
The notes were converted at $.50 per 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 common stock, as required by a
reset provision. The purpose of this arrangement was to ensure that the
investors had a return
14
<PAGE> 18
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.
As a result of this provision, we issued 546,990 shares and 551,203 shares
under the first and second reset, respectively.
The warrants entitle Isosceles and Cefeo to purchase an aggregate of
932,039 shares of our common stock. The warrants are exercisable until March 17,
2004. The warrants are exercisable at $0.50 per share. The warrants also contain
a cashless exercise provision which allows the selling security holders to use
the difference between the closing price of the common stock at the time of
exercise, minus the exercise price, as a currency to acquire the shares without
paying cash. By way of example, if 1,000 shares are being exercised when the
closing price is $1.00 and the exercise price is $.50, the selling shareholders
could use 500 shares with a market value of $500 to pay for the exercise of the
warrants. The holder would receive 500 shares net, as a result of the cashless
exercise.
We must, however, reduce the exercise price of the warrants if we were to
sell shares of our common stock, grant options or adjust the exercise prices of
options or issue other securities convertible into our common stock at prices
less than $.50.
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<PAGE> 19
In May 1999, we completed a private placement for the sale of 2,750,000
shares of common. The common shares were sold to three accredited investors with
whom we have had prior dealings, at $0.50 per share. Viragen received proceeds
of $1,375,000 from the sale of these shares.
16
<PAGE> 20
In November 1998, Viragen signed an exclusive supply and distribution
agreement with AGC, a Pakistan-based, multinational conglomerate, for the
purchase and distribution of Omniferon. Under this agreement AGC's designated
territories include Saudi Arabia, Kuwait, Yemen, Oman, UAE, Brunei and other
Middle Eastern countries, as well as India and Pakistan. The AGC agreement calls
for AGC to purchase a minimum of $20 million of Omniferon over five years. The
agreement is subject to AGC's receipt of the required regulatory approvals for
product commercialization in the designated territories and our receipt of the
requisite regulatory approvals to export Omniferon from our commercial
manufacturing facility in Edinburgh, Scotland. AGC agreed to secure the purchase
minimums with a $1 million irrevocable revolving letter of credit. The purchase
minimums increase significantly if and when we obtain regulatory approval for
commercialization of Omniferon in the United States and/or Europe.
Under the terms of the AGC agreement, AGC is responsible for clinical and
regulatory costs to obtain approvals for commercialization of Omniferon in its
designated territories and all subsequent sales, marketing and distribution
activities in these regions. The AGC agreement also calls for AGC to build, own
and operate, at its own expense, a pharmaceutical distribution facility in a
mutually agreeable location within the designated territories. AGC has informed
us that they will initially focus on the distribution for hepatitis B and C,
diseases which are at epidemic proportions in the designated territories.
In July 1999, Viragen entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and distribution agreement between Viragen and Drogsan for
natural interferon, under terms similar to the AGC agreement. The final terms of
this agreement are still being negotiated.
In August 1998, we entered into a strategic alliance simultaneously with
our 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 white blood cell preparation currently
in Food and Drug Administration Phase I/II clinical trials for rheumatoid
arthritis.
Under the terms of the Inflammatics agreement, we 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 our common stock at
prices ranging between $1.00 and $1.78 per share. In addition we 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 our 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 common
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, subject to our further evaluation of the Phase III clinical
trial results, provides for the issuance of an additional 2,000,000 shares of
common stock in exchange for an additional 33.3% equity interest.
Additional funding will be required to complete the clinical trial process
relating to Omniferon both in the European Union and domestically prior to
receiving regulatory approval to market the product. Anticipated funding
requirements related to approval of Omniferon for hepatitis C, the first
approval we are seeking includes: Phase I and Phase II trials -- $3.2 million
and Phase III studies -- $9.1 million. In addition, our anticipated funding
requirements for U.S. operations include: the establishment of domestic
manufacturing capacity -- $6 million; and joint research and development
projects -- $4 million. Additional funding will also be required to complete
Phase III studies in the U.S. New funding will also be used for continued
product development, general working capital purposes including administrative
support functions and the possible equity investments in businesses
complementary to the our operations.
Management believes that our Omniferon product currently under development
can be manufactured in sufficient quantity and be priced at a level to offer
patients an attractive alternative to currently available treatments for
illnesses such as hepatitis C. However, to maintain our current level of
operations including our production scale up projects for Omniferon currently
being conducted in our facility in Scotland and to commence our clinical trials
as planned, we will need to raise significant additional working capital from
outside sources. If we are unable to locate this additional funding we would
most likely be forced to terminate operations or significantly reduce our
operations.
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<PAGE> 21
While subject to significant limitation, at June 30, 1999 Viragen has
available approximately $31.3 million in net tax operating loss carryforwards
expiring between 2000 and 2019. These carryforwards may be used to offset
taxable income, if any, during those periods. Our ability to generate revenues
during future periods is dependent upon receiving regulatory approvals for our
Omniferon and/or LeukoVAX products. As we cannot be certain that we will receive
the necessary regulatory approvals, we are unable to conclude that realization
of benefits from our deferred tax assets is "more likely than not", as
prescribed by SFAS 109. Accordingly, we are recognizing a valuation allowance to
offset 100% of the deferred tax assets related to these carryforwards.
Currently, we believe that our foreign currency risk is not material. At
the present time, we do not have sales revenue or related receivables. Also, we
do not purchase foreign currencies on a regular basis. Transfers of funds to our
foreign subsidiaries are performed infrequently, in large sums, at the
then-current exchange rates.
To date we have not been impacted by the European Union's adoption of the
"Euro" currency. Our foreign operations are located in Edinburgh, Scotland, and
the United Kingdom did not participate in the adoption of the Euro. The United
Kingdom does not have a scheduled date for the eventual adoption of the Euro.
RESULTS OF OPERATIONS
As the discussion of Liquidity and Capital Resources noted, our fiscal 1999
report of independent certified public accountants noted our financial condition
raises substantial doubts as to our ability to continue as a going concern.
Viragen recognized no sales revenue or related costs for the fiscal years
ended June 30, 1999, 1998, or 1997. We have limited potential for sales prior to
receiving the necessary regulatory approvals from the U.S. Food and Drug
Administration and/or comparable European authorities. We could commence
generating sales revenue through export sales of Omniferon, under the AGC
Agreement. These sales, however, are contingent upon AGC's receipt of the
required regulatory approvals for product commercialization in the designated
territories, and our receipt of the requisite regulatory approvals. While we did
receive approval of our Clinical Trial Exemption Application from the European
Union regulatory authorities to begin clinical trials of Omniferon, our
multi-species natural human leukocyte-derived alpha interferon, we have not yet
begun these trials. We intend to commence clinical trials in the European Union
during the fourth calendar quarter of 1999 and eventually submit an
Investigational New Drug Application to the Food and Drug Administration. We
cannot assure you we will receive these approvals. These approvals are subject
to the successful completion of clinical trials and our ability to raise
significant additional investment capital to fund the completion of these
trials.
1999 Compared to 1998
The significant decline in interest and other income for 1999, compared to
the previous year reflects the reduction in cash balance invested between
periods. This reduction results primarily from operational losses, the cash
investment in Inflammatics, Inc., and expenditures associated with expansion of
our laboratory and manufacturing facility in Scotland.
Research and development costs totaled approximately $5,153,000 for the
fiscal 1999 compared to $4,222,000 for the same period of the previous year. The
increase of $931,000 (22%) included an increase in research related salaries and
support fees of $468,030, and an increase in equipment maintenance costs of
$127,988. We also recognized $136,021 in compensation expense on warrants issued
to scientific consultants, under the guidelines of FAS 123, not incurred in the
prior year. The bulk of our development work is now being done in our Scottish
facility. Research and development costs can be expected to continue to increase
in following periods as we commence clinical trials of Omniferon.
General and administrative expenses totaled approximately $5,528,000 for
the current year, a decrease of approximately $52,000 from the preceding year.
During 1999, we waived a 90-day expiration provision on stock options held by
three directors who were not re-elected to the board of directors and recognized
$171,875 in compensation expense as a result of the modified grants. We also
recognized $61,751 in compensation expense on warrants issued to consultants
during the year. Overall, compensation expense from
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<PAGE> 22
stock options and warrants increased by $176,000 compared to the prior year.
These increased expenses were offset by a decrease in insurance costs of $93,689
from the prior year due to favorable rates obtained on policy renewals. We also
experienced a decrease of $222,600 in legal fees between periods due to the
settlement of litigation during the prior year, as well as the completion of
contract negotiations. We expect general and administrative expenses to decrease
during the upcoming year as domestic administrative staff and related costs have
been reduced by approximately $1.3 million commencing in June, 1999.
During the year we recognized approximately $757,000 in losses related to
our investment in Inflammatics, Inc. This loss reflects 100% of the losses
incurred by Inflammatics associated with the clinical testing of LeukoVAX, as
well as the expensing of our excess investment costs.
Our management anticipates operational losses will continue increasing, as
we begin planned clinical trials of Omniferon. In January 1999, we began
implementing a cost-reduction plan. Planned cost reduction is expected to save
approximately $2.4 million annually in operating expenses. The reductions
include the elimination of administrative and research positions in the U.S.
saving approximately $1.6 million. We also plan on closing our Florida-based
research facility, consolidating these operations in our Scottish facility and
saving approximately an additional $800,000 annually. The changes in operations
reflect the shift from developing Omniferon in our domestic laboratories to
scale-up development and conducting clinical research in the European Union. As
a result, while significant savings will be realized in the US, particularly in
general and administrative expenses, these savings will be more than offset by
increasing expenses incurred in our Scottish facilities related to scale-up
process and the start of clinical trials. Clinical trials are expected to
commence in the forth calendar quarter of 1999.
1998 Compared to 1997
Interest and other income of $1,143,112 represented earnings on invested
cash balances during the year and reflect a 19% decline from the previous fiscal
year. This significant decline reflects the decline in cash balance from the
previous year. This decline was due primarily to cash redemption on convertible
preferred stock issuance and operational losses. This trend is expected to
continue into the next fiscal year.
Research and development costs totaled $4,222,332, for fiscal 1998 compared
to $2,360,416 for the previous year. This increase reflects the overall increase
in research activities being conducted between the periods both in the U.S. and
Scotland, related primarily to the scale-up of our manufacturing technology in
the Scottish manufacturing facility. Components of this increase included
increases in laboratory supplies expense of $466,900, increases in research
related salaries and support fees of $440,100, an increase in research related
scientific professional fees paid to the Transfusion Service of $200,100,
increased consulting and outside laboratory testing of $208,400, and increased
travel related expenses associated with the transfer of technology and process
development between our Florida and Scottish facilities. Research and
development costs associated with Omniferon process development projects are
expected to increase during the next fiscal year as process scale-up research
nears completion. While process development costs are expected to decline in the
following fiscal year, these reductions will be offset by costs associated with
clinical trial expenditures.
Selling, general and administrative expenses totaled $5,580,213 for fiscal
1998, reflecting an increase of $1,531,127 (38%) over the preceding year. This
increase included increases in administrative salaries and related taxes of
$599,400. This increase was due primarily to the addition of administrative
staff in our Florida facility and domestic salary increases. We also recognized
increases in rent expense commencing in August 1997 related to our new
administrative facility in Plantation, Florida and the expansion of leased space
in our Scottish manufacturing facility. Total rent expense for our facilities
increased by $393,600 over the prior year. Legal fees between the periods have
increased by $559,000 due to increases in fees associated with research of
technology patents of $111,300, expanded efforts in collaborative agreements and
general contractual transactions, both domestically and in Europe, of $211,200
and increased costs associated with litigation of $222,900. We also recognized
$109,900 in bad debt expense attributable to a director loan with related
accrued interest. These increases were offset by compensation expense in the
prior year of $396,500 attributable to the issuance of options, which was not
incurred in fiscal 1998, and a decrease of $250,391 in
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<PAGE> 23
losses on the settlement of litigation. During the prior year, we settled
threatened litigation for $288,245. The potential litigation stemmed from
allegations of a former Cytoferon Corp. shareholder claiming compensation due
under a consulting agreement entered into with Cytoferon Corp. While Cytoferon
Corp. and Viragen denied any wrong doing in this matter, it was believed that
the settlement, through the issuance of treasury shares, would prove less costly
to us. We have also experienced increased travel costs attributable to
administrative support functions related to the establishment of our Scottish
facility. General and administration expenses are expected to remain relatively
stable over the next fiscal year, as we have no plans to add to its
administrative staff with related costs. We also expect that legal fees
associated with litigation and due diligence efforts may decline.
Interest expense totaled $590,867 for fiscal 1998, reflecting a significant
increase over the preceding year. This increase was due primarily to interest
expense attributable to the 10% $9,720,240 note payable issued in July 1997 in
exchange for the series B convertible stock then outstanding. This note was
paid-in-full in April 1998.
YEAR 2000
Viragen recognizes the potential problems posed to operations by its
dependence upon date sensitive computer systems and applications throughout its
business and the operations of third parties upon whom we are dependent. We rely
heavily on computerized laboratory equipment both for our ongoing research and
production scale-up projects as well as computer controlled commercial scale
manufacturing equipment in place in our Scottish facility. In addition, through
strategic alliance and supply agreements currently in place, we are also
dependent upon Year 2000 compliance by third parties for the supply of critical
raw materials as well as certain manufacturing steps and storage of products
produced for planned clinical trials and eventually for commercial scale
production.
We have been using both internal and external resources to isolate and as
necessary, reprogram, update or replace hardware or software found to be non
Year 2000 compliant. The evaluation phase of our Year 2000 compliance program
began in the fourth quarter of fiscal 1998. Due to the limited size of our
administrative staff, it is expected that most of this work will be performed by
outside contractors retained specifically for this project. We expect to
complete our internal Year 2000 project by October 1999. The total estimated
cost for us to complete our internal Year 2000 project is $50,000 to $70,000,
including projected hardware replacements indicated. Funding for the evaluation
and corrective phases is being provided from general working capital.
We have contacted certain external third parties, including raw material
vendors and scientific equipment manufacturers considered critical to our
current and planned future operations to discuss and evaluate their own
compliance programs. After we complete our evaluation of third party responses,
we will prepare a contingency plan to mitigate third party Year 2000 issues, if
necessary.
The costs and projected completion dates of our Year 2000 compliance
program is based on our best estimates and is dependent in large part upon
compliance programs of external third parties or scientific equipment and
software vendors over whom we have no direct control. Accordingly, our inability
or the inability of critical vendors to meet Year 2000 compliance deadlines
could have a material adverse impact on our operations from a product
development, clinical trial or commercial manufacturing standpoint, negatively
affecting our financial condition, results of operations and cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
Securities Act Release No. 7386 which requires that we disclose our policies
used to account for derivatives and certain quantitative and qualitative
information about market risk exposures. Market risk generally represents the
risk of loss that may result from the potential change in value of a financial
instrument as a result of fluctuations in interest rates and market prices.
We have not traded or otherwise transacted in derivatives nor do we expect
to do so in the future. We have established policies and internal processes
related to the management of market risks which we use in the normal course of
our business operations.
Interest Rate Risk
The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 1999, a change in
interest rates would not have a material impact on our future operating results
or cash flows.
Foreign Currency Exchange Risk
We believe our foreign currency risk is not material. At the present time
we do not have sales revenues or related receivables. Also, we do not purchase
foreign currencies on a regular basis. Transfers of funds to our foreign
subsidiary in Scotland are infrequent and are transferred at the then current
exchange rate.
We were not impacted by the European Union's adoption of the "Euro"
currency. Our foreign operations are located in Scotland and the United Kingdom
did not participate in the adoption of the Euro. The United Kingdom does not
have a scheduled date for the eventual adoption of the Euro.
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<PAGE> 24
BUSINESS
INTRODUCTION
Viragen, Inc. was organized in 1980 and is in the business of researching
and developing products which help the human immune system resist viral
infections. Our primary product is a natural interferon product named
Omniferon(TM) which is produced from human white blood cells. Natural interferon
stimulates and controls the human immune system. In addition, interferon may
stem the growth of various viruses including those involved with diseases such
as hepatitis, multiple sclerosis, certain cancers and HIV/AIDS.
Our product has not been approved by the United States Food and Drug
Administration or the European Union regulatory authorities. Viragen will seek
Food and Drug Administration and European Union regulatory authority approval
for various uses of its Omniferon product in the future. This approval requires
several years of clinical trials and substantial additional funds. Until 1993,
we did not operate actively because of limited funds. Using funds raised in a
series of equity financings, we are concentrating our efforts in obtaining
approval for our Omniferon product initially in the European Union and
eventually from the Food and Drug Administration for the United States.
Our affiliate, Viragen (Scotland) Ltd., entered into a license and
manufacturing agreement with the Common Services Agency of Scotland and the
Scottish National Blood Transfusion Service. As a result of this agreement, the
Blood Transfusion Service will help in the manufacture of Omniferon for
exclusive distribution in the European Union and on a non-exclusive basis
worldwide. The Blood Transfusion Service will receive royalties and special
access to our Omniferon product. We have also entered into agreements with the
American Red Cross, America's Blood Centers and the German Red Cross for
supplies of white blood cells. These sources of white blood cells will enable us
to manufacture Omniferon in sufficient quantities to conduct planned European
Union and United States clinical trials and, subject to regulatory approvals,
also provide for commercial manufacturing in the future.
In August 1998, we acquired a 10% equity interest, with an option to
acquire up to an 80% interest, in Inflammatics, Inc. Inflammatics obtained a
license to the rights to LeukoVAX, also a human blood derived natural product,
for the treatment of rheumatoid arthritis. LeukoVAX is currently in U.S. Food
and Drug Administration Phase I/II clinical trials.
We intend to obtain Food and Drug Administration and European Union
approvals for various uses of our Omniferon and LeukoVAX in the future.
Approvals will require several years of clinical trials and substantial
additional funding. To date, we have not commercially distributed either
product, although we did manufacture Alpha Leukoferon(TM), our first generation
natural interferon product, which was distributed for research purposes under a
limited Florida investigatory license and protocols program which was
discontinued in August 1995. Following August 1995, we did distribute on a
limited basis for patients approved by the Florida HRS for humanitarian purposes
under an HIV/AIDS study protocol conducted at no charge to patients.
Currently we are concentrating our efforts on preparing for clinical trials
necessary to obtain approvals for Omniferon, initially within the European
Union, and later, in the United States. We commenced our preclinical studies
with Omniferon in March 1998 and obtained approval of our Clinical Trial
Exemption Application in July 1999. We plan to commence clinical trials of
Omniferon, in Europe, during the fourth calendar quarter of 1999.
RECENT DEVELOPMENTS
To secure reliable and safe sources of human white blood cells, also known
as leukocytes or buffy coats, critical to the production of both Omniferon and
LeukoVAX, we have entered into a series of strategic alliance and supply
agreements with major worldwide suppliers of blood products. During 1998, we
entered into agreements with the American Red Cross and America's Blood Centers,
which between them collect annually
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<PAGE> 25
a substantial majority of the U.S. blood supply. We also entered into a series
of agreements covering a majority of the blood supply in Germany, a major
European supplier.
In July 1998, we entered into a strategic alliance and supply agreement
with America's Blood Centers for the supply of human white blood cells.
America's Blood Centers is a national network of non-profit, independent
community blood centers operating in 45 states. America's Blood Centers members
annually collect in excess of 45% of the U.S. blood supply through member blood
donation centers and mobile collection facilities. Under the terms of the
America's Blood Centers agreement, we were granted first and preferential access
to all leukocytes produced by America's Blood Centers members who have elected
to participate in the program. We agreed to pay a fixed cost per leukocyte
provided during the first two years of the agreement. After the first two years,
the price may vary based upon incremental costs incurred by participating
America's Blood Centers members.
In addition to cost reimbursement for leukocytes provided, the America's
Blood Centers agreement provides for a royalty payment to be paid for each
leukocyte provided under this agreement. The royalty to be paid is based on the
higher of:
- a percentage of net revenues realized by Viragen
- the estimated net revenues that could have been realized, based on the
sale of Omniferon, utilizing the America's Blood Centers leukocytes
provided, or
- a fixed dollar amount per leukocyte.
No minimum order requirement exists under the agreement, however, we have agreed
with them that prior to the date that a New Drug Approval Application becomes
approved by the Food and Drug Administration, we will negotiate in good faith to
reach an agreement on a minimum leukocyte purchase commitment.
In August 1998, we entered into a fifteen-year agreement with the American
Red Cross for the supply of leukocytes. The American Red Cross collects
approximately half of the U.S. blood supply. The American Red Cross agreement
provides for us to purchase leukocytes, consistent with agreed upon
specifications, based on quarterly forecasts. We may pay for the leukocytes in
cash or our common stock at the option of the American Red Cross, with the
valuation of shares paid determined by the average closing price of our shares
for the five days prior to the payment due date less a discount. The American
Red Cross agreement also contains an initial price per leukocyte modified by a
volume discount pricing schedule and rebate program. This pricing schedule is
subject to periodic renegotiations. Upon execution of the agreement, the
American Red Cross received a warrant to purchase up to 500,000 shares of our
common stock with exercise prices ranging from $5.50 to $11.00 per share. We
also entered into a stockholder's agreement and registration rights agreement
relating to shares underlying the warrant and shares received, if any, in lieu
of cash for leukocyte purchases.
In August 1998, we entered into a strategic alliance simultaneously with
the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company, headquartered in Philadelphia, PA. Inflammatics has focused
on the development of therapeutic drugs for autoimmune disorders. Its lead
product is LeukoVAX, an immunomodulating therapy derived from leukocytes.
LeukoVAX is currently in Food and Drug Administration Phase I/II clinical trials
for rheumatoid arthritis.
Under the terms of the Inflammatics Agreement, we made an initial
investment by purchasing series A convertible preferred stock of Inflammatics
for $1 million and warrants to purchase 250,000 shares of our common stock
exercisable at prices ranging between $1.00 and $1.78 per share. We also
obtained two options to acquire up to an additional 70% equity position in
Inflammatics through two additional fundings to be made at our option. The first
additional funding, subject to our evaluation of the Phase I/II clinical trial
results, provides for us to issue 1,000,000 shares of common stock, the issuance
of 300,000 common 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 of the cost for us to
fund Phase III clinical trials of LeukoVAX range between $6.0 million and $10.0
million. The second additional funding, subject to our further evaluation of the
Phase III clinical trial results, provides for the issuance of an additional
2,000,000 shares of common stock in exchange for an additional 33.3% equity
interest.
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In November 1998, Viragen signed an exclusive supply and distribution
agreement with AGC, a Pakistan-based, multinational conglomerate, for the
purchase and distribution of Omniferon. Under this agreement AGC's designated
territories include Saudi Arabia, Kuwait, Yemen, Oman, UAE, Brunei and other
Middle Eastern countries, as well as India and Pakistan. The AGC agreement calls
for AGC to purchase a minimum of $20 million of Omniferon over five years
commencing with AGC's receipt of the required regulatory approvals for product
commercialization in the designated territories and our receipt of the requisite
regulatory approvals to export Omniferon from our commercial manufacturing
facility in Edinburgh, Scotland. The purchase minimums will be secured by a $1
million irrevocable revolving letter of credit. The purchase minimums increase
significantly if and when we obtain regulatory approval for commercialization of
Omniferon in the United States and/or Europe. The AGC agreement has been
approved by the boards of directors of AGC and Viragen.
Under the terms of the AGC agreement, AGC is responsible for clinical and
regulatory costs to obtain approvals for commercialization of Omniferon in their
designated territories and all subsequent sales, marketing and distribution
activities. The AGC agreement also calls for AGC to build, own and operate, at
their expense, a pharmaceutical distribution facility in a mutually agreeable
location within the designated territories. AGC has informed us that they
initially intend to focus on distribution for hepatitis B and C, diseases which
are at epidemic proportions in the designated territories.
In July 1999, Viragen entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and distribution agreement between Viragen and Drogsan for
natural interferon, under terms similar to the AGC agreement. The final terms of
this agreement are still being negotiated.
OPERATIONS
In July 1999, Viragen (Scotland) Ltd. received regulatory approval of its
Clinical Trial Exemption Application, to commence Phase I/II human clinical
trials of its Omniferon product, initially for the treatment of hepatitis C. We
anticipate the commencement of the clinical trials in the fourth calendar
quarter of 1999.
Viragen initially obtained approval for use of Alpha Leukoferon, its first
generation national interferon product, through approved investigational
protocols in 1983 under Florida Statute 402.36. This statute, the Cancer
Therapeutic Act, was the predecessor to Florida Statute 499. In 1984, Florida
Statute 499.018, was amended to include Viragen's protocols and Florida Statute
402.36 was repealed. In 1986, we received approval from the Florida Health and
Rehabilitation Services under the 499 Program, to distribute Alpha Leukoferon
under
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specific investigative clinical study protocols through hospitals, pharmacies
and Florida licensed physicians for the treatment of patients within the state
of Florida. We subsequently received state of Florida regulatory approval for
the investigational use of Alpha Leukoferon in the treatment of multiple
sclerosis, HIV/AIDS, AIDS Related Complex, AIDS/Kaposi Sarcoma, 32 types of
cancers, hepatitis and certain other viral diseases. In December 1994, we
discontinued enrollment of new patients in our multiple sclerosis study 499
program.
In August 1995, we negotiated an agreement with the Florida Department of
Health and Rehabilitative Services which provided for the elimination of the
enrollment of new patients in its existing 499 Program. Following August 1995,
we did distribute on a limited basis for patients approved by the Florida HRS
for humanitarian purposes. In 1996 we distributed Alpha Leukoferon in an
HIV/AIDS study conducted at no charge to patients. We believe the
discontinuation of our participation in the 499 Program will facilitate efforts
in obtaining Food and Drug Administration and European Union approvals for
Omniferon. This is based on management's concern that the continuation of the
499 Program, which involved the ongoing distribution of Alpha Leukoferon and
receipt of limited revenues, was an impediment to obtaining later approvals.
Viragen will require significant additional financing to conduct and
complete clinical trials for the purpose of obtaining European Union and/or Food
and Drug Administration approvals for Omniferon or LeukoVAX. Clinical testing
toward European Union and/or Food and Drug Administration approval is an
expensive process, which is expected to take several years to accomplish with no
assurance such approvals will eventually be obtained.
THE PRODUCTS
Viragen derives its Omniferon from human white cells, also known as
leukocytes. Natural interferon is one of the body's natural defensive responses
to foreign substances such as viruses, and is so named because it "interferes"
with viral growth. Natural interferon consists of protein molecules that induce
antiviral, antitumor and immunomodulatory responses within the body. Medical
studies have indicated that interferons may inhibit malignant cell and tumor
growth without affecting normal cell activity.
There are two basic types of interferon, differentiated primarily by their
method of manufacture and resulting composition. The first, as produced by
Viragen, is a multi-species natural, human leukocyte-derived alpha interferon
produced by cultivated human white blood cells. The introduction of a harmless
agent induces the cells to produce natural interferon. Natural interferon is
then separated from other natural proteins and purified to produce a highly
concentrated product for clinical use. The second type of interferon is
recombinant or synthetic interferon (alpha or beta), which is a genetically
engineered interferon generally produced from a single human gene in bacterial
cells by recombinant DNA techniques.
Clinical studies suggest that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon in certain cases may cause an
immunological response through the production by the human immune system of
neutralizing and/or binding antibodies, that reduces the effectiveness of the
treatment or which may cause adverse side effects. We believe that the
production of neutralizing and/or binding antibodies is virtually non-existent
in patients treated with natural interferon. Furthermore, primarily due to
biological differences, the side effects of treatment with natural interferon,
in certain instances, may be less severe than with a recombinant or synthetic
interferon.
THE INTERFERON INDUSTRY
Prior to 1985, natural interferon was the only type of interferon
available. Research institutions and other biomedical companies like Viragen
were working to solve the problem of the high cost related to the
industrial-scale production of natural interferon. In 1985, Hoffman-LaRoche,
Inc. and Schering-Plough Corporation, two major pharmaceutical companies,
successfully developed synthetic interferon using DNA technology and
subsequently received Food and Drug Administration approval to produce and
market their respective recombinant alpha interferon products for the treatment
of hairy-cell leukemia, hepatitis and Kaposi's Sarcoma, an AIDS-related skin
cancer.
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After the emergence of recombinant alpha interferon, the medical
community's interest in natural interferon diminished due primarily to the
limited availability and its higher cost of production. Most clinical studies
thereafter utilized a synthetic product.
Hoffman-LaRoche, Inc. and Schering-Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their respective
synthetic interferon products. In 1993 Chiron Corp. received Food and Drug
Administration approval of BetaSeron(TM), its recombinant beta interferon for
the treatment of relapsing/remitting multiple sclerosis. In 1996, Biogen, Inc.
received Food and Drug Administration approval for Avonex(TM), its recombinant
beta interferon for relapsing/remitting multiple sclerosis. In 1997, Teva
Pharmaceuticals received Food and Drug Administration approval of its peptide
chemical compound, Copaxone(TM), for relapsing/remitting multiple sclerosis. In
addition to the manufacturers of synthetic interferons, a domestic manufacturer
of natural interferon-alpha, Interferon Sciences, Inc., received Food and Drug
Administration approval in 1989 to sell, in injectable form, Alferon(TM), their
natural interferon product for genital warts.
APPLICATIONS OF INTERFERON
Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to certain viral infections. Viragen believes
interferons can arrest the progress of certain viral based infections, reducing
symptoms and disease related complications with a minimum of side effects.
Hepatitis C
The hepatitis C virus is a major worldwide cause of acute and chronic
hepatitis. Hepatitis C, previously known as "non-A, non-B hepatitis", affects an
estimated 4 million Americans with approximately 30,000 new cases diagnosed each
year. It is responsible for an estimated 8,000 deaths annually. Hepatitis C is
currently the leading cause of liver transplantation in the United States. Based
on a review of published literature and evaluation by our scientific staff and
advisors, we believe that our Omniferon product may prove effective in the
treatment of this indication.
Hepatitis B
Approximately 45% of the world population live in areas with a high
prevalence of hepatitis B infection where the lifetime risk of infection can
exceed 60%. Most infections in these areas are acquired at birth or during early
childhood when the risk of developing chronic infection is highest. In the
United States, which is not in a high prevalence area, approximately 300,000
cases of acute hepatitis B are diagnosed annually with 2% to 10% of these
patients developing chronic infections. These infections put the patients at
risk of progressive liver disease possibly leading to cirrhosis and/or
hepatocellar carcinoma.
Synthetic interferon alpha is the only Food and Drug Administration
approved drug for hepatitis B and has been found to be an effective treatment in
some cases. Viragen believes that Omniferon may also prove effective in the
treatment of hepatitis B.
Multiple Sclerosis
In 1988, following State of Florida regulatory approval for use of
Viragen's Alpha Leukoferon product for the treatment of multiple sclerosis, we
entered into a research agreement with the University of Miami School of
Medicine, Department of Neurology, Multiple Sclerosis Center. Under the Florida
499 Program, we conducted a patient funded, multi-phase clinical trial for the
treatment of multiple sclerosis with Alpha Leukoferon. This study was conducted
on a double-blind basis with certain patients receiving different dosage levels
of that product and certain patients receiving a placebo. The study terminated
in mid-1992. Published information on these trials indicated that, in many
cases, our Alpha Leukoferon product provided favorable results in the treatment
of patients afflicted with relapsing/remitting, relapsing progressive and
chronic progressive multiple sclerosis.
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The principal investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of our Alpha Leukoferon product in the treatment of various types of
multiple sclerosis. The abstract titled "Stabilization of Relapsing-Remitting
and Progressive Multiple Sclerosis with Natural Interferon Alpha: A Preliminary
Trial," was published in the Annals of Neurology, the official journal of the
American Neurological Association in 1994. An additional article was published
by the investigators and Viragen titled "Natural Alpha Interferon in Multiple
Sclerosis: Results of Three Preliminary Series," appeared in the Journal of
International Medical Research in 1996.
Chronic Myelogenous Leukemia
Chronic myelogenous leukemia is one of a group of diseases called
myeloproliferative disorders and is usually recognized by a distinctive
cytogenetic abnormality, known as the Philadelphia chromosome. The current
treatment for chronic myelogenous leukemia is high dose chemotherapy with bone
marrow transplantation. Interferon therapy has emerged as a possible effective
initial treatment in this disease affecting both the presence of leukemia cells
as well as the number of bone marrow cells having the Philadelphia chromosome.
HIV/AIDS
In July 1990, Viragen received approval from the Florida Health and
Rehabilitative Services for an HIV/AIDS treatment protocol using Alpha
Leukoferon in injectable form. In September 1993, we began distribution on a
limited basis of our product under this protocol. However, in December 1994,
Health and Rehabilitative Services informed us that no new patients may be
enrolled under the 499 Program, including those patients with HIV/ AIDS, ARC and
Kaposi's Sarcoma, until we had satisfied them of our compliance with Food and
Drug Administration promulgated current Good Manufacturing Practice
requirements. In July 1995, we discontinued enrollment of new patients in its
499 Program and in August 1995, reached a settlement agreement with the Florida
Health and Rehabilitative Services which provided for the elimination of the
enrollment of new patients in the 499 Program, with the possible exception of
certain limited enrollments approved by the Florida Health and Rehabilitative
Services for humanitarian purposes, the continued participation by previously
enrolled patients in the 499 Program and the resolution of other issues.
In March 1996, Viragen in collaboration with Biodoron, a Hollywood, Florida
based clinic, received approval from Health and Rehabilitative Services under
Florida's Investigational Drug Program to conduct an investigational study in
Florida of our Alpha Leukoferon product, for the treatment of HIV/AIDS in
hemophiliacs. Viragen entered into an agreement with Quantum Health Resources,
Inc., which contributed $330,000 toward to the cost of the study. Quantum, a
subsidiary of Olsten Services Corp., is a national provider of alternate site
therapies and support services for people affected by chronic disorders,
including hemophilia. The study commenced in March 1996, and 35 patients
enrolled to receive Alpha Leukoferon for a minimum of six months in combination
with a comprehensive HIV/AIDS treatment program. While the study suggested that
Alpha Leukoferon was safe or well tolerated, the overall study results proved to
be inconclusive due to the smaller than anticipated number of patients that
finished the study.
MANUFACTURE OF INTERFERON
Human white blood cells, also known as leukocytes, and a stimulating agent,
raw materials which are readily available to us, are needed to produce human
interferon. A Food and Drug Administration approved stimulating agent, which is
harmless to humans, is introduced into the white blood cell, which induces the
cell to produce interferon. The interferon is then separated from other
proteins, extracted and purified.
Viragen's Omniferon product is currently being manufactured in its Scottish
facility for use in planned human clinical trials anticipated to commence in the
fourth quarter of calendar 1999. Our first generation of natural interferon was
manufactured and distributed in Florida under the 499 Program under the name
Alpha Leukoferon. Production of Alpha Leukoferon was discontinued in January
1995.
Production methods that we have developed, as well as enhanced methods
currently under development could serve to reduce our costs of production and,
ultimately, the market price of Omniferon to patients.
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However, there can be no assurance that this new manufacturing technology will
enable us to achieve the level of manufacturing proficiency and product
improvement hoped for.
RESEARCH AND DEVELOPMENT
The entire process of research, development and European Union and/or Food
and Drug Administration approvals, if obtained, of a new bio-pharmaceutical
takes several years and requires substantial funding. In July 1999, Viragen
received approval of its European Clinical Trial Exemption Application to
commence clinical trials of Omniferon and, through its equity investment in
Inflammatics, is currently engaged in Food and Drug Administration Phase I/II
clinical trials of LeukoVAX. The completion of clinical studies for either
product which is required prior to obtaining marketing approval, is dependent
upon obtaining significant additional funding. Our present focus is the
continued research and development of Omniferon for the treatment of hepatitis B
and C, multiple sclerosis, chronic myelogenous leukemia, herpes and HIV/AIDS.
We have spent a substantial amount of time and resources on the research
and development of improved cell stimulation and purification techniques for our
Omniferon product. We believe that the improvement of these processes will
enhance the purity of the product while increasing production yields. We believe
that research efforts focused on increased production yields, if successful,
would significantly lower related costs of production, ultimately allowing a
lower more competitive sales price of Omniferon.
Research and development costs totaled $5,152,748, $4,222,332 and
$2,360,416, for fiscal years ended June 30, 1999, 1998 and 1997, respectively.
ROYALTY AGREEMENT
Viragen and Medicore, Inc., a former affiliate, have a royalty agreement
that provides for a maximum cap on royalties to be paid to Medicore of
$2,400,000, with a schedule of royalty payments of: 5% of the first $7,000,000
of sales of interferon and related products, 4% of the next $10,000,000 of sales
and 3% of the next $55,000,000 of sales until the total of $2,400,000 royalty is
paid. The agreement also specified that royalties of approximately $108,000
previously accrued as payable to Medicore will be the final payment due under
the agreement. As we have had no interferon sales, no royalty expense has been
recognized for the three fiscal years ended June 30, 1999.
PATENTS
Viragen believes its production techniques are unique and are capable of
yielding a superior quality product. We believe that our production techniques
will allow us to offer Omniferon at a price competitive with the recombinant
interferons currently being marketed.
Viragen has filed two patent applications covering Omniferon production
techniques. We have also submitted several foreign patent applications relating
to natural interferon for topical use, several of which have been granted.
During fiscal 1999, our patent issued in Japan for the topical use of interferon
was challenged by a Japanese company. We defended our patent position and were
successful in our defense.
Under a license agreement between Viragen and its majority owned
subsidiary, Viragen (Europe) Ltd. dated July 12, 1995, Viragen (Europe) was
granted exclusive rights to Viragen's proprietary technologies, including those
technologies covered by patent, for all countries comprising the European Union.
In addition, this agreement granted Viragen (Europe) the non-exclusive rights to
Viragen's technology throughout the world, excluding the United States and its
territories. This agreement provides that Viragen (Europe) will pay Viragen a
royalty ranging from 10% to 5% of sales, with a minimum of $2 million per year,
subsequently modified to $167,000 per month. The minimum royalty payment has
been deferred by Viragen until such time as Viragen (Europe) has the necessary
cash flow to meet this payment. This agreement has an initial term of 15 years
and automatically renews for two successive 15-year periods.
United States patents have been issued to others with respect to
genetically engineered and human-derived interferon. Subject to the extent of
such existing patent claims, Viragen may have to negotiate license agreements
with such patent holders to use such processes and products. We believe that we
do not infringe upon any current patent.
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The validity and enforceability of a patent can be challenged by litigation
after its issuance. If the outcome of that litigation is against the owner of
the patent, other parties may be free to use the subject matter covered by the
patent. The degree of protection afforded by foreign patents may be different
than in the United States. We cannot assure you that patents obtained in the
future will be of substantial protection or commercial benefit to us.
REGULATION
United States and European Union
Viragen's activities and its products and processes resulting from such
activities are subject to substantial government regulation in the United States
at both state and federal levels and within the European Union member nations.
The manufacturing, advertising and sale of biologic substances and
pharmaceutical products are regulated by, and require the approval of, the
European Union, Food and Drug Administration, state and local agencies. We
followed strict production and distribution procedures under state of Florida
Health and Rehabilitative Services guidelines relating to our limited
distribution of our Alpha Leukoferon within the state of Florida. The Food and
Drug Administration has established mandatory procedures and standards which
apply to the clinical testing, marketing and manufacture of any biologic product
including ours. Obtaining European Union and/or Food and Drug Administration
approval for commercialization of any new product can take significant time and
capital since it involves extensive testing procedures and lengthy clinical
trials. These trials involve the measurement of product safety, toxicity, and
efficacy, if any, under specific protocols. The process of obtaining European
Union and/or Food and Drug Administration regulatory approval extensive animal
testing to demonstrate product safety and preferred dosages. Human tests are
then performed to show and to document findings as to safety, effectiveness,
toxicity and side effects. Biostatistical analysis of data is then gathered and
evaluated, followed by the submission of all information and data to the
regulatory authorities.
Viragen, through Viragen (Scotland), has completed the preclinical studies
of its Omniferon product in the European Union, and in July 1999 received
approval of its Clinical Trial Exemption application to commence clinical trials
on humans. We intend to commence clinical trials in the European Union during
the fourth calendar quarter of 1999 and eventually submit an Investigative New
Drug Application to the Food and Drug Administration for use of Omniferon in the
U.S. To help us during the approval process, we have assembled a clinical
advisory committee consisting of scientists, medical researchers and clinicians
who are acting in an advisory capacity in order to assist us in developing the
medical, scientific and clinical aspects in support of our clinical trials
initially with the European Union and eventually in the United States.
In Europe and the United States, human clinical trial programs generally
involve a three phase process. Typically, Phase I trials are conducted in
healthy volunteers to determine the early side effect profile and the pattern of
drug distribution and metabolism. Phase II trials are conducted in groups of
patients afflicted with the target disease to provide sufficient data for the
statistical proof of efficacy and safety required by regulatory agencies. If
Phase II evaluations indicate a product demonstrated potential effectiveness and
has an acceptable safety profile, Phase III trials are performed to conclusively
demonstrate clinical efficacy and safety within an expanded patient population
from multiple clinical study sites. Regulatory authorities may also require
Phase IV studies to track patients after a product is approved for commercial
sale.
Regulatory approvals of a new pharmaceutical or biopharmaceutical product
can often take five years or longer unless accelerated in certain instances for
life-threatening diseases. In all cases this process involves the use and
expenditure of substantial resources. Approval depends on a number of factors,
including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials.
American pharmaceutical manufacturers who sell outside of the United States
are also subject to Food and Drug Administration jurisdiction. Semi-finished
drugs may be shipped under certain controlled circumstances for further
processing, packaging, labeling and distribution to third parties residing in
approved foreign countries, subject to the laws that apply in those countries.
For Viragen to conduct this type of sale, we must comply with all Food and Drug
Administration rules and regulations as well as those of the country to which
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we intend to ship the product before we would be permitted to export crude or
finished interferon products outside the United States.
License and Manufacturing Agreement
In certain instances, European Union regulations may require less stringent
preclinical studies for naturally occurring substances such as our Omniferon
product than for genetically engineered products. Accordingly, while there can
be no assurance, we expect to possibly receive an accelerated review of the
various European Union processes and clinical trials prior to market approval in
the European Union.
In July 1995, Viragen (Scotland) entered into a license and manufacturing
agreement with the Common Services Agency of Scotland to secure a sufficient
source of needed raw materials as well as expertise in the area of blood-derived
products and the regulatory approval process. The agency is an adjunct of the
Scottish Government which acts on behalf of the National Health Service in
Scotland and the Scottish National Blood Transfusion Service. The agency owns
and operates a blood fractionation facility in Edinburgh, Scotland, and has the
physical and technical capacity to supply leukocytes and manufacture alpha
interferon from human leukocytes using our processes. We believe that securing a
sufficient qualified long-term source of blood-derived raw materials within the
European Union is critical to enable us to conduct European Union clinical
trials as well as providing a sufficient source of raw materials necessary for
subsequent commercial manufacturing.
During fiscal 1998, we were notified that, due to concerns over the
possible presence of New Varient Creutzfeld-Jacob disease, also known as Mad Cow
disease, in the UK blood supply, human leukocytes collected in Scotland,
including those intended to be supplied under the Scottish agreement, would not
be approved for use in our planned clinical trials or potential commercial
production until the European regulatory authorities were satisfied that the
risk of contamination had been minimized. Due to their situation, we intend to
use leukocytes collected in Germany under our German Red Cross contractual
arrangements as well as other approved sources to continue with our planned
clinical trials and possibly the commencement of commercial scale production if
needed.
Under the terms of the agreement with the German Red Cross, our subsidiary,
Viragen (Germany) GmbH, has the right to receive on a preferential basis
leukocytes produced by the German Red Cross in Germany. Viragen (Germany) has a
right to receive on such a preferential basis 1,000,000 leukocytes per year with
deliveries to be ordered on a quarterly basis. During the initial two-year
period of the agreement, Viragen (Germany) may determine its annual order
quantity up to 1,000,000 leukocytes. After the initial two-year period, the
annual order quantity will be 1,000,000 leukocytes plus or minus 15%. Under this
agreement we will pay the German Red Cross on a percentage of sales of Omniferon
attributable to Viragen (Germany) leukocytes. The German Red Cross will also be
entitled to receive priority distributions of Omniferon from German sourced
leukocytes. Leukocytes provided by the German Red Cross have been approved for
use in our Scottish facility. Processing to separate the leukocytes from German
whole blood donations will be done in Germany at the facilities of the German
Red Cross.
Prior to the beginning of clinical trials, our Scottish manufacturing
facility must be approved by European Union regulatory authorities. We engaged
professionally recognized consultants familiar with the European Union
regulatory process to assist in the manufacturing and product approval
submissions to the European Union regulatory authorities. In addition, the
Scottish Blood Transfusion Service has a full-time regulatory department that
has obtained approval in the European Union of numerous European Union
blood-derived products. The Scottish Blood Transfusion Service will also work
with us to obtain a manufacturing license and subsequent product approvals at
the conclusion of the European Union clinical studies. After a manufacturing
license is obtained for Omniferon, we intend to seek Food and Drug
Administration manufacturing approval of our Scottish manufacturing facility.
However, we can give you no assurances that the Food and Drug Administration
will license or approve the Scottish manufacturing facility or Omniferon for
clinical trials and subsequent distribution in the United States.
Viragen (Scotland) was organized to manufacture and distribute Omniferon
and related products in the European Union and other countries outside the
United States. Viragen has transferred patent and proprietary
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rights associated with the production of Omniferon and related technology to
Viragen (Scotland) under a grant of license. Viragen (Scotland) has provided the
Transfusion Service with an exclusive license to use the proprietary rights
covered by the license and manufacturing agreement for the manufacture and
distribution of Omniferon within the European Union. The Transfusion Service has
committed to participate with us in the manufacture of Omniferon in sufficient
scale to accommodate the European Union clinical trials and also to conduct
studies relevant to our product and cooperate with us in complying with the laws
and regulations of the European Union in connection with the production of
Omniferon.
Under the terms of the license and manufacturing agreement, we are
providing the Transfusion Service with full access to our proprietary technology
and specialized equipment. We are also absorbing all costs associated with
securing permits and regulatory approvals, augmenting the Transfusion Service
facilities, if necessary, to participate in the manufacture of Omniferon and
securing documentation demonstrating compliance with European Union regulatory
requirements.
We have agreed to pay the Transfusion Service for product manufactured for
use in clinical trials in the European Union, for product manufactured for sales
prior to obtaining new drug application approval, and for sales following such
approval. Under this arrangement, payments will be made at varying percentages
in relation to costs. For products manufactured for use in clinical trials, they
are entitled to cost plus 25%, for sales prior to obtaining new drug
application approval, cost plus 40%, and for sales following approval, cost plus
50%. Products manufactured and used for humanitarian purposes or for medical use
by patients of the Scottish National Health Services or the United Kingdom
National Health Services will involve either no payments to the agency or
payments at substantially discounted prices. We also have agreed to pay the
Transfusion Service for providing process documentation for any additional
manufacturing facilities we might establish.
The term of the license and manufacturing agreement is for a five-year
period with two additional five-year extension terms at our option. The
agreement also contains provisions protecting our proprietary rights and limits
of certain competitive activities by the Transfusion Service.
COMPETITION
Competition in the research, development and production of interferon, and
other immunological products is intense and involves major, well-established and
abundantly financed pharmaceutical and commercial entities, as well as major
educational and scientific institutions. Many researchers, some of whom have
substantial private and government funding, are involved with interferon
production, including production of interferon through recombinant DNA
technology. A number of large companies including Hoffman-LaRoche, Inc.,
Schering-Plough Corporation, Glaxo-Wellcome, Biogen, Inc., Chiron Corp., Berlex
Laboratories and Ares-Serono are producing, selling and conducting clinical
trials with recombinant interferons (alpha and beta) and other immunological
products for the treatment of certain cancers and viral infections, including
hepatitis C, our first targeted use of Omniferon.
In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of natural interferon, received Food and
Drug Administration approval in 1989 to sell, in injectable form, their natural
interferon product for genital warts.
We believe that competition is also based on production ability,
technological superiority and administrative and regulatory expertise in
obtaining governmental approvals for testing, manufacturing and marketing of the
product.
The timing of the entry of a new pharmaceutical product into the market is
an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. Our
ability to develop products, complete clinical studies and obtain governmental
approvals in the past had been hampered by a lack of adequate capital. Viragen
is not presently a competitive factor in revenue participation in the
biopharmaceutical industry.
30
<PAGE> 34
EMPLOYEES
As of September 10, 1999, we have 41 employees, of which 30 are research
and development and quality assurance/quality control personnel. The remaining
11 employees are management, regulatory and/or administrative personnel.
PROPERTIES
In November 1996, Viragen entered into a ten year lease for 14,800 square
feet in Plantation, Florida. This location contains our domestic administrative
and executive offices. The lease contains an option for up to two additional
five-year terms. Base lease payments on the facility total $15,700 per month.
Our administrative offices are located at 865 SW. 78th Avenue, Suite 100,
Plantation, Florida 33324; phone (954) 233-8746.
Viragen owns a 14,000 square foot building in Hialeah, Florida. This
facility includes a laboratory for biomedical research and development
activities. In August 1999, we obtained a $600,000 mortgage on our Florida
laboratory facility. The mortgage provides for payments of interest only, at the
prime rate plus 1%, through July 2000, at which time the principal is payable in
full. We intend to sell our Florida laboratory facility during fiscal 2000,
consolidating our research and production assets in our Edinburgh, Scotland
facility.
In November 1996, through Viragen (Scotland), we entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, consisting of approximately 12,000 sq. ft., contains our European
laboratory and production facilities. This location augments other productive
assets available to us within the Transfusion Service facility under the
Scottish agreement. The annual base lease rate for the facility is 71,700 UK
pounds or approximately US$119,700 plus adjustment for common area maintenance
charges. Viragen (Scotland) has the right to renew the lease for four additional
five-year terms.
We believe our properties are in good condition, well-maintained and
generally suitable and adequate to carry on our business. We also believe that
we maintain sufficient insurance coverage on all of our real and personal
property.
LEGAL PROCEEDINGS
In October 1997, Viragen, the company's president and Cytoferon Corp., a
former affiliate of the president, were named as defendants in a civil action
brought in the United States District Court for the Southern District of Florida
(Walter L Smith v Cytoferon Corp. et al; Case No: 97-3187-CIV-MARCUS) by a
Viragen stockholder 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 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.
In December 1998, the U.S. District court awarded us reimbursement of
attorneys' fees and expenses under Rule 11 of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act. While there can be
no assurance as to the amount, if any, that we will ultimately recover, we have
submitted to the Court a request for reimbursement of litigation related costs
of approximately $75,000.
The plaintiff filed a complaint in the Circuit Court of the 11th Judicial
Circuit 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 an unspecified monetary
judgment and specific performance delivery of 441,368 shares of common stock.
The plaintiff is claiming that he is entitled to additional shares of common
stock under a consulting agreement, that Viragen's President breached his
fiduciary duty to Cytoferon Corp. by not achieving sufficient financing for
Viragen which would
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<PAGE> 35
have entitled Cytoferon Corp. to additional shares and for misrepresentations in
connection with the previous Cytoferon financings.
In March 1998 the Circuit Court granted Viragen's Motion to Dismiss the
complaint. Subsequently, the plaintiff filed an Amended Complaint alleging
breach of contract, fraud, violation of Florida's RICO ACT and breach of
fiduciary duties and seeking an unspecified monetary judgement and specific
performance delivery of 441,368 shares of common stock. In April 1998, Viragen
filed a Motion to Dismiss plaintiff's amended complaint which was denied by the
Court. Viragen denies the allegations of the complaint and intends to continue
to vigorously defend the claims with regard to this matter. The ultimate
liability, if any, resulting from this litigation cannot be determined at this
time and no accrual for loss has been recorded.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS
OFFICER AND/OR
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE CLASS
- ---- --- ------------------------- -------------- -----
<S> <C> <C> <C> <C>
Gerald Smith...................... 69 Chairman of the Board, Chief 1994 C
Executive Officer and President 1993
Robert Zeiger..................... 55 Vice Chairman of the Board 1995 B
Dennis W. Healey.................. 51 Chief Financial Officer,
Treasurer 1980 B
Director 1984
Executive Vice President 1993
Secretary 1994
Dr. Magnus Nicolson............... 39 Chief Operating Officer 1999
Melvin Rothberg................... 52 Executive Vice President 1999
Carl N. Singer.................... 81 Director 1997 C
Peter D. Fischbein................ 59 Director 1981 B
Sidney Dworkin, Ph.D.............. 78 Director 1994 A
Robert Salisbury.................. 54 Director 1998 A
Charlie Simons.................... 81 Director 1998 A
Jose I. Ortega.................... 27 Controller 1996
</TABLE>
On February 28, 1997, we amended our Certificate of Incorporation and
established a classified board of directors commencing with the 1997 annual
meeting. Following that meeting, directors were divided into three subclasses
consisting of class A, class B and class C, respectively. The initial term of
the class A directors expired after the 1998 annual meeting of stockholders; the
term of the class B directors initially expires after the 1999 annual meeting of
stockholders; and the term of the class C directors initially expires
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<PAGE> 37
after the 2000 annual meeting of stockholders. At each annual meeting of
stockholders, directors of the respective class whose term expired will be
elected. Directors chosen to succeed those whose terms have expired will be
elected to hold office for a term to expire at the third ensueing annual meeting
of stockholders after their election, and until their respective successors are
elected and qualified.
Gerald Smith became president of Viragen in May 1993. Since 1982, Mr.
Smith was a principal stockholder, president, chief executive officer and
director of Business Development Corp., which has served as a managing entity
and consultant to several high technology ventures including Compupix Technology
Joint Venture. From August 1991 to December 1991, Mr. Smith was the chief
executive officer of Electronic Imagery, Inc., a company engaged in the
development of imaging software. Mr. Smith is also the president, chief
executive officer and a director of Cinescopic Corporation and International
Database Service, Inc., computer-oriented companies which developed database
technology using the personal computer for audio, video, animation and real time
communication. Mr. Smith discontinued the operations of Business Development
Corp. in order to devote all of his time to Viragen. Mr. Smith is also chairman
of the board and president of Viragen (Europe) Ltd and its subsidiaries.
Robert H. Zeiger was appointed chief executive officer and chief operating
officer of Viragen and was elected as a director in May 1995. Mr. Zeiger has
served as a pharmaceutical executive since 1971. From 1985 to 1994, Mr. Zeiger
was employed by Glaxo, Inc., Research Triangle Park, North Carolina, serving as
vice president and general manager of their Dermatological Division from 1985 to
1988 and vice president and general manager of Glaxo Pharmaceuticals from 1991
to 1994. Mr. Zeiger also served as vice president marketing and sales with
Stiefel Laboratories, Inc., Coral Gables, Florida, from 1979 to 1985 and as
national sales manager to Knoll Pharmaceutical Company, Whipping, New Jersey
from 1971 to 1979. Mr. Zeiger was also chief executive officer and a director of
Viragen (Europe). On July 31, 1998 Mr. Zeiger resigned his positions of chief
executive officer of Viragen and director of Viragen (Europe) for health
reasons. His resignations were effective September 30, 1998. Mr. Zeiger
continues to serve as vice chairman and senior pharmaceutical advisor to the
board and a member of the executive committee of the board of directors.
Dennis W. Healey, is a certified public accountant and was appointed
chairman of the board and chief executive officer on April 13, 1993. In June
1994, Mr. Healey relinquished that position as chairman of the board to Mr.
Smith. In July 1994, he relinquished the position of chief executive officer.
Upon Gerald Smith becoming president in May 1993, Mr. Healey became executive
vice president and has served as chief financial officer and treasurer since
1980. Mr. Healey was appointed secretary in 1994. Until his resignation in July
1996, Mr. Healy served as senior vice president, principal financial officer and
treasurer of Medicore, Inc., a public company engaged primarily in electronics
assembly and ownership of dialysis centers and executive vice president of its
Techdyne affiliate. He also served as treasurer of most of Medicore's
subsidiaries and as a vice president of Dialysis Corporation of America, a
subsidiary of Medicore, and as secretary, treasurer and director of other
Dialysis Corporation of America subsidiaries. Mr. Healey joined Medicore in 1976
as its controller. Mr. Healey is also executive vice president, treasurer,
secretary and a director of Viragen (Europe) and Viragen U.S.A.
D. Magnus Nicolson, Ph.D. was appointed chief operating officer of Viragen
and Viragen (Europe) upon the resignation of Dr. Jay Sawardeker in July 1999 and
August 1999, respectively. Dr. Nicolson was elected a director of Viragen
(Europe) in 1997 and has served as the managing director of Viragen (Scotland)
since April 1996. From 1992 to 1995, Dr. Nicolson was employed by Scottish
Enterprise, an agency of the Scottish government responsible for generating
economic development in Scotland. During his time at Scottish Enterprise, he
served as technology manager for Locate in Scotland (1995), senior executive
(1993 to 1995), and contractor, healthcare liaison office of Dunbartonshire
Enterprise (1992 to 1993). From 1990 to 1992, Dr. Nicolson conducted various
market research projects for a variety of public and private enterprises as an
independent marketing consultant. In 1988, Dr. Nicolson was awarded a Doctorate
in Immunology from the University of Strathclyde, in addition to acquiring
Masters Degrees in both Immunology and Business in 1985 and 1992, respectively.
Dr. Nicolson is a Fellow of the Royal Society of Medicine, a Member of the Royal
Society of Chemistry, and a Member of the Chartered Institute of Marketing.
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<PAGE> 38
Melvin Rothberg joined Viragen as chief executive officer of Viragen U.S.A.
in April 1998. In April 1999, Mr. Rothberg assumed the position of an executive
vice president of Viragen. Prior to joining Viragen, Mr. Rothberg served as a
vice president of Althin Medical, Inc., a U.S. subsidiary of a Swedish medical
company from 1990 to 1998. Mr. Rothberg served as a director and manager of a
number of divisions of C.D. Medical, a division of the Dow Chemical Company from
1983 to 1990 and was an engineer with Cordis Dow Corporation from 1974 to 1983.
Carl N. Singer was elected a director in August 1997 and also serves as
chairman of the executive committee of the board of directors. Since 1981, Mr.
Singer has served as chairman of Fundamental Management Corporation, a
Florida-based institutional investment fund. Mr. Singer has served as a
director, president and CEO of Sealy, Inc., Scripto, Inc. and the BVD Company.
Peter D. Fischbein, is an attorney who has been practicing law for
approximately 34 years. Mr. Fischbein served as Viragen's secretary between May
and December 1994. His former law firm on occasion represented Viragen, Medicore
and the Viragen Research Associates Limited Partnership which has certain
contracts with Viragen, Inc. Mr. Fischbein is also a director of Medicore since
1984 and a director of Techdyne since 1985. Mr. Fischbein has been general
partner of several limited partnerships engaged in oil exploration and real
estate development.
Sidney Dworkin, Ph.D., was elected a director in August 1994, was a
founder, former president, chief executive officer and chairman of Revco, Inc.
Between 1987 and the present, Dr. Dworkin has also served as chairman of
Stonegate Trading, Inc., an importer and exporter of various health, beauty
aids, groceries and sundries. Between 1988 and the present, Dr. Dworkin has
served as chairman of the board of Advanced Modular Systems, which is engaged in
the sale of modular buildings. Between June 1993 and the present, Dr. Dworkin
has also served as chairman of Comtrex Systems, Inc., which is engaged in
development and sale of programmable cash registers. Dr. Dworkin also serves on
the board of directors of CCA Industries, Inc., Interactive Technologies, Inc.,
Northern Technologies International Corporation and Crager Industries, Inc., all
of which are publicly-traded companies.
Charles J. Simons was elected to the board of directors in July 1998 and
serves as chairman of the audit, finance and compensation committee of the board
of directors. Mr. Simons has been a director of Renex Corp. since its inception
in July 1993. Mr. Simons is the chairman of the board of G.W. Plastics, Inc., a
plastic manufacturer, and is an independent management and financial consultant.
From 1940 to 1981, he was employed by Eastern Airlines, last serving as vice
chairman, executive vice president and as a director. Mr. Simons is a director
of Arrow Air, Inc., a cargo air carrier; Veridian, Inc., an aerospace company;
and a number of private companies. He was also a director of Home Intensive
Care, Inc. from 1988 until July 1993. Mr. Simons is also a director of MedWaste,
Inc.
Robert C. Salisbury was appointed a director of Viragen in December 1998.
From 1974 to 1995, Mr. Salisbury was employed by the Upjohn Company serving in
several financial related positions including manager of cash management,
internal control and corporate finance from 1975 to 1981, vice president from
1985 to 1990, senior vice president from 1991 to 1994 and executive vice
president for finance and chief financial officer from 1994 to 1995. Following
the merger of Pharmacia and Upjohn, Inc. in 1995, Mr. Salisbury served as
executive vice president and chief financial officer until 1998.
Jose I. Ortega is a certified public accountant and joined Viragen as its
controller in June 1996. From 1993 until joining Viragen, Mr. Ortega was a
member of the audit staff of Ernst & Young LLP, Viragen's independent audit
firm.
There is no family relationship between any of the officers and directors.
During fiscal 1999, Viragen's board of directors met on four occasions.
Viragen has an executive committee and an audit, finance and compensation
committee. The executive committee consists of Messrs. Singer (chairperson),
Smith and Zeiger. The audit, finance and compensation committee consists of
Messrs. Simons (chairperson), Dworkin, Salisbury and Healey.
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<PAGE> 39
The executive committee is empowered to act for the full board in intervals
between board meetings, with the exception of certain matters which by law may
not be delegated. The executive committee will meet as necessary, and all
actions by the committee are to be reported at the next board of directors
meeting. During fiscal 1999, the executive committee met on four occasions.
The audit, finance and compensation committee oversees Viragen's audit
activities to protect against improper and unsound practices and to furnish
adequate protection to all assets and records. The audit, finance and
compensation committee also communicate with Viragen's independent certified
public accountants, on behalf of the board of directors. This committee also
receives written reports, supplemented by such oral reports as it deems
necessary, from the audit firm. The audit, finance and compensation committee
also provides overall guidance for officer compensation programs, including
salaries and other forms of compensation, and for implementation of Viragen's
budget process. Prior to fiscal 1998, our board of directors acted as a whole as
the audit, finance and compensation committee. During fiscal 1999, the audit,
finance and compensation committee met four times with all committee members
present.
AUDIT, FINANCE AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Currently, there are four members of the audit, finance and compensation
committee, three of whom are outside directors and one is an inside director.
The one inside director is Dennis W. Healey, an executive vice president,
treasurer, chief financial officer, and secretary of Viragen. Mr. Healey also
serves in a similar capacity for one or more of Viragen's subsidiaries. Mr.
Healey abstains from any discussions or votes concerning his salary and other
forms of compensation.
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth information concerning the compensation and
employment agreements of the chief executive officers of Viragen and the four
other most highly compensated executive officers as of June 30, 1999.
<TABLE>
<CAPTION>
OTHER RESTRICTED ALL
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS/ LTIP OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS(#) PAYOUTS COMPENSATION
- ------------------ ---- -------- ------ ------------ ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith......................... 1999 $282,000
Chairman of Board and 1998 263,000
President(1) 1997 175,885 1,050,000
Robert H. Zeiger..................... 1999 22,582
CEO, Director (2) 1998 111,347
1997 65,250 12,500 5,000 50,000
Dennis W. Healey..................... 1999 252,000
Exec. V.P., 1998 240,500
Treas., CFO and 1997 163,345 350,000
Director(3)
Charles F. Fistel,................... 1999 151,846
Exec. V.P, 1998 150,000
Director(4) 1997 138,886 300,000
Jay Sawardeker....................... 1999 174,039
Exec. V.P., and 1998 148,470
Director(5) 1997 113,462 200,000
</TABLE>
- -------------------------
(1) On March 1, 1997 Mr. Smith entered into a two-year employment agreement
which provided for health and life insurance and similar employee benefits
generally available to other employees, use of an automobile and related
maintenance and reimbursement of business related expenses. This agreement
provided for a salary of $190,000 and $200,000 for the first and second
years, respectively, and options to purchase 1,000,000 shares of commons
stock at $3.22 per share exercisable over five years.
36
<PAGE> 40
On March 1, 1997, Mr. Smith also entered into a two year employment
agreement with Viragen (Europe) Ltd. under terms similar to those of his
Viragen employment agreement. The agreement provided for an annual salary
of $10,000 and $20,000 for the first and second years, respectively. This
agreement was amended on July 3, 1997 to provide for an annual salary of
$72,000 for the period July 1, 1997 through June 30, 1998 and $82,000 per
annum for the period from July 1, 1998 through February 28, 1999.
Upon the expiration of Mr. Smith's employment agreements with both Viragen
and Viragen (Europe), on March 1, 1999 he entered into an employment
agreement with Viragen under terms similar to his previous agreement. This
agreement provides for an annual salary of $282,000. Mr. Smith continues to
serve as the president and chairman of Viragen (Europe).
(2) On May 9, 1995, Viragen entered into a two-year employment agreement
expiring May 1, 1997, with Robert H. Zeiger to serve as chief executive
officer and chief operating officer at an annual salary of $120,000. The
agreement provided for health, life and similar employee benefits generally
made available to other employees use of an automobile and related
maintenance expenses and reimbursement of business related expenses The
agreement provided for the issuance of options to purchase the aggregate of
1,000,000 shares of common stock at an exercise price of $.96 per share,
with 500,000 shares being exercisable commencing May 8, 1996 through May 8,
2001 and the remaining 500,000 shares being exercisable commencing May 8,
1997 through May 8, 2002. On August 1, 1997 Mr. Zeiger entered into a one
year employment agreement under terms similar to his previous agreement
except for certain notice of termination provisions. This agreement provided
for a salary of $120,000 per year with an additional $5,000 per month,
payable monthly, for the first six months of the contract term. In July
1998, Mr. Zeiger resigned for health reasons his position as chief executive
officer of Viragen and director of Viragen (Europe), effective September 30,
1998. Mr. Zeiger continues to serve as vice chairman and as senior
pharmaceutical advisor to the board and a member of the executive committee
of the board of directors.
(3) On March 1, 1997 Mr. Healey entered into two-year employment agreement which
provided for health and life insurance generally available to other
employees, reimbursement of automobile and business related expenses. This
agreement as amended July 1, 1997, provided for a salary $190,000 and
$195,000 for the first and second years, respectively, options to purchase
300,000 shares of common stock at $3.22 per share, exercisable over five
years.
On July 30, 1996 Viragen (Europe) entered into a two-year employment
agreement with Mr. Healey under the terms similar to his employment
agreement with Viragen, providing for a salary of $14,200 for the two month
period ending September 30, 1996 and $85,000 for the year ended September
30, 1997. On March 1, 1997 Mr. Healey entered into a two-year employment
agreement subsequently amended on July 3, 1997, to run concurrent with Mr.
Smith's and superceding all previous agreements. This agreement provided
for a salary of $31,700 for the four month period ending June 30, 1997,
$52,000 for the year ended June 30, 1998 and $38,000 for the eight month
period ending February 28, 1998. Upon the expiration of Mr. Healey's
employment agreements with Viragen and Viragen (Europe), on March 1, 1999
he entered into an employment agreement with Viragen under terms similar to
his previous agreements. The agreement provides for an annual salary of
$252,000. Mr. Healey serves as executive vice president, chief financial
officer, secretary and director of Viragen (Europe).
(4) On July 1, 1996, Viragen entered into a two-year employment agreement with
Charles Fistel to serve as executive vice president, providing for an annual
salary of $140,000 and $150,000 for the first and second years,
respectively. The agreement provided for health and life insurance, and
similar employee benefits generally made available to other employees, and
use of an automobile and related expenses. In February 1997, Viragen issued
to Mr. Fistel five-year options to purchase 250,000 shares at $2.75 per
share. Viragen recognized $218,750 in compensation expenses as a result of
the issuance of these options. On July 1, 1998, upon the expiration of Mr.
Fistel's 1996 agreement, Viragen entered into a two year employment
agreement with Mr. Fistel under terms similar to his previous employment,
modified to increase his salary to $172,500 during the two year term. Mr.
Fistel resigned on May 14, 1999.
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<PAGE> 41
(5) From March 1996 to May 1996, Dr. Sawardeker served as an consultant to
Viragen in scientific affairs. On May 6, 1996, Dr. Sawardeker entered into
two year employment agreement effective July 1, 1996, a salary of $100,000
per year. At that time Dr. Sawardeker also was granted a five year option to
acquire 250,000 shares of common stock, exercisable at $1.80 per share.
These options vested one third on the effective date of the employment
agreement and an additional one third vesting on the first and second
anniversary dates. Dr. Sawardeker's employment agreement was subsequently
amended and extended through June 30, 1999, providing for an annual salary
of $150,000 for the period from February 10, 1997 to February 9, 1998 and
$160,000 for the period from February 10, 1998 to June 30, 1999. Dr.
Sawardeker's amended employment agreement also provided for the grant of an
option to acquire 200,000 shares of common stock, exercisable at $1.59 per
share with all options vesting June 30, 1999. Upon the expiration on Dr.
Sawardeker's contract, he resigned as chief operating officer of Viragen and
a director of Viragen (Europe).
On July 1, 1999 Mr. Rothberg entered into a two year employment agreement
with Viragen, superceding all previous agreements. The agreement provided for
health insurance and similar employee benefits generally available to executive
employees, $400 per month auto allowance and reimbursement of business related
expenses. The terms of the agreement provided for an annual salary of $160,000
and $172,500 for the first and second years, respectively. Mr. Rothberg also
received the grant of an option to acquire 250,000 shares of common stock at
$.625 per share. The options are exercisable for a period of 5 years from
vesting and vest one-half on the date of grant and one-half on the first year
anniversary.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended June 30,
1999 to each person named in the summary compensation table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARES) DATE
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Gerald Smith.................................... -- -- -- --
Robert H. Zeiger................................ -- -- -- --
Dennis W. Healey................................ -- -- -- --
Charles F. Fistel............................... -- -- -- --
Jay Sawardeker.................................. -- -- -- --
</TABLE>
On July 1, 1999, in connection with an employment agreement on the same
date, Mr. Rothberg received a grant of an option to acquire 250,000 of common
stock of Viragen at $.625 per share. The options are exercisable for a period of
5 years from vesting and vest one-half on the date of grant and one-half on the
first year anniversary.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of common stock during the fiscal year ended June 30,
1999 to each person named in the summary compensation table and the unexercised
options held as of the end of the 1999 fiscal year.
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<PAGE> 42
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1999 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN THE MONEY
VALUE REALIZED OPTIONS AT FY-END
MARKET PRICE NUMBER OF UNEXERCISED (BASED ON FY-END/SHARE)
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $0.75
ACQUIRED LESS PRICE --------------------------- ---------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith........................... 250,000 139,000 2,450,000 $ 350,000
Robert H. Zeiger....................... -- -- 1,050,000 --
Dennis W. Healey....................... 250,000 139,000 650,000 75,000
Charles F. Fistel...................... 410,000 41,250 300,000 --
Jay Sawardeker......................... -- -- 450,000 --
</TABLE>
1997 AMENDED STOCK OPTION PLAN AND 1995 AMENDED STOCK OPTION PLAN
On May 15, 1995 the board of directors adopted, subject to approval by the
stockholders, a stock option plan, called the 1995 stock option plan. On
September 22, 1995, the board of directors amended the 1995 stock option plan to
define certain terms and clarify the minimum exercise price of the non-qualified
options to as not less than 55% of the fair market value. The 1995 stock option
plan was submitted to the stockholders at the annual meeting of stockholders
held on December 15, 1995, and the stockholders ratified the plan at that time.
On January 27, 1997 the board of directors adopted, subject to approval by
the stockholders, a stock option plan called the 1997 stock option plan,
containing terms and provisions similar to the 1995 stock option plan. The 1997
stock option plan was submitted to the stockholders for approval at the annual
meeting of stockholders held on February 28, 1997 at which time the plan was
ratified. On April 24, 1998 the board of directors adopted, subject to
ratification by the stockholders, an amendment to the 1997 stock option plan,
reserving an additional 1,000,000 shares of common stock for issuance under that
plan. This amendment brought the total shares reserved under the 1997 stock
option plan to 4,000,000 shares. On July 31, 1998, the stockholders ratified
this amendment to the 1997 stock option plan.
Under both the 1995 stock option plan and the 1997 stock option plan,
Viragen has reserved of common stock for issuance. The audit, finance and
compensation committee of the board of directors and the board of directors
currently administer the plans including, the selection of the persons who will
be granted plan options under the plans, the type of plan options to be granted,
the number of shares subject to each plan options and the plan options price.
Plan options granted under either the 1995 stock option plan or the 1997
stock option plan may either be options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, or options
that do not so qualify. In addition, the plans also allow for the inclusion of a
reload option provision, which permits an eligible person to pay the exercise
price of the plan option with shares of common stock owned by the eligible
person and receive a new plan option to purchase shares of common stock equal in
number to the tendered shares. Any incentive option granted under the plan must
provide for an exercise price of not less than 100% of the fair market value of
the underlying shares on the date of such grant. The exercise price of any
incentive option granted to an eligible employee owning more than 10% of our
common stock must be at least 110% of such fair market value as determined on
the date of the grant. The term of each plan option and the manner in which it
may be exercised is determined by the board of directors or the audit, finance
and compensation committee. No plan option may be exercisable more than 10 years
after the date of its grant and, in the case of an incentive option granted to
an eligible employee owning more than 10% of Viragen's common stock, no more
than five years after the date of the grant.
The exercise price of non-qualified options will be determined by the board
of directors or the audit, finance and compensation committee.
The per share purchase price of shares subject to plan options granted
under the plans may be adjusted in the event of certain changes in Viragen's
capitalization, but any adjustment cannot change the total purchase price
payable upon the exercise in full of plan options granted under the plans.
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<PAGE> 43
Officers, directors, key employees and consultants of Viragen and its
subsidiaries are eligible to receive non-qualified options under the stock
option plans. Only officers, directors and employees who are employed by Viragen
or by any of its subsidiaries are eligible to receive incentive options.
Incentive options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee. Incentive options may be exercised only by the optionee. Under a
recent amendment to the 1997 stock option plan, non-qualified options may be
transferable under limited circumstances for estate planning if authorized by
the board of directors or the committee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee but is a member of Viragen's board
of directors and his service as a director is terminated for any reason, other
then death or disability, the plan option granted to him will lapse to the
extent unexercised on the earlier of the expiration date or 30 days following
the date of termination unless otherwise extended by the board. If the optionee
dies during the term of his employment, the plan option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date of the
plan option or the date one year following the date of the optionee's death. If
the optionee is permanently and totally disabled within the meaning of Section
22(c)(3) of the Internal Revenue Code of 1986, the plan option granted to him
lapses to the extent unexercised on the earlier of the expiration date of the
option or one year following the date of such disability.
The board of directors or the audit, finance and compensation committee may
amend, suspend or terminate the plans at any time, except that no amendment can
be made which (1) changes the minimum purchase price, except in either case in
the event of adjustments due to changes in Viragen's capitalization, (2)
affects outstanding plan options or any exercise right, (3) extends the term of
any plan option beyond ten years, or (4) extends the termination date of the
plans. Unless the plans have been suspended or terminated by the board of
directors, the 1995 stock option plan will terminate on May 15, 2005 and the
1997 stock option plan will terminate on January 27, 2007. The termination of
either plan will not affect the validity of any plan options previously granted.
As of September 24, 1999, 3,965,000 options have been issued and are
outstanding under the 1995 stock option plan and 3,574,000 options have
been issued and are outstanding under the 1997 stock option plan.
40
<PAGE> 44
CERTAIN TRANSACTIONS
Gerald Smith and Dennis W. Healey, who are principal executive officers of
Viragen, also serve as the principal executive officers of Viragen (Europe).
Messrs. Smith and Healey and also serve as principal executive officers of our
majority-owned subsidiary, Viragen U.S.A., Inc. Commencing in July 1996,
following his resignation from Medicore and subsidiaries, Mr. Healey who is
serving as Viragen (Europe's) executive vice president, treasurer and secretary,
began receiving an annual salary of $85,000 per year from that company. On
March 1, 1997, Messrs. Smith and Healey entered into two year employment
agreements, subsequently amended, with Viragen (Europe) under terms similar to
their employment agreements. The agreements provide for annual salaries of
$72,000 and $52,000, respectively.
On April 25, 1997, Viragen loaned William Saeger, a former director,
$100,000, receiving a one year promissory note bearing interest at 8 1/2%. In
April 1998, Mr. Saeger defaulted on this note. Due to a subsequent deterioration
in Mr. Saeger's health and financial condition, we were unable to ascertain the
amounts, 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 written-off as uncollectable by fiscal 1998 year
end. We intend to pursue collection efforts relative to this transaction.
On September 1, 1998, Gerald Smith and Dennis W. Healey each exercised
250,000 options to purchase common stock. The options were exercised through the
issuance of promissory notes payable to Viragen totaling $300,000. Messrs. Smith
and Healey also entered into related pledge and escrow agreements. The
promissory notes bear interest at 5.47%, payable semi-annually and are secured
by the underlying common stock purchased. The purchased shares are being held in
escrow pending payment of the related notes pursuant to the provisions of the
pledge and escrow agreements.
Options were also exercised by Mr. Carl Singer, a director, for 50,000
shares on October 1, 1998, Mr. Peter Fischbein, a director, for 200,000 shares
on October 8, 1998 and Mr. Charles F. Fistel a former officer, for 410,000
shares on May 3, 1999 (300,000 shares) and May 11, 1999 (110,000 shares). These
options were exercised through the issuance of promissory notes payable Viragen
totaling $302,000, and related pledge and escrow agreements. The promissory
notes bear interest at rates ranging between 5.06% and 5.15%, payable semi-
annually and are secured by the underlying common stock purchased. The purchased
shares are being held in escrow pending payment of the related notes pursuant to
the provisions of the pledge and escrow agreements.
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<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table shows certain information regarding Viragen's common
stock beneficially owned at September 24, 1999, (a) by each person who is known
by us to own beneficially or exercise voting or dispositive control over 5% or
more of Viragen's common stock, (b) by each of Viragen's directors, and (c)
by all officers and directors as a group. A person is deemed to be a beneficial
owner of any securities of which the person has the right to acquire beneficial
ownership within 60 days. At September 24, 1999, there were 75,400,430 shares of
common stock outstanding.
<TABLE>
<CAPTION>
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------------------------ ------------ ----------
<S> <C> <C>
Gerald Smith................................................ 3,000,000(3) 3.9%
Robert H. Zeiger............................................ 1,050,000(4) 1.4
Carl N. Singer.............................................. 1,915,541(5) 2.6
Dennis W. Healey............................................ 1,025,000(6) 1.4
Peter D. Fischbein.......................................... 450,000(7) 0.6
Sidney Dworkin, Ph.D........................................ 375,244(8) 0.5
Charles J. Simons........................................... 35,000(9) 0.0
Robert C. Salisbury......................................... 30,000(10) 0.0
Officers & Directors (as a Group 12 persons)................ 9,585,240 10.1
The Isosceles Fund.......................................... 4,606,838(11) 6.1
</TABLE>
- ---------------
(1) Based upon information furnished to us by the principal security holders or
obtained from the stock transfer books of Viragen. Other than indicated in
the notes, we have been informed that these persons have sole voting and
dispositive power with respect to their shares.
(2) Based on 75,400,430 shares of common stock outstanding as of September 24,
1999. Exclusive of (a) 11,289 shares of common stock reserved for issuance
upon the conversion of 2,650 outstanding shares of preferred stock each
convertible into 4.26 shares of common stock; and (b) 11,202,243 shares of
common stock reserved for issuance pursuant to exercise of options and
warrants.
(3) Mr. Smith is chairman of the board of directors and president of Viragen.
Includes (a) 550,000 shares owned directly by Mr. Smith; (b) 1,400,000
options exercisable at $.50 per share granted Mr. Smith's October 6, 1995
employment agreement; (c) 1,000,000 options exercisable at $3.22 per
share granted pursuant to Mr. Smith's March 1, 1997 employment agreement
and (d) 50,000 options exercisable at $3.22 granted to all directors in
February 1997.
(4) Mr. Zeiger was chief executive officer of Viragen until his resignation for
health reasons effective September 30, 1998. Mr. Zeiger continues to serve
as vice chairperson of the board of directors and senior pharmaceutical
advisor to the board. Includes (a) 1,000,000 common stock purchase options
exercisable at $.96 per share pursuant to Mr. Zeiger's May 9, 1995
employment agreement and (b) 50,000 options exercisable at $3.22 granted
to all directors in February 1997.
(5) Mr. Singer is a director of Viragen. Includes (a) 79,500 shares owned
directly by Mr. Singer and (b) 1,836,041 shares held by Fundamental
Management Corporation, an institutional investment fund for which Mr.
Singer serves as chairman.
(6) Mr. Healey is executive vice president, treasurer, chief financial officer,
secretary and a director of Viragen. Includes (a) 375,000 shares held in
Mr. Healey's name; (b) 300,000 options exercisable at $.50 per share
granted pursuant to Mr. Healey's October 6, 1995 employment agreement;
(c) 300,000 options exercisable at $3.22 per share granted with Mr.
Healey's March 1, 1997 employment agreement and (d) 50,000 options
exercisable at $3.22 granted to all directors in February 1997.
(7) Mr. Fischbein is a director. Includes (a) 125,000 shares held in Mr.
Fischbein's name; (b) 50,000 options exercisable at $1.00 per share
granted to all directors in August 1994; (c) 25,000 options exercisable
at $.50 per share granted in October 1995; (d) and 50,000 options
exercisable at $3.22 granted to all directors in February 1997.
(8) Mr. Dworkin is a director. Includes (a) 175,244 shares owned directly by
Mr. Dworkin and his wife; (b) 50,000 options exercisable at $1.00 per
share granted to all directors in August 1994; (c) 100,000 options
exercisable at $.50 per share granted in October 1995; and (d) 50,000
options exercisable at $3.22 granted to all directors in February 1997.
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<PAGE> 46
(9) Mr. Simons was elected a director of Viragen in July 1998. Includes (a)
10,000 shares owned directly by Mr. Simons and (b) 25,000 options
exercisable at $1.88 granted on July 31, 1998.
(10) Mr. Salisbury was appointed to the board of directors in December, 1998.
Includes (a) 5,000 shares owned directly and (b) 25,000 options
exercisable at $.75 granted December 27, 1998.
(11) Includes (a) 3,907,809 shares acquired upon conversion of notes and
related re-set shares, and (b) 699,029 shares which may be acquired upon
the exercise of warrants. The Isosceles Fund is controlled by Linford Asset
Management Ltd.
During fiscal 1999, Viragen issued 1,339,000 options to purchase common
stock to consultants (1,245,000 shares) and employees (94,000 shares).
On July 1, 1999, in connection with his two year employment agreement, Dr.
D. Magnus Nicolson received a grant of 200,000 options to purchase common stock
of Viragen with an exercise price of $0.625 per share. The options are
exercisable for a period of five years from vesting and vest one-half on the
first anniversary of the grant date and one-half on the second anniversary.
On April 27, 1998, Viragen U.S.A. Inc., entered into a two year employment
agreement with Mr. Melvin Rothberg to serve as its chief executive officer. The
employment agreement provided for an annual salary of $150,000 and options to
purchase 125,000 shares of Viragen U.S.A. common stock, exercisable at $.22 per
share, vesting 50,000 shares and 75,000 shares on the first and second
anniversaries, respectively. This stock option agreement also provided that if
Viragen U.S.A. did not complete an initial public offering of its stock within
two years of the effective date of the employment agreement, Viragen and Mr.
Rothberg will negotiate an exchange of his Viragen U.S.A. options into options
of Viragen or a publicly traded subsidiary with equal value to Mr. Rothberg's
Viragen U.S.A. options.
During fiscal 1998, Viragen issued 449,500 options to purchase common stock
to a consultant and employees at prices varying from $ 1.00 to $2.50 per share
during the five-year term of each option.
In February 1997, the board of directors awarded options to purchase
1,750,000 shares of common stock to officers and directors exercisable over five
years at an exercise price of $3.22 per share. The options were granted to the
following individuals: Gerald Smith (1,050,000), Robert H. Zeiger (50,000),
Dennis W. Healey (350,000), Peter D. Fischbein (50,000), Sidney Dworkin
(50,000), and former directors; Jay Haft (50,000), William B. Saeger (50,000),
Fred D. Hirt (50,000) and Charles F. Fistel (50,000). In addition, between
August 1996 and June 1997, Viragen awarded options to purchase up to 459,500
shares of common stock to other employees (inclusive of 250,000 of Charles F.
Fistel), which options are exercisable at prices ranging from $1.97 to $3.69 per
share during the five year term of the options.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of our equity securities, to file with the Securities and Exchange Commission
initial reports of their ownership and reports of changes in their ownership of
common stock and other equity securities of Viragen. Officers, directors and
greater than ten percent (10%) stockholders are required by regulation to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of these reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended June 30, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
(10%) beneficial owners were completed and timely filed.
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<PAGE> 47
SELLING SECURITY HOLDERS
TRANSACTION OVERVIEW
On March 17, 1999, we entered into a purchase agreement with the
Isosceles Fund Limited and Cefeo Investments Limited. We signed an amended
agreement to the purchase agreement on June 16, 1999. This amendment reduced the
conversion price, waived first refusal rights for an interim financing and
extended the date for Viragen to complete the processing of its registration
statement. The purchase agreement:
o describes the terms pursuant to which we issued Isosceles and
Cefeo 8% redeemable promissory notes in the aggregate principal
amount of $2,000,000 and warrants to purchase shares of our common
stock;
o requires us to indemnify Isosceles, Cefeo and their respective
officers, directors and affiliates from any damages they incur if
we breach the purchase agreement; and
o gives Isosceles a right of first refusal to participate in private
equity financings we undertake prior to March 17, 2000.
At the same time we executed the purchase agreement, we entered into a
memorandum of agreement with Isosceles which gave us the option to sell
Isosceles an aggregate of up to $7,000,000 of additional notes and warrants in
two tranches. Neither Viragen nor the selling security holders have an
obligation to complete the subsequent tranches.
NOTES. We issued Isosceles and Cefeo promissory notes in the principal
amount of $2,000,000 under the purchase agreement. The principal amount of the
notes accrued interest at a rate of 8% annually.
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<PAGE> 48
CONVERSION. One-half of the principal balance 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 selling security 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 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. The
quotient obtained was multiplied by 1.2 on the first re-set date and 1.22 on the
second re-set date. The resulting product was reduced by 1. The resulting number
was then multiplied by the shares issued on the first or second conversion
dates, as appropriate. The formula is as follows:
(applicable rate X $0.644/future price) -1) x (shares issued)
On August 6, 1999, Isosceles and Cefeo received a total 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 a total 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.
DEFAULT. The purchase agreement, notes and registration rights
agreement defined several events of default including:
o failure to continue trading on the NASDAQ stock market;
o failure to have this registration statement effective by
July 7, 1999, the initial deadline;
o failure to have this registration statement effective by
September 13, 1999, the final deadline;
o failure to maintain this registration as effective for 30
consecutive days.
As Viragen was delisted from the NASDAQ Stock Market on June 28, 1999,
and has failed to meet the two registration deadline requirements, we are in
default of these terms. Accordingly, we continue to accrue a penalty of $40,000
per month. Also, Isosceles and Cefeo holders have the right to request a cash
redemption of the common shares issued upon conversion of the notes. The
redemption, if requested, would require us to pay the $2 million note principal
plus a premium of 25% and related interest and penalties. To date, the selling
security holders have not requested a cash redemption.
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<PAGE> 49
THE WARRANTS
The warrants entitle Isosceles and Cefeo to purchase a total of
932,039 shares of our common stock. The warrants are exercisable until March 17,
2004 with the exercise price of $0.50 per share. The warrants also contain a
cashless exercise provision which allows the selling security holders to use the
difference between the closing price of the common stock, at the time of
exercise, minus the exercise price as a currency to acquire the shares without
paying cash. By way of example, if 1,000 shares are being exercised when the
closing price is $1.00 and the exercise price is $0.50, the selling shareholders
could use 500 shares with a market value of $500 to pay for the exercise of the
warrants. The holder would receive 500 shares net, as a result of the cashless
exercise.
We must, however, reduce the exercise price of the warrants if we sell
shares of our common stock, grant options or adjust the exercise prices of
options or issue other securities convertible into our common stock at prices
less than $.50. We are required to pay the warrant holders a fee of up to $2,500
per day if we do not deliver the shares issuable upon exercise of the warrants
within three trading days after the warrants are exercised.
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<PAGE> 50
ADDITIONAL WARRANTS
We also issued warrants to purchase an aggregate of up to 155,339
shares of our common stock at $.774 per share to Ballsbridge Finance Limited,
Elliot Layne & Associates, Inc. and Ven-Gua Capital Markets, Ltd. in
consideration for introducing Viragen to Isosceles and Cefeo. The warrants we
issued to Ballsbridge, Elliot Layne and Ven-Gua 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 the warrants issued to Ballsbridge, Elliot
Layne and Ven-Gua were returned to Viragen. We entered into a registration
rights agreement with Ballsbridge, Elliot Layne & Associates and Ven-Gua similar
to the one we entered into with Isosceles and Cefeo.
The following table sets forth as of September 24, 1999 (1) the name
of the selling security holders, (2) the amount of common stock held directly or
indirectly or underlying the notes and the warrants to be offered by the selling
security holders and (3) the amount to be owned by the selling security holders
following the sale of these shares. As of September 24, 1999, there were
outstanding 75,400,430 shares of Viragen's common stock.
The total of 6,220,121 potential shares allocated to the selling
security holders was derived as follows:
o 4,112,219 shares issued upon conversion of the promissory notes and
related interest at $0.50 per share;
o 1,098,139 shares issued under the re-set provision of the notes; and
o 1,009,709 shares issuable upon exercise of related warrants.
47
<PAGE> 51
<TABLE>
<CAPTION>
Percentage
of Shares Shares to be
Name of Selling Number of Owned Prior Owned After
Security Holders Shares Owned to Offering Offering
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
The Isosceles Fund Limited(1) 4,606,838 6.1% 0
Cefeo Investments Limited(2) 1,535,613 2.0% 0
Ballsbridge Finance, Limited(3) 19,418 * 0
Elliott Layne & Associates, Inc.(3) 29,126 * 0
Ven-Gua Capital Markets Ltd.(3) 29,126 * 0
</TABLE>
- -------------------
* Is less than 1%
(1) Includes (a) 3,907,809 shares acquired upon conversion of notes and related
re-set shares, and (b) 699,029 shares which may be acquired upon the exercise of
warrants. The Isosceles Fund is controlled by Linford Asset Management Ltd.
(2) Includes (a) 1,302,603 shares acquired upon conversion of notes and related
re-set shares, and (b) 233,010 shares which may be acquired upon the exercise of
warrants. Cefeo Investments Limited is beneficially owned by Banca, Privata,
Solari and Blum, S.A.
(3) Issuable upon exercise of warrants exercisable at $.773 until March 17,
2004.
Viragen agreed to pay for all costs and expenses in the issuance,
offer, sale and delivery of the shares of our common stock. These include, all
expenses and fees of preparing, filing and printing the registration statement
and mailing of these items. Viragen will not pay selling commissions and
expenses for any sales by the selling security holders. Viragen will indemnify
the selling security holders against civil liabilities including liabilities
under the Securities Act of 1933.
PLAN OF DISTRIBUTION
These shares of our common stock may be sold by the selling security
holders, or by other successors in interest. The sales may be made on one or
more exchanges or in the over-the-counter market or at prices related to the
then current market price, or in negotiated transactions.
The shares of our common stock may be sold by one or more of the
following methods, including, without limitation:
o a block trade in which the broker-dealer so engaged will attempt
to sell the shares of our common stock as agent, but may position
and resell a portion of the block as principal;
o purchases by a broker or dealer as principal and resale by the
broker or dealer;
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<PAGE> 52
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o face-to-face or other direct transactions between the selling
security holders and purchasers without a broker-dealer or other
intermediary.
In addition, the selling security holders may, subject to the
restrictions described below and previously under "Selling Security Holders",
sell short the common stock of Viragen. In these instances, this prospectus may
be delivered in the connection with the short sale and the shares offered may be
used to cover the short sale. The selling security holders will be considered
underwriters within the meaning of the Securities Act of 1933, as amended, in
connection with the sale of the shares offered. In making sales, broker-dealers
or agents engaged by the selling security holders may arrange for other
broker-dealers or agents to participate. Broker-dealers may receive commissions
or discounts from the selling security holders in amounts to be negotiated
immediately prior to the sale. These broker-dealers and agents and any other
participating broker-dealers or agents, as well as the selling security holders
and the placement agent, will be considered to be "underwriters" within the
meaning of the Securities Act of 1933. In addition, any securities covered by
this prospectus that qualify for sale under Rule 144 may be sold under Rule 144
rather than by this prospectus.
We informed the selling security holders that the anti-manipulative
rules under the Securities Exchange Act of 1934, including Regulation M, may
apply to their sales in the market. We have furnished the selling security
holders with a copy of these rules. We have also informed the selling security
holders that they must deliver a copy of this prospectus with any sale of their
shares.
DESCRIPTION OF SECURITIES
Viragen is currently authorized to issue up to 125,000,000 shares of
common stock, par value $.01 per share, of which 75,400,430 shares were
outstanding as of September 24, 1999. Viragen is also authorized to issue up to
1,000,000 shares of preferred stock, par value $1.00 per share, of which 2,650
shares of series A preferred stock and 11 shares of series I preferred stock
were outstanding as of September 24, 1999.
COMMON STOCK
Subject to the dividend rights of the holders of preferred stock,
holders of shares of common stock are entitled to share, on a proportionate
basis, such dividends as may be declared by the board of directors. Upon
liquidation, dissolution or winding up of Viragen, after payment to creditors
and holders of our outstanding preferred stock, Viragen's assets will be divided
proportionately on a per share basis among the holders of our common stock.
Each share of our common stock has one vote. Holders of our common
stock do not have cumulative voting rights, which means that the holders of a
plurality of the shares voting for the election of directors can elect all of
the directors. In that event, the holders of the remaining shares will not be
able to elect any directors. Viragen's By-Laws provide that a majority of the
issued and
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<PAGE> 53
outstanding shares of our common stock are a quorum to transact business at a
stockholders' meeting. Our common stock has no preemptive, subscription or
conversion rights and is not redeemable.
PREFERRED STOCK
Viragen is authorized to issue a total of 1,000,000 shares of preferred
stock, par value $1.00 per share. The preferred stock may be issued by
resolutions of Viragen's board of directors without any action of the
stockholders. These resolutions may authorize issuances of such preferred stock
in one or more series. In addition, they may fix and determine dividend and
liquidation preferences, voting rights, conversion privileges, redemption terms
and other privileges and rights of the shares of each authorized series.
While Viragen includes preferred stock in its capitalization to improve
its financial flexibility, preferred stock could possibly be used by Viragen to
preserve control by present management in the event of a potential hostile
takeover of Viragen. In addition, the issuance of large blocks of preferred
stock could also have a dilutive effect to existing holders of Viragen's common
stock.
SERIES A PREFERRED STOCK
Viragen established the series A preferred stock in November 1986. Each
share of series A preferred stock is immediately convertible into 4.26 shares of
our common stock. Dividends on the series A preferred stock are cumulative, have
priority to our common stock and are payable in either cash or common stock, at
Viragen's option.
The series A preferred stock has voting rights only if dividends are in
arrears for five annual dividends. Upon such occurrence, the voting is limited
to the election of two directors. Voting rights terminate upon payment of the
cumulative dividends. The series A preferred stock is redeemable at the option
of Viragen at any time after expiration of ten consecutive business days during
which the bid or last sale price for our common stock is $6.00 per share or
higher. There is no mandatory redemption or sinking fund obligation for the
series A preferred stock.
Owners of the series A preferred stock are entitled to receive $10.00
per share, plus accrued and unpaid dividends, upon liquidation, dissolution or
winding up of Viragen before any distribution or payment is made to holders of
the common stock or other stock of Viragen junior to the series A preferred
stock.
SERIES I PREFERRED STOCK
The series I preferred stock have no dividends, although an 8% accretion
factor has been included for purposes of determining the liquidation and
conversion amounts. The series I preferred stock carries no voting rights and
has a stated value of $10,000 per share.
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<PAGE> 54
The series I preferred stock and the 8% accretion factor is convertible
into shares of our common stock at the lower of:
(1) $1.59; or
(2) the variable conversion price which will equal 82% of the market
price on the date of conversion.
The amount of the shares of our common stock a holder of the series I
preferred stock may convert into is limited to a maximum of 15% of the aggregate
principal amount of the series I preferred stock issued to a holder for each
monthly period. This is subject to a maximum of 25% per monthly period if the
holder has not elected to convert the permitted 15% amount for the series during
any previous monthly conversion period. In addition, this conversion quota will
not be applicable in the event Viragen completes a private offering of its debt
or equity securities.
At Viragen's option, any shares of series I preferred stock which are
outstanding on August 19, 2000 will either be (1) automatically converted at the
conversion rate in effect at that time or (2) automatically redeemed at $10,000
per preferred share plus any liquidated damages and any other cash payments then
due from Viragen.
Viragen also has the right to redeem all or any part of the series I
preferred stock submitted for conversion if on the date of conversion the
conversion price of Viragen's common stock is less than $1.50. Under the right
to redeem option, if the closing bid price of the common stock on the date of
conversion is less than $1.50, the redemption price paid by Viragen to the
holder will be $11,200 per share of the series I preferred stock. On the other
hand, if the closing bid price is greater than $1.50, the redemption price paid
by Viragen to the holder will be $11,750 per share of series I preferred stock.
OVER-THE-COUNTER MARKET
Viragen's common stock is traded on the OTC Bulletin Board. In the
event we do not maintain a minimum net tangible worth of at least $2,000,000,
our common stock will be covered by a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors, generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
the sale. Consequently, the rule may affect the ability of broker-dealers to
sell Viragen's securities. It also may affect the ability of purchasers in this
offering to sell their shares in the secondary market. See the section of this
prospectus entitled "High Risk Factors" for more information on the topics
discussed above.
51
<PAGE> 55
TRANSFER AGENT
The transfer agent for the shares of our common stock is Chase Mellon
Shareholders Services, Overpeck Centre, 85 Challenger Road, Ridgefield Park, New
Jersey 07660-2108.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market
following this offering could negatively affect the market price of our common
stock and could impair our future ability to raise capital through the sale of
our equity securities.
Upon the completion of the sale of common stock by the selling security
holders, we will have outstanding 76,410,139 shares of common stock. Of these
shares, approximately:
o 69,562,519 shares will be freely tradable by persons, other
than "affiliates," without restriction under the Securities Act of
1933; and
o 6,847,620 shares will be "restricted" securities, within the
meaning of Rule 144 under the Securities Act of 1933, and may not
be sold in the absence of registration under the Securities Act of
1933 unless an exemption from registration is available, including
the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, a person or persons
whose shares are aggregated, including any affiliate of Viragen who has
beneficially owned restricted securities for at least one year, would be
entitled to sell within any three-month period, a number of shares that does not
exceed 1% of the number of common stock then outstanding. This would be
approximately 764,101 shares immediately after the completion of this offering.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
Viragen. Under Rule 144(k), a person who is not considered to have been an
affiliate of Viragen at any time during the 90 days preceding a sale, and who
has beneficially owned restricted securities for at least two years, including
the holding period of any prior owner except an affiliate of Viragen, may sell
these shares without complying with the manner of sale, public information
requirements volume limitations or notice requirements of Rule 144. Sales of
shares by affiliates will continue to be subject to these volume limitations,
and manner of sale, notice and public information requirements.
LEGAL MATTERS
The validity of the issuance of the shares of our common stock being
offered hereby will be passed upon by Atlas, Pearlman, Trop & Borkson, P.A., 200
East Las Olas Boulevard, Suite 1900, Fort Lauderdale, Florida 33301. Members of
that firm or members of their family own a total of 37,000 shares of our common
stock.
52
<PAGE> 56
EXPERTS
Ernst & Young LLP, independent certified public accountants, have
audited our consolidated financial statements at June 30, 1999 and 1998, and for
each of the three years ended June 30, 1999, as set forth in their report. We've
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1. This prospectus is a part of the
registration statement and does not contain all of the information set forth in
the registration statement. For further information with respect to Viragen,
Inc. and the common stock, you should refer to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to in this prospectus are not necessarily complete.
Where a contract or other document is an exhibit to the registration statement
each of those statements is qualified in all respects by the provisions of the
exhibit, to which reference is hereby made.
We are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may review the registration statement, as well as reports and other
information we have filed, without charge at the Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies may also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates or at the Commission's web site
at HTTP://WWW.SEC.GOV. These materials may also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005. For
further information on the operation of the public reference rooms, please call
1-800-SEC-0330. You may also review these statements at the regional offices of
the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048 and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
53
<PAGE> 57
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 June 30,
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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 certain
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. Viragen is also expensing its excess investment costs
ratably, as research is performed by 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 such as 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> 67
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> 68
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> 69
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 such 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> 70
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> 71
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%) -- $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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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 expensing of our
excess investment costs.
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> 79
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.
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> 80
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> 81
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> 82
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.
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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 such products until it has received approximately $900,000
and, thereafter, it is to receive 2% of the gross revenues of such 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
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<PAGE> 84
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> 85
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> 86
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with this offer. If given or made, the information or representations
must not be relied upon as having been authorized by Viragen, Inc. or any
underwriter. This prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered in any
circumstance in which the offer or solicitation would be unlawful. Neither the
delivery of this prospectus nor any sale made using this prospectus shall under
any circumstances create an implication that information in it is correct at any
time subsequent to the date of this prospectus.
-----------------
TABLE OF CONTENTS
PAGE
Prospectus Summary................................................. 2
High Risk Factors.................................................. 4
Use of Proceeds.................................................... 10
Price Range of Common Stock and Dividend Policy.................... 10
Capitalization..................................................... 11
Selected Financial Data............................................ 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13
Business........................................................... 21
Management......................................................... 33
Certain Transactions............................................... 41
Principal Stockholders............................................. 42
Selling Security Holders........................................... 44
Plan of Distribution............................................... 48
Description of Securities.......................................... 49
Shares Eligible for Future Sale.................................... 52
Legal Matters...................................................... 52
Experts............................................................ 53
Additional Information............................................. 53
List of Financial Statements....................................... F-1
VIRAGEN, INC.
----------
PROSPECTUS
----------
October ___, 1999
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the common stock being registered, other
than underwriting discounts and commissions.
Securities and Exchange Commission
registration fee........................................... $ 1,734
Legal fees and expenses....................................... 50,000*
Accounting fees and expenses ................................. 32,500*
Blue sky fees and expenses.................................... 500*
Printing expenses............................................. 10,000*
Registrar and transfer agent's fee............................ 1,500*
Miscellaneous................................................. 1,766*
---------
Total ........................................................ $ 98,000
=========
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware allows a
corporation to indemnify any person who was or is, or is threatened to be made a
party to any threatened, pending, or completed suit or proceeding. This applies
whether the matter is civil, criminal, administrative or investigative because
he or she is or was a director, officer, employee or agent of the corporation.
A corporation may indemnify against expenses, including attorney's
fees, and, except for an action by or in the name of the corporation, against
judgments, fines and amounts paid in settlement as part of this suit or
proceeding. This applies only if the person indemnified acted in good faith and
in a manner he or she reasonably believed to be in the best interest of the
corporation. In addition, with respect to any criminal action or proceeding, the
person had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or in the name of the corporation, no
indemnification of expenses may be made for any claim, as to which the person
has been found to be liable to the corporation. The exception is if the court in
which this action was brought determines that the person is reasonably entitled
to indemnity for expenses.
Section 145 of the General Corporation Law of Delaware further provides
that if a director, officer, employee or agent of the corporation has been
successful in the defense of any suit, claim
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<PAGE> 88
or proceeding described above, he or she will be indemnified for expenses,
including attorney's fees, actually and reasonably incurred by him or her.
Indemnification for liabilities arising under the Securities Act of
1933, as amended, is permitted as to directors, officers and controlling persons
of Viragen, in the opinion of the Securities and Exchange Commission,
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification against these liabilities, other than
the payment by Viragen in the successful defense of any action, suit or
proceeding, is asserted, Viragen will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether indemnification by it is against
public policy. Viragen will be governed by the final adjudication of this issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1996, Viragen issued 5,000 shares of its series C
convertible preferred stock to three accredited investors for a cash
consideration of $5,000,000. The issuance was effected pursuant to Rule 506
under Section 4(2) of the Securities Act of 1933. The issuance also included
warrants to purchase an aggregate of 214,593 shares of common stock.
In February 1997, Viragen issued 15,000 shares of its series D
convertible preferred stock to a single accredited investor for an aggregate
consideration of $20,000,000. The transaction was effected pursuant to Rule 506
under Section 4(2) of the Securities Act of 1933. In connection with this
issuance, Viragen also issued 375,000 common stock purchase warrants. In
September 1997, we exchanged an equal number of shares of our series F
convertible preferred stock for the remaining series D convertible preferred
stock outstanding pursuant to Section 3(9) of the Securities Act of 1933.
In February 1997, Viragen issued 15,000 shares of its series E
convertible preferred stock to a single accredited investor for an aggregate
consideration of $5,000,000. The transaction was effected pursuant to Rule 506
under Section 4(2) of the Securities Act of 1933. In September 1997, we
exchanged an equal number of shares of our series G convertible preferred stock
for the remaining series E convertible preferred stock outstanding pursuant to
Section 3(9) of the Securities Act of 1933.
In June 1997, Viragen issued 138,223 common shares from treasury, in
order to settle threatened litigation. The treasury shares had a cost of
approximately $288,000 and were issued pursuant to Rule 506 under Section 4(2)
of the Securities Act of 1933.
During February 1998 and April 1998, Viragen issued 500 shares of its
series H convertible preferred stock for an aggregate consideration of
$5,000,000 and 200 shares of its series I preferred stock, respectively, to five
accredited investors for an aggregate consideration of $2,000,000. The
transaction was completed pursuant to Rule 506 under Section 4(2) of the
Securities Act of 1933. In connection with the issuance of the securities, we
issued to the holders of the series H and series I preferred stock, warrants to
purchase a total of 1,844,336 shares of common stock of Viragen. In addition,
warrants to purchase 402,052 shares of common stock of Viragen were issued to a
finder for the transaction.
In March 1999, Viragen issued convertible promissory notes in the
aggregate principal amount of $2,000,000 to two accredited investors. In June
1999, Viragen modified the terms of
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<PAGE> 89
conversion of the promissory notes. Viragen also issued to these investors
warrants to purchase 932,039 shares of common stock of the Company. The
transaction was effected pursuant to Rule 506 under Section 4(2) of the
Securities Act of 1933. Viragen also issued warrants to purchase 155,339 shares
of its common stock to certain finders in the transaction.
In April 1999, Viragen issued 25,000 common shares as compensation for
services performed by a consultant. The shares had a value of $12,500 and were
issued pursuant to Rule 506 under Section 4(2) of the Securities Act of 1933.
In May 1999, Viragen issued 2,750,000 shares of its common stock to
three accredited investors for an aggregate consideration of $1,375,000. Each of
the investors was highly sophisticated, had significant financial resources, had
pre-existing relationships with Viragen and was provided with access to relevant
information relating to Viragen. The transaction was effected in accordance with
Section 4(2) of the Securities Act of 1933.
ITEM 16. 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)
(iii) Certificate of Amendment to Certificate of Incorporation of
Viragen, Inc.
(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))
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<PAGE> 90
(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))
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<PAGE> 91
(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))
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<PAGE> 92
(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)
II-6
<PAGE> 93
(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 (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 (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 (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.
II-7
<PAGE> 94
(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.
(b) Reports on Form 8-K filed during the fourth quarter
None
II-8
<PAGE> 95
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
Viragen has been advised that in the opinion of the Securities and Exchange
Commission indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of Viragen in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection with the
securities being registered, Viragen will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of this issue.
(b) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of these securities at that time will be
deemed to be the initial bona fide offering thereof.
II-9
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Plantation, state of Florida on October 11, 1999.
VIRAGEN, INC.
BY: /s/ Gerald Smith
---------------------------
Gerald Smith
Chairman of the Board of Directors
and President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Gerald Smith Chairman of the October 11, 1999
- ------------------------------------ Board of Directors,
Gerald Smith President and Principal
Executive Officer
/s/ Robert H. Zeiger Vice Chairman of the Board October 11, 1999
- -----------------------------------
Robert H. Zeiger
/s/ Carl N. Singer Director and Chairman of October 11, 1999
- ----------------------------------- the Executive Committee
Carl N. Singer
/s/ Dennis W. Healey Executive Vice President October 11, 1999
- ----------------------------------- Treasurer, Principal
Dennis W. Healey Financial Officer,
Director and Secretary
/s/ Charles J. Simons Director October 11, 1999
- -----------------------------------
Charles J. Simons
/s/ Peter D. Fischbein Director October 11, 1999
- -----------------------------------
Peter D. Fischbein
</TABLE>
II-10
<PAGE> 97
<TABLE>
<CAPTION>
<S> <C> <C>
Director October , 1999
- -----------------------------------
Sidney Dworkin
Director October , 1999
- -----------------------------------
Robert C. Salisbury
/s/ Jose I. Ortega Controller and Principal October 11, 1999
- ----------------------------------- Accounting Officer
Jose I. Ortega
</TABLE>
II-11
<PAGE> 1
Exhibit 3(iii)
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
VIRAGEN, INC.
Viragen, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
The amendment to the Corporation's Certification of Incorporation as
set forth in the following resolution approved by the Corporation's Board of
Directors and stockholders was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware:
RESOLVED, that the Board of Directors hereby authorizes an amendment
to its Certificate of Incorporation to increase its authorized common
capital stock from 75,000,000 shares of Common Stock, $.01 par value,
to 125,000,000 shares of Common Stock, $.01 par value, and in
particular the Board hereby approved an amendment to Article FOURTH of
the Certificate of Incorporation, as amended, to increase the Common
Stock, $.01 par value, and shall read in its entirety as follows:
"FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 126,000,000 of which
1,000,000 shares shall be Preferred Stock, $1.00 par value, and
125,000,000 shares shall be Common Stock, $.01 par value. The
Preferred Stock shall be issued from time to time in one or more
series with such distinctive serial designations and (a) may have such
voting powers, full or limited, or may be without voting power; (b)
may be subject to redemption at such time or times and at such prices,
as determined; (c) may be entitled to receive dividends (which may be
cumulative or noncumulative) at such rate or rates, on such
conditions, and at such times, and payable in preference to, or in
such relation to, the dividends payable on any other class or series
of stock; (d) may have such rights upon the dissolution of, or upon
any distribution of the assets of the Corporation; (e) may be
convertible into, or exchangeable for, shares of any other class or of
any other series of the same or any other class or series of stock of
the Corporation, at such price of prices or at such rates of exchange
and with such adjustments, as determined; and (f) shall have such
other relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, all as shall
hereinafter be stated and expressed in the resolution or resolutions
providing for the issuance of such Preferred Stock from time to time
adopted by the Board of Directors, pursuant to authority so to do
which is hereby expressly vested in the Board of Directors."
<PAGE> 2
Each share of Common Stock shall entitle the holder thereof to one
vote, in person or by proxy, on all matters on which holders of shares
of Common Stock are entitled to vote.
The number of authorized shares of any class of capital stock of the
Corporation including, but without limitation, the Preferred Stock and
the Common Stock, may be or decreased by the affirmative vote of the
holders of a majority of the stock of the Corporation entitled to
vote.
IN WITNESS WHEREOF, Viragen, Inc. has caused this Certificate of
Amendment to the Certification of Incorporation to be signed by Gerald Smith,
Chairmen of the Board and President and attested to by Dennis W. Healey,
Secretary, and the seal of the Corporation has been duly affixed hereto, this
4th day of October, 1999.
VIRAGEN, INC.
By: /s/ Gerald Smith
-------------------------------
Gerald Smith, Chief Executive
Officer and President
ATTEST:
/s/ Dennis W. Healey
- ---------------------------
Dennis W. Healey, Secretary
2
<PAGE> 1
Exhibit (10)(LViii)
Translation from German into English
Cooperation and Supply Agreement
between
1. VIRAGEN INC.
having its registered office at
865 SW 78th Avenue, Suite 100
Plantation, Florida 33324 USA
hereinafter referred to as "Viragen"
2. VIRAGEN DEUTSCHLAND GmbH
having its registered office at
Frankfurt
-hereinafter referred to as "VGer"-
- parties of the first part -
and
1. DRK-BLUTSPENDEDIENST BADEN-WURTTEMBERG gGmbH
having its registered office in Baden-Baden
2. BLUTSPENDEDIENST DER DRK-LANDESVERBANDE NORDRHEIN UND WESTFALEN-LIPPE
gGMBH
having its registered office at Hagen
3. Blutspendedienst Hessen des Deutschen Roten Kreutzes gGmbH
having its registered office at Frankfurt am Main
4. Blutspendedienst des Bayerischen Roten Krenzes gGmbH
having its registered office at Munich
- parties of the second part
*the information redacted herefrom is the subject of a Confidentiality Request
submitted to the Securities and Exchange Commission.
<PAGE> 2
I.
PRELIMINARY STATEMENT
In medical practice, whole blood preserves are being used less and less.
Instead, blood components are more frequently being fractionally distilled into
blood plasma and erythrocytes depending on the medical indices. During this
first phase of fractionation (centrifugation), a layer is created alongside the
blood plasma and erythrocytes, the so called 'buffycoats", that contains
various cells: the different types of leukocytes which, for medical reasons,
must be strictly separated from the erythrocytes. An alternative method for
separating the leukocytes is filtration. When whole blood is filtered the
leukocytes remain in the filter. Unlike blood plasma and erythrocytes,
leukocytes may not be used directly for medical purposes. Certain leukocytes
contained in the buffycoats (source leukocytes) produce different interferon.
Viragen bas developed a medical product. Omniferon(TM), the production of which
requires substantial quantities of source leukocytes, Since source leukocytes
cannot be stored for longer periods of time, the processing must take place in
the Federal Republic of Germany. Viragen intends to establish the processing
facilities through a subsidiary ("VGer") in Germany.
Omniferon has not yet been approved as a drug.
Thus the use of source leukocytes lies in Viragen's interest because the source
leukocytes is the originating material for the production of Omniferon. A
prerequisite for VGer in establishing processing facilities in Germany is that
a sufficient quantity of source leukocytes be yielded and available.
The DRK-BSD's interest in this matter lies in putting to further, medically
meaningful use the source leukocytes which are automatically yielded during the
first fractionation of the valuable basic blood plasma (Guts Blut)
Based on the foregoing reasons. Viragen. VGer and DRK-Blutspendedicnstc are
interested in working together as partners.
Wherefore, the parties agree as follows:
II.
COOPERATION AND SUPPLY AGREEMENT
SS. 1
SUBJECT MATTER OF THE AGREEMENT
(1) The subject matter of this Agreement is the collaboration of the
Contracting Parties to use DRK source leukocytes in the manufacture of
biological medical products.
(2) In furtherance hereof, DRK-BSD shall, on a preferential basis, supply
to VGer source leukocytes which have been produced from whole blood
preserves and which were examined in accordance with the applicable
statutory and regulatory provisions (Appendix 1) under the laws of the
Federal Republic of Germany. Such source leukocytes will be supplied
for purposes of producing and Interferon compound. Delivery shall be
made in the form of buffycoats containing source leukocytes. DRK-BSD
shall not conduct a prior second fractionation of the buffycoats. The
buffycoats are not a finished pharmaceutical product, but rather a
by-product.
(3) VGer agrees to derive the source leukocytes from the raw material
supplied (buffycoats or filter). If new production methods are
employed, then the agreements memorialized in this contract will
<PAGE> 3
apply to the separated leukocytes only. If necessary, VGer will be
responsible for yielding the leukocytes.
(4) The DRK-BSD agree at their own expense to adjust their production
conditions to the extent required in order to comply with the approval
requirements for the other compounds created from the whole blood. The
DRK-BSD further agree to adapt their production conditions to VGer's
production conditions and specifications if this is possible as part of
the approval process for the other compounds extracted from while blood
and provided that VGer expresses its willingness to assume the
additional expenses resulting therefrom. The quality features of the
buffycoats as well as the requirements of production, transport and
specifications which must be observed in any given case are set forth
in detail in Annex 2 to this Agreement. The DRK-BSD shall bear all
costs arising from the production of raw material in this respect.
SS. 2
DELIVERY, ANNUAL SCHEDULING, ACCEPTANCE
(1) The DRK-BSD agree to deliver the quantity of source leukocytes required
by VGer for operating and fully utilizing a production facility
(1 million buffycoats annually)
(2) VGer agrees to accept for the upcoming year the buffycoats that have
been ordered by 30 September of a current year. The deliveries will be
ordered on a quarterly basis with a margin of fluctuation of plus or
minus 15%. Such margin of fluctuation will be based on one-fourth of
the annual amount ordered. VGer shall project the estimated annual
quantity each calendar year and notify the DRK-BSD thereof.
(3) VGer is free to determine the annual order quantity (preferential
deliveries) during a transitional two-year period beginning with the
acceptance of deliveries. After such two-year period, the annual order
quantity shall be one million buffycoats, plus or minus 15%.
(4) The order must be in writing and shall be submitted to a contact
person as defined in SS.15.
(5) Each of the DRK-BSD agrees, under this Agreement and up to their
respective capacity limit, to supply a proportional quantity of
buffycoats or source leukocytes corresponding to its respective
donations in the previous year. VGcr shall be informed of such in
writing no later than 31 January of the following calendar year. The
delivery of small quantities shall be carried out by internal
arrangement of the DRK-BSD through individual DRK-BSD.
The time-table for on-going deliveries by the individual DRK.BSD shall
be mutually stipulated by all the parties from time to time during the
term of the Agreement.
If one DRK-BSD cannot fulfill this obligation, in whole or in part, the
other DRK-BSD agree to supply, within the scope of this Agreement and
their respective capacity limits, the deficient quantity. The delivery
shall be arranged internally by the DRK-BSD in accordance with sentence
3 of SS.2(5). This also applies to the mutual duty to inform and any
agreements among the DRK-BSD regarding internal financial settlement
arrangements. In the event of a non-culpable interruption in business
operations, the DRK-BSD that are privy to this Agreement may discharge
their delivery obligations by also supplying VGer with source
leukocytes which are obtained from other DRK-BSD and which meet the
quality requirements under this Agreement.
<PAGE> 4
( ) VGer may export any buffycoats supplied by the DRK-BSD to other
production facilities within the Viragen group of affiliated companies.
VGer shall obtain the necessary governmental permits and approvals.
( ) VGer shall notify the DRK-BSD six months prior to the date on which the
DRK-BSD should initiate regular deliveries (following the approval of
Omniferon) as part of the production procedure. Once the deliveries
have commenced, the DRK-BSD are obliged to initially supply half of the
contractually stipulated quantity for a period of six months.
SS.3
DISTRIBUTION
(1) Pursuant to a special agreement yet to be concluded. VGer shall grant
DRK-BSD the right to use Omniferon - a substance produced from the
source leukocytes supplied by the DRK-BSD - at the institutions which
are listed in Annex 3 and in which the associations of the German Red
Cross have a majority interest or which are operated by one or more
associations of the German Red Cross at wholesale prices which VGer
changes from time to time in Germany and which are otherwise based on
terms which have yet to be mutually stipulated. The Contracting Parties
shall use their best efforts to negotiate a definitive sales agreement
as soon as all documents necessary for approval (product license
application) have been submitted to the competent authorities.
(2) VGer further agrees that, to the extent commercially reasonable, the
Federal Republic of Germany will receive priority distribution of the
Omniferon made from the source leukocytes supplied by the DRK-BSD after
it has been approved in there.
SS.4
COMPENSATION, PAYMENT DATES, CONFIRMATION
(1) The compensation for the source leukocytes supplied by the DRK-BSD
shall be (*) of the consolidated sales of Omniferon as
achieved by the Viragen group affiliated companies (Viragen, Inc. and
all subsidiaries in which Viragen, Inc. is a majority owner). The basis
for this calculation will not be the actual realized sale price, but
rather the final sales price to consumers (without turnover tax) as
shown in the so-called "Red List". The lowest sales price shall be DEM
(*)/buffycoat plus turnover tax and the highest sales price shall be
DEM (*)/buffycoat plus turnover tax. If no end sale price is indicated
on the Red List, then the sales price will be the lowest sales price
per buffycoat. Section 12(4) governs adjustments to the lowest and
highest sale price.
(2) Compensation is due each year after the annual Viragen group
financial statements have been reviewed. Installment payments toward
the compensation must be made for the supplied buffycoats based on the
lowest purchase price. The installment payments are due 90 days after
delivery is made. Upon demand by DRK-BSD, Viragen or VGer shall furnish
a bank guaranty (Bankburgschaft) in the amount if DEM (*) million to
cover the amounts outstanding.
(3) The DRK-BSD have the right to obtain from the Viragen group financial
statement auditor a certification as to the relevant annual sales of
the Omniferon which is the subject matter of this Agreement. The
certification shall be sent to DRK-BSD within 30 days after the
auditor has presented this audited Viragen annual financial statements.
(4) If turnover tax is due on services performed under this Agreement, then
such taxes shall be paid by the recipient of the services. The DRK-BSD
agree to clarify the turnover tax treatment of the services.
(5) To discharge the obligation owed, payments must be made to a bank
account specified in the future.
<PAGE> 5
(6) Claims arising from this Agreement may not be assigned.
SS.5
PLACE OF PERFORMANCE, RISK OF LOSS
(1) With respect to any processing in Germany, the place of performance is
the VGer production facility. With respect to any processing abroad,
the place of performance is the airport in Germany which VGer has
designated to the DRK-BSD as the place of delivery.
(2) The DRK-BSD bears the risk of loss for the accidental destruction or
accidental deterioration of the buffycoats during their transport to
the place of performance.
SS.7
COMPENSATORY DAMAGES, WARRANTY, DUTIES OF CARE, INSURANCE
(1) DRK-BSD's liability for product defects and consequential damages due
to product defects is expressly limited to cases where the defect is
the result of fault and the causality of the damage has been proven.
The fault of the DRK-BSD vicarious agents will be imputed to the
DRK-BSD. If the fact surrounding the faulty act occurred within the
DRK-BSD sphere of risk, then DRK-BSD shall have the burden to prove
that it was not at fault. Where fault exists, DRK-BSD will be liable
for all damages including any pecuniary harm arising when products
produced by Viragen or one of its affiliated companies cannot be sold
or can be sold only at a reduced price. The total liability for all
parties is limited to a maximum of DEM 2 million annually. The DRK-BSD
are also obligated to replace all original material they had delivered
in the event damages arose as a result of their fault.
In all other cases, DRK-BSD's liability shall be governed by statute or
the legal principles developed by case law. Liability will attach only
if the relevant Contracting Parties are responsible for the
circumstances upon which the liability is based. Compensatory damage
claims for VGer's lost profits based on the non-performance of the
delivery obligation under SS.2(5) are precluded.
(2) The Contracting Parties are aware that not all rare infectious diseases
(e.g., Creutzfeldt-Jacob Syndrome) can be identified under today's
current testing procedures. The legal reporting requirements which are
partially in place today may in some cases lead to a recall actions
many years down the road. The DRK-BSD agree to promptly inform Viragen
and VGer in the event that recall action criteria arise. The
Contracting Parties hereby establish that henceforth in such cases the
DRK-BSD shall replace free of charge the delivered source material
produced from a contaminated production batch. Any additional losses
shall be borne by each Contracting Party individually.
(3) The DRK-BSD also otherwise agree to recall promptly any buffycoats
which fail to meet the requirements set forth in SS.1(4). The DRK-BSD
agree to comply with all statutory and regulatory provisions together
with the requirements implicit therein as prescribed under the laws of
the European Union and Germany and applicable to the production and
introduction into commerce of source leukocytes (see also SS.1(4). The
current quality requirements for the buffycoats, the production
conditions, and the specifications are reproduced in Annex 2 to this
Agreement.
(4) The DRK-BSD agree to obtain a general liability insurance policy for a
reasonable amount with a reputable insurance company, to maintain such
policy for the duration of the Agreement, and to furnish proof thereof
to VGer. The current insurance policies are listed in Annex 4 of this
Agreement.
<PAGE> 6
SS.7
PARTICIPATION IN APPROVAL PROCEEDINGS
At the request of the DRK-BSD, the clinics (German Red Cross member associations
or a companies of which a German Red Cross member association holds a majority
interest) listed in Annex 5 of this Agreement may be included in the
implementation of clinical studies within the scope of the approval proceedings
if these clinics fulfill the clinical and technical requirements for such and
also have the requisite licenses.
SS.8
TERM OF THE AGREEMENT, TERMINATION
(1) The Agreement shall enter into force on 1 July 1998 for an initial
definite term of ten years. The Agreement shall be automatically
extended for an additional year in the event that a termination notice
has not been given twelve months before the expiration of the Agreement
or the expiration of any extension of the Agreement.
(2) A party to the Agreement may, without notice, prematurely terminate the
Agreement for cause if the terminating party is not responsible for the
facts or circumstances underlying the cause for termination. Cause will
be deemed to exist if:
- Viragen, VGer or a subsidiary has not submitted all documents
necessary for the approval of Omniferon (Product License
Application) in a European Union (EU) member state by 1 July
2003;
- a party to the Agreement materially breaches Red Cross Policy,
printed in Annex 6 of this Agreement, and the breach is not
remedied within 30 days despite a written demand to do so;
- circumstances arise for a party to the Agreement (particularly
through sovereign acts) that make impossible, materially
disrupt, prejudice, or make unreasonable the continuation of
the Agreement, or it is no longer technically feasible and
commercially practicable for Viragen to extract source
leukocytes from the supplied raw material;
- a party to the Agreement ceases making payments; files for
bankruptcy, a judicial composition among creditors or a
similar debt settlement procedure or a bankruptcy position is
denied based on insufficient assets; or
- a party to the Agreement fails to discharge a material duty
(particularly duties to deliver and pay) under the Agreement
within thirty (30) days of a written demand to do so.
In the event of a termination without notice, the obligations pursuant to this
Agreement shall be fulfilled until the other party acknowledges the existence of
cause of until a final, non-appealable judgment has been rendered. In any case,
such performance may cease once the quantities ordered pursuant to SS.2(2) and
(3) have been delivered.
(3) In the event of a premature termination pursuant to sub-section 2, the
Contracting Party responsible for giving rise to the cause therefore
shall be liable to the other Contracting Parties for any damages
resulting from the premature termination. Liability based on any claim
for lost profits shall be limited to DEM 1 million.
(4) Notice of termination must be made in writing.
<PAGE> 7
SS.9
SURRENDING DOCUMENTS
Upon the expiration or termination of the contract, each Contracting Party
shall surrender any and all property relating to or owned by the other
Contracting Party including, inter alia, books, writings and records. No
Contracting Party has the right to withhold such property.
SS.10
NON-DISCLOSURE
Each Contracting Party covenants not to disclose any matters, relationships and
business secrets to which they have become privy by virtue of the contract.
This covenant will continue to bind the Parties even after the contract has
ended. A breach of this duty of non-disclosure and any other such duty under
the other agreements between the Contracting Parties shall be deemed cause
within the meaning of SS.8(2).
SS.11
PUBLICATION
DRK-BSD is aware that under US law, Viragen is obligated to publish material
facts concerning its enterprise. Subject to the prior consent of the other
Contracting Parties in accordance with SS.10, all Contracting Parties are
entitled to publish details concerning the cooperation between the Contracting
Parties. Viragen's compliance with its obligation under sentence one of this
sub-section may not be thereby impaired. Consent will be deemed to have been
given if no objection is lodged within one week following receipt of the
publication draft.
SS.12
ADJUSTMENTS TO THE AGREEMENT
(1) If, as a result of medical/technical developments and/or statutory or
regulatory requirements, changes arise which will negatively impact
costs and/or prices, then the Contracting Parties shall, using their
best efforts, conduct negotiations concerning adjustments to the
Agreement.
(2) Sub-section 1 shall also apply in the event of significant changes in
the cost structure connection with the creation of source leukocytes
and/or the production of Omniferons and the availability of source
leukocytes in quantities and forms (buffycoat/filter) and in the event
of a significant drop in donations. This will apply accordingly in the
event that VGer manufactures additional products from the raw materials
supplied.
(3) The Contracting Parties mutually agree, to the extent it is reasonable,
to eliminate or reduce any detrimental changes from the current
conditions and to use any possible improvements.
(4) The following applies with respect to any adjustments to the minimum
and maximum per buffycoat purchase price as provided in SS.4(1). If the
cost of living index for a 4-person household of civil servants and
employees with higher incomes as established by the Federal Office of
Statistics in Wiesbaden increases and decreases from the status per
January 2000, then the minimum or maximum purchase price will be
adjusted accordingly. The adjustment will be conducted annually at the
beginning of any given calendar month commencing with deliveries were
made prior thereto. Regarding the price quote, the date on which
delivery is made to the DRK-Blutspendedienst will be dispositive.
Should the above-referenced cost of living index
<PAGE> 8
disappear (e.g., as a result of the Euro), then the index which
replaces it or the one which is most similar to it will be deemed as
the controlling index for purposes of this provision.
SS.13
FINAL PROVISIONS
(1) Viragen and VGer are prepared to review the prospect of including
additional DRK-BSD.
(2) The DRK-BSD are prepared to review whether or not they would make
available to VGer - against cost reimbursement - a portion of their
land or the bordering land (which would still need to be purchased) for
purposes of constructing manufacturing facilities.
(3) The DRK-BSD grant VGer an option for the delivery of a supply of source
leukocytes which would be required to make full capacity use of a
second facility in German (an additional million buffycoats per year).
The delivery would be in accordance with the terms of the Agreement and
is subject to their actually having the required quantities in stock at
the time the second production facilities are put into operation. In
consideration hereof, VGer agrees, after a second production facility
is put into operation, to purchase one million buffycoats plus or minus
15% annually pursuant to the terms of this Agreement. This option is
valid until 30 June 2003.
SS.14
OPTIONS
(1) Viragen and VGer are prepared to review the prospect of including
additional DRK-BSD.
(2) The DRK-BSD are prepared tor eview whether or not they would make
available to VGer - against cost reimbursement - a portion of their
land or the bordering land (which would still need to be purchased) for
purposes of constructing manufacturing facilities.
(3) The DRK-BSD grant VGer an option for the delivery of a supply of source
leukocytes which would be required to make full capacity use of a
second facility in Germany (an additional million buffycoats per year).
The delivery would be in accordance with the terms of this Agreement
and is subject to their actually having the required quantities in
stock at the time the second production facilities are put into
operation. In consideration hereof, VGer agrees, after a second
production facility is put into operation, to purchase one million
buffycoats plus or minus 15% annually pursuant to the terms of this
Agreement. This option is valid until June 2003.
SS.15
CONTACT PERSONS AT DRK-BSD; BINDING AUTHORITY
(1) Any legally binding statements that must be made to the DRK-BSD shall
be made to the person whom the DRK-BSD designates.
(2) Any legally binding statements of the DRK-BSD must be made by the
person whom it designates to do so.
SS.16
CORPORATE AUTHORIZATION REQUIRED
This Agreement will not enter into force until it has been approved by each
supervisory body of the DRK-BSD. The DRK-BSD agree to promptly obtain such
approval.
<PAGE> 9
March 19, 1998
--------------
Viragen, Inc.
/s/ Charles F. Fistel, Executive Vice President
- ------------------------------------------------
/s/ Gerald Smith, President
- ----------------------------
Viragen Deutschland GmbH
/s/ Gerald Smith, Managing Director
- ------------------------------------
DRK-Bluspendedienste
- --------------------------------------------
DRK-Blutspendedienst Baden-Wurttemberg gGmbH
- --------------------------------------------
Blutspendedienst der DRK-Landesverbande
Nordrhein und Westfalen-Lippe gGmbH
- --------------------------------------------
Blutspendedienst Hessen des Deutschen
Roten Kreuzes gGmbH
- --------------------------------------------
Blutspendedienst des Bayerischen
Roten Kreuzes gGmbH
<PAGE> 10
SUMMARY OF ANNEXES TO THE
COOPERATION AND SUPPLY AGREEMENT BETWEEN THE COMPANY,
VIRAGEN DEUTSCHLAND GMBH AND GERMAN RED CROSS DATED MARCH 19, 1998
ANLAGE 1
- --------
This document notifies German health agencies that the Scientific Advisory
Committee of the German Medical Association, in collaboration with several other
agencies, revised the guidelines for blood type classification and blood
transfusion in December 1996. The revised guidelines were published in
"Bundesgesundheitsblatt" in December 1996.
ANLAGE 2
- --------
This document defines the Buffycoat Specifications required by Viragen, Inc and
Viragen (Germany) Ltd. This document is similar to the Buffycoat Specifications
included in the America Red Cross agreement.
ANLAGE 4
- --------
This document lists the insurance coverage maintained by each of the German Red
Cross sites for material, property and personal injury liability claims.
ANLAGE 6
- --------
This document defines the German Red Cross' Principles, which include
Humanitarianism, Objective, Neutrality, Independent, Voluntary, Unity and
Universal. The document also defines its duty, regulations, philosophy, goals
and by-laws.
<PAGE> 11
Anlage 1
zum Kooperations- und Liefervertrag
RICHTLINIEN ZUR
BLUTGRUPPENBESTIMMUNG
UND BLUTTRANSFUSION
(HAMOTHERAPIE)
Aufgestellt vom Wissenschaftlichen Beirat
der Bundesarztekammer
und vom Paul-Ehrlich-Institut
Uberarbeitete Fassung 1996
Deutscher Arzte-Verlag
* The information redacted herefrom is the subject of a Confidentiality Request
submitted to the Securities and Exchange Commission.
<PAGE> 12
RICHTLINIEN ZUR BLUTGRUPPENBESTIMMUNG
UND BLUTTRANSFUSION (HAMOTHERAPIE)
ISBN 3-7691-0341-6
Der Wissenschaftliche Beirat der Bundesarztekammer hat gemeinsam mit Vertretern
aus 34 medizinisch-wissenschaftlichen Fachgesellschaften, Berufsverbanden, dem
Bundesministerium fur Gesundheit, der Arbeitsgemeinschaft der Leitenden
Medizinalbeamtinnen und -beam-ten der Lander und dem Paul-Ehrlich-Institut die
,,Richtlinien zur Blutgruppenbestimung und Bluttransfusion" uberarbeitet und
einige Kapitel erganzt. Diese Richtlinien gelten fur alle Arztinnen und Arzte in
der Bundesrepublik Deutschland.
Mit der Veroffentlichung im Bundesgesundheitsblatt Mitte Dezember 1996 werden
die bisherigen Richtlinien (veroffentlicht im Bundesgesundheitsblaff 35, Nr. 5,
Mai 1992) ungultig.
DIE IN DEN LETZTEN JAHREN ERZIELTEN FORTSCHRITTE IN DER TRANSFUSIONMEDIZIN UND
IN DER ARZNEIMITTELSICHERHEIT VON BLUTKOMPONENTEN UND PLASMADERIVATEN WURDEN IN
DEN RICHTLINIEN BESONDERS BERUCKSICHTIGT.
Deutscher Arzte-Verlag
AUS DEM INHALT:
o Allgemeine Hinweise zu Aufgaben und Geltungsbereich der Richtlinien,
zur Verantwortung des Arztes und zu Haftungsfragen
o Blutgruppenserologische Untersuchungen
o Blutspender und Spendebedingungen
o Praparative Hamapherese - Organisation, Ausstattung der Zentren,
Durchfuhrung (NEU)
o Herstellung, Lagerung und Transport von Blutkomponenten und
Plasmaderivaten
o Transfusion von Blutkomponenten und Plasmaderivaten - Aufgaben des
transfundierenden Arztes bei Identitatssicherung und Dokumentation
o Unerwunschte Wirkungen nach Transfusion von Blutkomponenten und
Plasmaderivaten - Dokumentation, Ruckverfolgung (look back) und
Meldewesen
o Autologe Hamotherapie - notwendige Voraussetzungen, Organisation,
Herstellung u. Lagerung, patientenspezifische Besonderheiten
o Therapeutische Hamapherese (NEU)
o Perinatale Transfusionsmedizin und ihre Besonderheiten - Diagnostik,
Behandlung und Prophylaxe fetomaternaler Inkompatilitaten (NEU)
o Qualitatsmanagement - Ziele und Aufgaben, Verantwortung und
Zustandigkeiten (NEU)
o Chargendokumentation
o Gesetze, Verordnungen und Vorschriften
<PAGE> 13
Anlage 2
zum Kooperations- und Liefervertrag
QUALITATSMERKMALE DER BUFFY COATS
o Die Buffy Coats mussen innerhalb von [ * ] Stunden nach der
ursprunglichen Blutabnahme [ * ] an VGer geliefert worden sein;
o Buffy Coats werden aus Blutkonserven hergestellt, die den Anforderungen
fur die Verwendung fur Transfusionen nach deutschen und EU-Vorschriften
entsprechen. Sie mussen steril sein;
o Lagerung, Handhabung und Transport der Buffy Coats mussen bei einer
Temperatur von [ * ] Celsius [ * ] durchgefuhrt werden;
o [ * ] Hamatokrit pro Buffy-Coat-Beutel;
o Alle Tests auf ubertragbare Krankheiten und andere Tests, die von
deutschen und EU Behorden vorgeschrieben oder empfohlen werden, mussen
bereits durchgefuhrt worden und negativ ausgefallen sein;
o Ein Beutel Buffy Coat darf nicht weniger als [ * ] Milliarden
weiBe Blutkorperchen enthalten, die aus einer einzelnen, [ * ] ml
umfassenden Blutspende stammen;
o Die Beutel mussen den behordlichen Vorschriften entsprechend verpackt
und beschriftet sein;
o Soweit hier nicht anders festgelegt, werden Buffycoats in
Ubereinstimmung mit deutschen und EU Vorschriften und Empfehlungen zur
Herstellung von menschlichen Source Leukozyten, hergestellt
(einschlieBlich aller dazugehorigen Schritte wie zum Beispiel
Sammlung, Handhabung, Lagerung, Untersuchung (Qualitatssicherung),
Verpackung, Beschriftung, Versand und Dokumentation).
<PAGE> 14
ANLAGE 4 ZUM KOOPERATIONS- UND LIEFERVERTRAG
DRK-Blutspendedienst Betriebshaftpflicht
- ---------------------------- ----------------------------------
Baden-Wurttemberg 10.000.000 DM Personenschaden
500.000 DM Sachschaden
40.000 DM Vermogensschaden
- ---------------------------- ----------------------------------
Nordrhein-Westfalen 5.000.000 DM Personenschaden
500.000 DM Sachschaden
100.000 DM Vermogensschaden
- ---------------------------- ----------------------------------
Hessen 20.000.000 DM Personenschaden
2.000.000 DM Sachschaden
100.000 DM Vermogensschaden
- ---------------------------- ----------------------------------
Bayern 5.000.000 DM Personenschaden
300.000 DM Sachschaden
100.000 DM Vermogensschaden
<PAGE> 15
Anlage 6
zum Kooperations- und Liefervertrag
UNSER LEITBILD
<PAGE> 16
Im Zeichen
der Menschlichkeit
<PAGE> 17
UNSERE GRUNDSATZE
o Menschlichkeit
o Unparteilichkeit
o Neutralitat
o Unabhangigkeit
o Freiwilligkeit
o Einheit
o Universalitat
UNSER SELBSTVERSTANDNIS
o ss. 1 DRK-Satzung
o ss. 2 DRK-Satzung
UNSER LEITSATZ
UNSERE LEITLINIEN
UNSERE FUHRUNGSGRUNDSATZE
<PAGE> 18
UNSERE GRUNDSATZE
MENSCHLICHKEIT
UNPARTEILICHKEIT
NEUTRALITAT
UNABHANGIGKEIT
FREIWILLIGKEIT
EINHEIT
UNIVERSALIAT
<PAGE> 19
MENSCHLICHKEIT
Die Internationale Rotkreuz- und Rothalbmondbewegung, entstanden aus dem Willen,
den Verwundeten der Schlachtfelder unterschiedslos Hilfe zu leisten, bemuht sich
in ihrer nationalen und internationalen Tatigkeit, menschliches Leiden uberall
und jederzeit zu verhuten und zu lindern. Sie ist bestrebt, Leben und Gesundheit
zu schutzen und der Wurde des Menschen Achtung zu verschaffen. Sie fordert
gegenseitiges Verstandnis, Freundschaft, Zusammenarbeit und einen dauerhaften
Frieden unter den Volkern.
UNPARTEILICHKEIT
Die Rotkreuz- und Rothalbmondbewegung unterscheidet nicht nach Nationalitat,
Rasse, Religion, sozialer Stellung oder politischer Uberzeugung. Sie ist einzig
bemuht, den Menschen nach dem MaB ihrer Not zu helfen und dabei den
dringendsten FallenVorrang zu geben.
<PAGE> 20
NEUTRALITAT
Um sich das Vertrauen aller zu bewahren, enthalt sich die Rotkreuz- und
Rothalbmondbewegung der Teilnahme an Feindseligkeiten wie auch, zu jeder Zeit,
an politischen, rassischen, religiosen oder ideologischen Auseinandersetzungen.
UNABHANGIGKEIT
Die Rotkreuz- und Rothalbmondbewegung ist unabhangig. Wenn auch die Nationalen
Gesellschaften den Behorden bei ihrer humanitaren Tatigkeit als
Hilfsgesellschaften zur Seite stehen und den jeweiligen Landesgesetzen
unterworfen sind, mussen sie dennoch eine Eigenstandigkeit bewahren, die ihnen
gestattet, jederzeit nach den Grundsatzen der Rotkreuz- und Rothalbmondbewegung
zu handeln.
<PAGE> 21
FREIWILLIGKEIT
Die Rotkreuz- und Rothalbmondbewegung verkorpert freiwillige und uneigennutzige
Hilfe ohne jedes Gewinnstreben.
EINHEIT
In jedem Land kann es nur eine einzige Nationale Rotkreuz- oder
Rothalbmondgesellschaft geben. Sie muB allen offenstehen und ihre
humanitare Tatigkeit im ganzen Gebiet ausuben.
UNIVERSALITAT
Die Rotkreuz- und Rothalbmondbewegung ist weltumfassend. In ihr haben alle
Nationalen Gesellschaften gleiche Rechte und die Pflicht, einander zu helfen.
<PAGE> 22
UNSER SELBSTVERSTANDNIS
SS.1 DRK-SATZUNG
[1] Das Deutsche Rote Kreuz ist die Gesamtheit aller Mitglieder, Verbande,
Vereinigungen und Einrichtungen des Roten Kreuzes in der Bundesrepublik
Deutschland. Die Mitgliedschaft im Deutschen Roten Kreuz steht ohne Unterschied
der Nationalitat, der Rasse, der ethnischen Zugehorigkeit, des Geschlechts, der
Religion und der politischen Uberzeugung allen offen, die gewillt sind, bei der
Erfullung der Aufgaben des Deutschen Roten Kreuzes mitzuwirken.
<PAGE> 23
[2] Das Deutsche Rote Kreuz ist die nationale Rotkreuzgesellschaft der
Bundesrepublik Deutschland. Es nimmt die Aufgaben wahr, die sich aus den Genfer
Rotkreuz-Abkommen, den Zusatzprotokollen und den Beschlussen der Internationalen
Rotkreuz- und Rothalbmond-Konferenzen ergeben. Es achtet auf deren Durchfuhrung
im Gebiet der Bundesrepublik Deutschland und vertritt in Wort, Schrift und Tat
die Ideen der Nachstenliebe, der Volkerverstandigung und des Friedens. Das
Deutsche Rote Kreuz ist von der Bundesregierung und vom Internationalen Komitee
vom Roten Kreuz als Nationale Rotkreuz-Gesellschaft im Sinne der Genfer
Rotkreuz-Abkommen anerkannt und wirkt im standigen Sanitatsdienst der Bundeswehr
unter der Verantwortung der Bundesregierung als freiwillige Hilfsgesellschaft
mit.
[3] Das Deutsche Rote Kreuz ist ein anerkannter Spitzenverband der Freien
Wohlfahrtspflege. Es nimmt die Interessen derjenigen wahr, die der Hilfe und
Unterstutzung bedurfen, um soziale Benachteiligung, Not und menschenunwurdige
Situationen zu beseitigen sowie auf die Verbesserung der individuellen,
familiaren und sozialen Lebensbedingungen hinzuwirken.
<PAGE> 24
[4] Das Jugendrotkreuz ist der anerkannte Jugendverband des Deutschen Roten
Kreuzes. Durch seine Erziehungsund Bildungsarbeit fuhrt das Jugendrotkreuz junge
Menschen an das Ideengut des Roten Kreuzes heran und tragt zur Verwirklichung
seiner Aufgaben bei. Das Jugendrotkreuz vertritt die Interessen der jungen
Menschen des Deutschen Roten Kreuzes.
[5] Das Deutsche Rote Kreuz bekennt sich zu den sieben Grundsatzen der
Internationalen Rotkreuz- und Rothalbmondbewegung:
o Menschlichkeit,
o Unparteilichkeit,
o Neutralitat,
o Unabhangigkeit,
o Freiwilligkeit,
o Einheit und
o Universalitat.
Diese Grundsatze sind fur alle Verbande, Vereinigungen und Einrichtungen des
Deutschen Roten Kreuzes verbindlich.
Das Deutsche Rote Kreuz ist mit dem Internationalen Komitee vom Roten Kreuz, der
Internationalen Foderation der Rotkreuz- und Rothalbmond-Gesellschaften sowie
den anderen nationalen Rotkreuz- und Rothalbmond-Gesellschaften ein Teil der
Internationalen Rotkreuz- und Rothalbmondbewegung.
<PAGE> 25
SS.2 DRK-SATZUNG
Das Deutsche Rote Kreuz stellt sich aufgrund seines Selbstverstandnisses und
seiner Moglichkeiten folgende Aufgaben:
o Verbreitung der Kenntnisse des humanitaren Volkerrechts sowie der
Grundsatze und Ideale der Internationalen Rotkreuz- und
Rothalbmondbewegung,
o Hilfe fur die Opfer von bewaffneten Konflikten, Naturkatastrophen und
anderen Notsituationen,
o Verhutung und Linderung menschlicher Leiden, die sich aus Krankheit,
Verletzung, Behinderung oder Benachteiligung ergeben,
o Forderung der Gesundheit, der Wohlfahrt und der Jugend,
Forderung der Entwicklung nationaler Rotkreuz- und Rothalbmond-Gesellschaften.
<PAGE> 26
UNSER LEITSATZ
Wir vom Roten Kreuz sind Teil einer weltweiten Gemeinschaft von Menschen in der
Internationalen Rotkreuz- und Rothalbmondbewegung, die Opfern von Konflikten und
Katastrophen sowie anderen hilfsbedurftigen Menschen unterschiedslos Hilfe
gewahrt, allein nach dem MaB ihrer Not.
Im Zeichen der Menschlichkeit setzen wir uns fur das Leben, die Gesundheit, das
Wohlergehen, den Schutz, das friedliche Zusammenleben und die Wurde aller
Menschen ein.
<PAGE> 27
UNSERE LEITLINIEN
1. DER HILFEBEDURFTIGE MENSCH
Wir schutzen und helfen dort, wo menschliches Leiden zu verhuten und zu lindern
ist.
2. DIE UNPARTEILICHE HILFELEISTUNG
Alle Hilfebedurftigen haben den gleichen Anspruch auf Hilfe, ohne Ansehen der
Nationalitat, der Rasse, der Religion, des Geschlechts, der sozialen Stellung
oder der politischen Uberzeugung. Wir setzen die verfugbaren Mittel allein nach
dem Ma(beta) der Not und der Dringlichkeit der Hilfe ein. Unsere freiwillige
Hilfeleistung soll die Selbsthilfekrafte der Hilfebedurftigen wiederherstellen.
3. NEUTRAL IM ZEICHEN DER MENSCHLICHKEIT
Wir sehen uns ausschlieBlich als Helfer und Anwalte der Hilfebedurftigen
und enthalten uns zu jeder Zeit der Teilnahme an politischen, rassischen oder
religiosen Auseinandersetzungen. Wir sind jedoch nicht bereit, Unmenschlichkeit
hinzunehmen, und erheben deshalb, wo geboten, unsere Stimme gegen ihre Ursachen.
<PAGE> 28
4. DIE MENSCHEN IM ROTEN KREUZ
Wir konnen unseren Auftrag nur erfullen, wenn wir Menschen, insbesondere als
unentgeltlich tatige Freiwillige, fur unsere Aufgaben gewinnen. Von ihnen wird
unsere Arbeit getragen, namlich von engagierten, fachlich und menschlich
qualifizierten, ehrenamtlichen, aber auch von gleichermaBen geeigneten
hauptamtlichen Mitarbeiterinnnen und Mitarbeitern, derenVerhaltnis untereinander
von Gleichwertigkeit und gegenseitigem Vertrauen gekennzeichnet ist.
5. UNSERE LEISTUNGEN
Wir bieten alle Leistungen an, die zur Erfullung unseres Auftrages erforderlich
sind. Sie sollen im Umfang und Qualitat hochsten Anforderungen genugen. Wir
konnen Aufgaben nur dann ubernehmen, wenn fachliches Konnen und finanzielle
Mittel ausreichend vorhanden sind.
<PAGE> 29
6. UNSERE STARKEN
Wir sind die Nationale Rotkreuzgesellschaft der Bundesrepublik Deutschland. Wir
treten unter einer weltweit wirksamen gemeinsamen Idee mit einheitlichem
Erscheinungsbild und in gleicher Struktur auf. Die foderalistische Struktur
unseres Verbandes ermoglicht Beweglichkeit und schnelles koordiniertes Handeln.
Doch nur die Bundelung unserer Erfahrungen und die gemeinsame Nutzung unserer
personellen und materiellen Mittel sichern unsere Leistungsstarke.
7. DAS VERHALTNIS ZU ANDEREN
Zur Erfullung unserer Aufgaben kooperieren wir mit allen Institutionen und
Organisationen aus Staat und Gesellschaft, die uns in Erfullung der
selbstgesteckten Ziele und Aufgaben behilflich oder nutzlich sein konnen
und/oder vergleichbare Zielsetzungen haben. Wir bewahren dabei unsere
Unabhangigkeit. Wir stellen uns dem Wettbewerb mit anderen, indem wir die
Qualitat unserer Hilfeleistung, aber auch ihre Wirtschaftlichkeit standig
verbessern.
<PAGE> 30
UNSERE FUHRUNGSGRUNDSATZE
1. FUHRUNG GEMAB UNSEREM LEITBILD
Als Fuhrungskrafte identifizieren wir uns vorbehaltlos mit den
Rotkreuzgrundsatzen. Der Dienst am Menschen steht fur uns im Mittelpunkt und ist
Ziel unseres Handelns.
<PAGE> 31
2. FUHRUNG
Fuhrung bedeutet, in Erfullung der Hilfsaufgabe des Roten Kreuzes
verantwortungsbewuBt zu planen, zu entscheiden und Auftrage zu erteilen,
dabei stets in gebotener Weise zu informieren, wo angebracht, zu delegieren und
unsere Aufgabenerfullung zu kontrollieren. Wir pflegen einen kooperativen
Fuhrungsstil, der verlangt, auf die unserer Leitung anvertrauten Menschen
eingehen und mit ihnen umgehen zu konnen.
3. WER FUHRT, IST VORBILD
Als Fuhrungskrafte zeigen wir ein hohes MaB an Einsatzfreude,
Leistungsbereitschaft und Eigeninitiative und konnen diese deshalb von allen
anderen Menschen verlangen, die zusammen mit uns an der Aufgabenerfullung des
DRK mitwirken. Offener, hoflicher, aber auch einfulsamer Ugang mit unseren
Helfern und Mitarbeitern schafft Glaubwurdigkeit und Vertrauen in die Fuhrung.
<PAGE> 32
4. DELEGATION
Als Fuhrungskrafte delegieren wir, soweit angemessen, Aufgaben und die damit
verbundene Teilverantwortung an unsere ehren- und hauptamtlichen Mitarbeiter,
wobei wir unsere Auftrage prazise und verstandlich zu formulieren und die zu
erreichenden Ziele zu definieren haben.
5. INFORMATION DER MITARBEITER
Als Fuhrungskrafte sind wir uns bewuBt, daB die unserer Fuhrung
anvertrauten Menschen sich nur dann mit unserer humanitaren Aufgabe
identifizieren und in Erfullung ihrer Auftrage selbstandig handeln werden, wenn
wir stets umfassend und sachbezogen informieren.
<PAGE> 33
6. KONFLIKTREGELUNG
Wir achten die unter unserer Fuhrung arbeitenden ehrenamtlichen Helfer und
hauptamtlichen Mitarbeiter nach dem Grundsatz der Gleichwertigkeit. Im Falle von
Auseinandersetzungen arbeiten wir die unterschiedlichen Standpunkte heraus,
bewerten sie mit sachgerechter Kritik und fuhren sie einer sachlichen
Verstandigung zu. Gebotene Kritik sollte offen, aber auch forderlich und
aufbauend sein; sie darf nicht Lob und Dank ersetzen, die Vorrang haben sollten.
7. FORDERUNG DER MITARBEITER
Zu unserer Aufgabe als Fuhrungskrafte gehort auch die gezielte Auswahl sowie die
systematische Qualifizierung unserer Helfer und Mitarbeiter im Rahmen unserer
Personalentwicklung. So wie wir uns selbst zu eigener Fortbildung verpflichten,
ermuntern wir sie zur Weiterentwicklung ihres Wissens und Konnens. Wir erkennen
ihre Leistungen an und zeigen ihnen Perspektiven auf. Wir fordern Teamarbeit,
Flexibilitat und Kreativitat sowie die Fahigkeit, uber die Grenzen der
Aufgabenbereiche hinaus zu denken und zu handeln.
<PAGE> 1
Exhibit 10(lix)
Buffycoat Supply Agreement between America's Blood Centers and the Company
dated July 15, 1998
<PAGE> 2
AGREEMENT
This agreement ("Agreement") is made and entered into this 15th day of July,
1998 by and between America's Blood Centers ("ABC"), an Arizona non-profit
corporation with its principal office at 725 15th St., N.W., Suite 700,
Washington, DC 20005, and Viragen, Inc. ("Viragen"), a Delaware corporation,
and Viragen, U.S.A., Inc. ("VUSA"), a Delaware corporation and a wholly-owned
subsidiary of Viragen, both having their principal offices at 865 SW 78th Ave.,
Suite 100, Plantation, FL 33324.
RECITALS
The parties recognize that the U.S. blood supply is a vital resource of which
the non-profit independent blood centers who are members of ABC ("IBCs") are
partially entrusted and that the IBCs have a charitable mission to serve the
communities in which they operate and collect blood.
ABC and the IBCs have indicated that most Buffycoats (defined herein)
harvestable by the IBCs from whole blood or blood component collections
currently are not separated from the IBCs' core component products, and,
therefore, are generally considered an underutilized byproduct.
It is VUSA's intention, directly or indirectly, to conduct manufacturing and
clinical operations and to seek FDA approval to market its products for the
treatment of one or more medical conditions. In addition, it is VUSA's
intention, subject to approval by its Board of Directors, to eventually list
its shares of common stock either on the OTC bulletin board or, upon
qualifying, on NASDAQ.
ABC has agreed to collaborate with Viragen and VUSA to put Buffycoats to
humanitarian use by establishing a program under which IBCs that are members of
ABC may supply Buffycoats to VUSA on a preferential basis for manufacture into
certain products by or on behalf of VUSA (and its Affiliates and sublicensees)
including the manufacture of Omniferon(TM), Viragen's second-generation natural
human alpha interferon product. Omniferon is being developed for use in the
potential treatment of various life threatening and debilitating diseases,
including HIV/AIDS, hepatitis B & C, multiple sclerosis and cancer.
DEFINITIONS
"Affiliate" means any Person in which Viragen or its successor has, directly or
indirectly, an ownership interest of 20 percent or more. A "Non-Affiliate
Person" shall mean a Person which is not an Affiliate.
"Available Supply" shall mean during any forecast period either the greater of
the number of Buffycoats (i) that are actually manufactured by a PIBC in the
prior forecast period, or (ii) that could be reasonably manufactured by a PIBC
during that current forecast period through the exercise of good faith
commercial diligence, taking into account source material supply and good
manufacturing practices. The Available Supply shall be determined before any
reductions of inventory for obligations to any Person other than VUSA;
provided, that human source leukocytes retained under Section 2.4 herein shall
be excluded from Available Supply.
"Buffycoat(s)" shall mean individual shipping units of packaged human source
leukocytes produced by ABC members from whole blood unit collections, or from
other means, including filtration and pheresis.
"Buffycoat Capacity" shall mean the total number of whole blood units that are
or reasonably could be drawn, processed or otherwise obtained by all PIBC
establishments, including the Buffycoat Facilities.
"Buffycoat Facility(ies)" shall mean any PIBCs' blood collection, processing,
fractionation, laboratory and testing facilities, as may be designated or
required to produce and deliver Buffycoats to VUSA's Sites.
1
* The information redacted herefrom is the subject of a Confidentiality Request
submitted to the Securities and Exchange Commission.
<PAGE> 3
"Commercialization" and "Commercially" shall mean with respect to Omniferon or
other product, the distribution, marketing and sale of Omniferon (or other
product) under an unrestricted approved NDA or similar FDA approval (i.e.,
BLA).
"Confidential Information" with respect to VUSA and Viragen and their
Affiliates shall mean all commercially important information maintained by or
on behalf of Viragen or VUSA or their Affiliates as confidential that is (i)
disclosed directly or indirectly to ABC or to the PIBCs or IBCs, whether in
written, oral, electronic, visual or other form, or (ii) developed in
connection with or arises out of the activities performed under this Agreement
or through the use of or access to such confidential information, including but
not limited to manufacturing or other information pertaining to the Buffycoats
provided to ABC or to the PIBCs or IBCs. Confidential Information shall
include, but is not limited to the following: (i) discoveries, inventions,
unpublished works, research results, methods and data; (ii) specifications
(including the Specifications as defined herein), designs, uses, testing or
manufacturing methods, procedures or data, programming, and performance
characteristics for current or future products, materials and equipment used in
connection therewith; (iii) technical, business, regulatory, market and
economic, commercialization, development, and research methods, plans,
strategies and information; (iv) unfiled or pending patent, copyright,
trademark and other intellectual property rights applications or disclosures;
and (v) other trade secrets and know-how.
"Confidential Information" with respect to ABC and the PIBCs shall with mean
all commercially important information maintained by or on behalf ABC or the
PIBCs as confidential that is disclosed directly or indirectly to VUSA, Viragen
or their Affiliates, whether in written, oral, electronic, visual or other
form. Confidential Information shall include, but is not limited to the
following: (i) discoveries, inventions, unpublished works, research results,
methods and data; (ii) specifications, designs, uses, testing or manufacturing
methods, procedures or data, programming, and performance characteristics for
current or future products, materials and equipment used in connection
therewith; (iii) technical, business, regulatory, market and economic,
commercialization, development, and research methods, plans, strategies and
information; (iv) unfiled or pending patent, copyright, trademark and other
intellectual property rights applications or disclosures; and (v) other trade
secrets and know-how. The ABC and PIBCs Confidential Information shall not
include any information, including information pertaining to manufacture of
Buffycoats provided under this Agreement, which is defined above as the VUSA
and/or Viragen Confidential Information.
"Effective Date" shall mean July 31, 1998.
"IBC" shall mean a non-profit independent blood center that is a member of ABC.
"No-Fault Recall" shall mean a recall by any PIBC (or any revocation of
acceptance by VUSA) of Buffycoats that were manufactured in accordance with
this Agreement and the Specifications, that is made because such Buffycoats
after delivery to VUSA were determined to be unsuitable for manufacture into
parenteral use products if such recall or revocation is not initiated because
of events arising from the PIBC's breach of its obligations under this
Agreement.
"Net Revenues" shall mean VUSA's gross revenues less standard allowances and
deductions for credits, returns, bad debts, reserves, and other such holdbacks,
in accordance with GAAP.
"Omniferon" shall mean VUSA's human leukocyte-derived interferon product, or
any modifications or improvements thereto or derivative thereof.
"Person" shall mean any individual, partnership, corporation, trust or other
legal entity.
"PIBC" shall mean a non-profit independent blood center that is a member of ABC
and that has entered into a Subagreement to provide Buffycoats to VUSA.
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<PAGE> 4
"PIBC Establishment" shall mean any facility owned, operated or controlled by a
PIBC or its Affiliates that draws, processes or otherwise obtains blood and
blood products (including pheresis) that could be used in the manufacture of
Buffycoats.
"Site" shall mean VUSA designated facility or facilities operated for the
manufacture of or Omniferon or Other Products.
"Specifications" shall mean the confidential requirements for Buffycoat
collection, handling, and processing, as set forth in Exhibit 1, or such other
requirements as may be adopted in accordance with 4.10 or 4.11. The
Specifications for any shipment of Buffycoats shall be those Specifications in
effect at the time such shipment is ordered, unless the parties specifically
agreed otherwise in writing.
"Subagreement" shall mean an agreement between a PIBC and VUSA in the form
attached as Exhibit 2.
COVENANTS
1. ABC LOGISTICS OBLIGATIONS.
1.1 Recruiting PIBCs. ABC shall use its best efforts during the term of the
Agreement to recruit and cause the maximum number of IBCs to become PIBCs.
1.2 Acceptance of PIBCs. VUSA shall accept and enter into a Subagreement with
any IBC recruited by ABC, provided that the PIBC (a) meets all FDA and other
federal, state and local government regulatory requirements to be a supplier of
Buffycoats to VUSA, (b) is not under a notice of intent to revoke or has
received notice of intent to revoke its FDA authority to be a supplier of
Buffycoats, and (c) demonstrates its ability, to VUSA's reasonable
satisfaction, to meet the Specifications; and (d) is willing and able to enter
into and perform its obligations under the Subagreement. VUSA shall not be
obligated to enter into a Subagreement with any PIBC that is subject to
threatened with material and unresolved adverse regulatory findings or actions
by FDA or other authority, or that is under or threatened with insolvency or
bankruptcy or other adverse actions of its creditors.
1.3 Coordination of Production and Delivery of Buffycoats. ABC will perform
logistical and other services ("Services") under this Agreement, particularly,
acting as an interface between VUSA and the PIBCs. ABC's Services shall
include, but not be limited to, preparation and coordination of supply
forecasts, purchase orders and shipments, billings and payments,
communications, accounting and financial audits, document retention, and
allocation of VUSA purchase orders among PIBCs. No later than 10 days before
the commencement of a calendar quarter, ABC will advise VUSA of the PIBCs that
are expected to be fulfilling that quarter's purchase order for Buffycoats and
the estimated number of Buffycoats that will be shipped by each PIBC. VUSA,
ABC, and the PIBCs will cooperate to ensure that the Buffycoats purchased and
sold by PIBCs are shipped in an orderly manner so as to allow both VUSA and the
PIBCs to conduct their operations in the most efficient manner. In determining
which PIBCs will fulfill a particular purchase order, ABC intends not to
discriminate among PIBCs; provided, however, that ABC shall use its good faith
best efforts to coordinate shipments to minimize the number of PIBCs shipping
Buffycoats to a particular VUSA facility at or about the same time and the
transportation costs incurred (e.g., freight and insurance). ABC shall (i) give
VUSA timely notice if a PIBC that was to deliver Buffycoats to VUSA is unable
to fulfill such order, and (ii) use its best efforts to promptly fulfill the
undelivered portion of that order from another PIBC.
1.4 Compensation of ABC for Logistical and Other Services. As compensation for
ABC's Services, at the end of each calendar quarter, VUSA shall pay ABC the
following: (a) reimbursement of the actual, incremental costs of these Services
during the prior quarter, including but not limited to personnel costs,
long-distance telephone costs, and facsimile and express mailing costs
(provided they do not exceed the budget by more than 10%); and (b) a
reimbursement of $0.10 for each Buffycoat supplied under the
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<PAGE> 5
Agreement during the prior quarter (to cover costs previously incurred). The
$0.10 per Buffycoat reimbursement under "1.4(b)" will continue only until the
sum of $25,000 has been paid under 1.4(b). ABC shall provide advance annual
budgets to VUSA (with quarterly reviews) for the Services anticipated, and VUSA
shall have the right in advance to decline Services that it does not wish ABC
to perform. Payments to ABC under this paragraph shall be made within 30 days
of the end of the quarter or within 30 days of receiving ABC's invoice,
whichever is later.
2. BUFFYCOAT SUPPLY.
2.1 First and Preferential Access. During the term of the Agreement, and
subject to the provisions of 2.4, VUSA shall have First And Preferential Access
to all Buffycoats harvestable by each PIBC from its blood or blood component
collections (including from filtration) to meet VUSA's clinical, research and
development, and commercial production needs. "First And Preferential Access"
means the following: (a) ABC and/or each PIBC shall not enter into any contract
or arrangement that conflicts with or negates the PIBCs ability during the term
of the Agreement to fulfill a potential VUSA purchase order for Buffycoats; and
(b) each PIBC shall give priority to fulfillment of VUSA's existing orders for
Buffycoats.
2.2 Use of Buffycoats. VUSA shall not be restricted in the use of Buffycoats
obtained from the PIBCs, provided, however, Buffycoats may not be resold by
VUSA (except to Viragen or a VUSA or Viragen Affiliate for use by Viragen or
such Affiliate and not further re-sale as unprocessed Buffycoats).
2.3 Harvesting of Buffycoats. Each PIBC agrees to harvest and deliver the
Buffycoats in accordance with FDA requirements and guidelines, including
applicable Good Manufacturing Practices ("GMP"), and the Specifications.
2.4 Exceptions to First and Preferential Access. VUSA's First And Preferential
Access shall be subject to the right of each PIBC during the term of the
Agreement (a) to retain human source leukocytes to supply hospitals solely for
the purpose of direct transfusions for patient treatment and (b) to meet the
preexisting contractual obligations set forth as an Exhibit to each PIBC
Subagreement. Each PIBC agrees not to expand any of the obligations set forth
in third party agreements listed in such Exhibit (unless such third party
agreement requires such expansion). Unless otherwise prohibited from doing so,
each PIBC agrees to provide VUSA, for informational purposes, with historical
and current data on Buffycoats supplied for the purpose of direct transfusions
in patient treatment and pursuant to pre-existing contractual obligations.
2.5 Supply of Buffycoats to Other Parties. Each PIBC shall have the right to
supply other parties with Buffycoats provided that such supply does not
interfere with VUSA's First And Preferential Access.
2.6 Buffycoat Production from Pheresis Collections. Each PIBC shall use its
best efforts to undertake to supplement Buffycoat production with Buffycoats
from pheresis collections, if requested by VUSA and subject to the PIBCs
reasonable consent, provided, however, there are no regulatory impediments or
material negative consequences to the production of other blood components or
other aspects of the PIBCs operations.
2.7 Buffycoat Testing. The PIBC shall conduct transmissible disease testing on
all Buffycoats, and source materials, in accordance with FDA and other federal,
state and local requirements, guidelines and recommendations.
2.8 Non-compete. During the term of this Agreement and for one year thereafter
(and in the case of termination by VUSA or Viragen on account of a material
breach by ABC or any PIBC for no less than the expected initial term of this
Agreement, or if the initial term has expired, for three years from the date of
termination), neither ABC nor any PIBC shall engage directly, or indirectly, in
the research, development, production or commercialization of any Buffycoat or
white blood cell-derived product or interferon
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<PAGE> 6
products or derivatives, or methods of making or using same; provided, however,
that nothing herein shall prohibit ABC or any PIBC from reselling an interferon
product.
2.9 Sublicense. VUSA shall grant a sublicense to each PIBC, at no cost, to use
VUSA's Specifications for the purposes of performing this Agreement and the
Subagreements.
2.10 Obtaining Buffycoats from Other Parties. Subject to the other terms and
conditions of the Agreement, Viragen, VUSA and/or Affiliates may obtain
Buffycoats from other parties, provided, however, that (i) Viragen, VUSA and/or
their Affiliates may not give priority or preference in ordering to any other
U.S. source of Buffycoats, (ii) VUSA may not give priority or preference in
ordering to any other source of Buffycoats, and (iii) during the first 24
months after the Effective Date, Viragen, VUSA and Affiliates agree that at
least *_________ of Buffycoats utilized by them in the United States shall be
ordered from PIBCs pursuant to this Agreement.
2.11 MFN for Purchases from ABC Members. Viragen and/or its Affiliates will not
obtain Buffycoats from any ABC member for greater aggregate compensation per
Buffycoat than is provided in this Agreement (taking into account all forms of
compensation to be received by the PIBCs).
2.12 No MFN for U.S. Source Buffycoats Given to a Non-ABC Member. Viragen and
VUSA represent and covenant that they have not given and will not give a "most
favored nation clause" for U.S. source Buffycoats to any non-ABC member.
2.13 Training and Education. VUSA shall provide reasonable and necessary
training and education on the Specifications at VUSA's expense to each PIBC,
including on-site training at VUSA's expense where reasonably necessary. Such
training and education shall be provided before the PIBC harvests Buffycoats
under this Agreement, and thereafter as reasonably required on an as needed
basis.
3. FORECASTS AND ORDERS.
3.1 Rolling Forecasts. VUSA shall provide ABC with rolling quarterly forecasts
of VUSA's Buffycoat requirements ("Rolling Requirements Forecast") from the
PIBCs for the three calendar quarters that follow the next immediate calendar
quarter. Such Rolling Requirements Forecasts shall be provided 30 days before
the start of the next immediate calendar quarter, for the term of the
Agreement. (Example: on or before February 28, 1999, VUSA shall provide ABC
with forecasts of its Buffycoat requirements for July-September 1999,
October-December 1999, and January-March 2000.)
3.2 Purchase Orders. Along with the Rolling Requirements Forecast, VUSA shall
submit a purchase order for the quantity of Buffycoats to be supplied by the
PIBCs during the next immediate calendar quarter. (Example: on or before
February 28, 1999, VUSA shall provide ABC with a purchase order for Buffycoats
for April-June 1999.). The parties agree that prior to the date an NDA for
Omniferon becomes approved by FDA they will negotiate in good faith to reach an
agreement on minimum Buffycoat purchase commitment by VUSA during the period of
Omniferon Commercialization, which minimum purchase commitment shall be
consistent with Sections 2.10(i) and 2.10(ii).
3.3 ABC/PIBC Forecasts. Upon the Effective Date and thereafter during the Term,
at least thirty (30) days before the start of the each subsequent calendar
quarter, ABC shall provide VUSA with good faith rolling quarterly forecasts of
ABC/PIBCs anticipated Available Supply for each of the subsequent four calendar
quarters (the "Rolling Supply Forecast"). The forecast made in the Rolling
Supply Forecast of anticipated PIBC Available Supply for the calendar quarter
immediately subsequent to the quarter following the date the Rolling Forecast
is provided shall be the "Confirmed Supply Forecast".
3.4 Taking Title to and Payment for Buffycoats. During the term of this
Agreement, VUSA shall be obligated to pay for and take title to and possession
of all acceptable Buffycoats that conform to the
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<PAGE> 7
Specifications, ordered by VUSA and produced and delivered by each PIBC in
accordance with this Agreement; provided that all such Buffycoats shall be free
of all liens, security interests and third party interests upon delivery.
3.5 Variations Between Forecast and Order. VUSA may order an amount that is no
more than 25% greater or lesser than the applicable Rolling Requirements
Forecast; provided that in no event shall any order exceed, in the aggregate,
the ABC/PIBC Confirmed Supply Forecast.
3.6 Variations Between Forecasts. VUSA may not submit a Rolling Requirements
Forecast that is less than 75% of the last quarterly Rolling Supply Forecast
submitted for that quarter. Additionally, subject to Section 3.7, VUSA may not
submit a Rolling Requirements Forecast that is greater than 125% of the last
quarterly Rolling Requirements Forecast submitted for that quarter. (Example:
When VUSA submits its Rolling Requirements Forecasts on or before February 28,
1999, the Rolling Requirements Forecast for July-September 1999 may not, except
as provided in this Agreement, deviate more than 25% (upward or downward) from
the Rolling Requirements Forecast that was submitted on or before November 30,
1998 for that quarter.)
3.7 Additional Variations. ABC and the PIBCs shall use their best efforts to
fulfill VUSA purchase orders or quarterly forecasts for amounts greater than
permitted in 3.5 and 3.6; provided, however, that nothing in this Agreement
shall prohibit any PIBC from honoring any prior documented agreement with a
third party to sell Buffycoats to such third party that was made prior to a
VUSA forecast for such Buffycoats.
4. COMPENSATION FOR BUFFYCOATS.
4.1 Cost Reimbursement. VUSA will reimburse each PIBC, through ABC, on a per
Buffycoat basis for all incremental costs, if any, that each PIBC may incur in
producing Buffycoats for VUSA to VUSA Specifications. Incremental costs shall
be defined as conversion of facilities, protocols, and training of personnel,
if necessary, to produce Buffycoats for VUSA, and direct material, labor, and
overhead costs directly attributable to Buffycoat production and supply under
VUSA Specifications; provided, that the maximum budget for each PIBC for all
such incremental costs for that PIBC shall be specifically agreed upon by the
parties in writing before being incurred, and shall not thereafter be exceeded
except with the parties' mutual agreement. Incremental costs shall include the
net value (profit) of any other blood components (e.g., plasma) lost by a PIBC
due to the its production of Buffycoats to the extent that such other blood
component could have been actually sold by such PIBC.
4.2 Interim Cost Reimbursement. The interim cost reimbursement shall be --- per
Buffycoat, excluding ABC's fee as specified in Section 1.4 herein. This
reimbursement rate shall be used for the first twenty-four (24) months from the
Effective Date of the Agreement.
4.3 Independent Audit and Analysis of Buffycoat Production Costs. The parties
agree that, no later than 18 months after the Effective Date, the parties shall
select a mutually agreeable independent, national certified public accounting
firm to conduct a reasonable analysis and audit of incremental Buffycoat
production costs as defined herein in order to derive a per Buffycoat cost to
be used under the Agreement. The evaluation, analysis and audit criteria shall
be specified by mutual agreement of the parties hereto. In the event that the
parties are not then able to resolve any differences as to the appropriate per
Buffycoat cost to be used, the matter shall be arbitrated in accordance with
the dispute resolution provisions of this Agreement.
4.4 Transportation Costs. Buffycoats shall be shipped freight and insurance
prepaid FOB VUSA designated location. Incremental transportation costs for
Buffycoats from the PIBCs to VUSA's facilities
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<PAGE> 8
shall be the responsibility of VUSA, and are not included in the interim cost
reimbursement stated in 4.2. Insurance on each shipment shall be for the
benefit of the PIBC initiating such shipment.
4.5 Royalties on Buffycoats Not Used Commercially. In addition to cost
reimbursements as specified herein, for any Buffycoats that are not used to
produce Omniferon or other products that are ultimately sold Commercially,
directly or indirectly, to a Non-Affiliate Person, each PIBC, through ABC, shall
receive a cash payment for each conforming Buffycoat delivered to VUSA by that
PIBC in the form of a royalty equal to *_____ of the estimated Net Revenues that
VUSA could reasonably have realized from the sale of the marketable Omniferon
that reasonably could have been produced from such Buffycoat, regardless of
whether or not VUSA actually receives any revenues from the sale or use of such
product, or *_____ per Buffycoat, whichever is higher.
4.6 Royalties on Buffycoats Used Commercially. Where conforming PIBC supplied
Buffycoats are used to produce Omniferon that is ultimately sold Commercially,
directly or indirectly, to a Non-Affiliate Person, each PIBC, through ABC, shall
receive *_____ of the actual Net Revenues realized from the sale of Omniferon to
such Non-Affiliate Person, to the extent that such Net Revenues are allocable to
the Buffycoats delivered by each such PIBC, or *_____ per Buffycoat, whichever
is higher.
4.7 Other Product Royalties. Should VUSA develop and manufacture products
derived from the Buffycoats other than Omniferon ("Other Products"), the
royalty rate applicable to such Buffycoats shall be that amount that would be
due had the Buffycoats been used to manufacture Omniferon instead of the Other
Products, taking into account the typical net marketable quantity of Omniferon
then obtained from a Buffycoat (e.g., considering manufacturing yields, cGMP
testing requirements) and net revenues then realized from such Omniferon.
4.8 Time for Payment. Payments for each PIBC for minimum royalties and cost
reimbursements shall be made to ABC no later than 30 days from the date of
acceptance (as specified in Section 5 herein) by VUSA or the date of invoicing,
whichever is later. VUSA shall make any adjustment of the royalty payment (for
royalties due in excess of the minimum) no later than 90 days after the end of
the quarter. VUSA shall pay interest on any wrongfully unpaid amounts at the
rate of 1% per month for each month beyond the due date applicable to such
amounts. All payments shall be itemized by VUSA with regards to basis of the
amount paid (e.g., royalty or reimbursement and the PIBCs and Buffycoat
shipments to which the payment relates).
4.9 Other VUSA Royalty Obligations. ABC and the PIBCs acknowledge that (a) VUSA
is obligated to pay a royalty to Viragen (Scotland) Ltd. of two percent (2%) of
VUSA's net revenues (as such term is defined in the license agreement between
VUSA and Viragen) derived from the sale of Omniferon and (b) VUSA is obligated
to pay a minimum royalty to Viragen of $2,000,000 annually for the exclusive
license in the U.S. to the Specifications and related know-how and the
exclusive manufacturing, marketing and distribution rights for Omniferon in the
U.S., as set forth in the license agreement between VUSA and Viragen, which
royalty payments commence with the date of the first use of the Specifications
and related know-how by or on behalf of VUSA.
4.10 Changes in Specifications or Method of Harvesting Buffycoats. VUSA may
reasonably request that the Specifications be modified or that one or more
PIBCs change their method of harvesting Buffycoats, for example, by employing a
technology upgrade. Any such modifications or changes shall be in writing and
shall require the consent of ABC and the affected PIBCs, which consent shall
not be unreasonably withheld, provided that: (a) reasonable advance notice is
given; (b) VUSA reimburses the PIBC for its non-recurring costs (including
equipment and training costs) of such modification or change; and (c) if the
modification or change results in change in ongoing costs, VUSA and ABC and the
PIBCs shall agree to make a corresponding change in the interim cost
reimbursement (if applicable) or the actual cost reimbursement.
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4.11 New Tests or Procedures. In the event that FDA or industry standards
requires the PIBCs to perform new tests or procedures that materially increase
the incremental costs of producing Buffycoats (as defined herein), the parties
shall negotiate an appropriate adjustment of the interim or actual cost
reimbursement to cover such change in costs.
5. SHIPMENT AND ACCEPTANCE OF BUFFYCOATS.
5.1 Shipment of Buffycoats. Buffycoats shall be shipped at VUSA's expense from
the PIBC to VUSA's designated sites in such manner as VUSA and ABC shall agree
upon in writing, and in accordance with the Specifications.
5.2 Certificate. VUSA shall not be required to accept Buffycoats shipped by a
PIBC unless and until VUSA receives a certificate of analysis that sets forth
all test results for each such shipment and certifies that the shipment of
Buffycoats conforms with the Specifications, and the date and time when and the
location where such blood unit used to manufacture the Buffycoat was drawn from
a blood donor, and each PIBC shall provide such certificate of analysis with
each shipment of Buffycoats.
5.3 Rejection of Buffycoats. No later than five (5) business days after VUSA
receives the certificate of analysis described in 5.2, VUSA may reject any
Buffycoats that (i) do not conform to the Specifications, or (ii) that were not
manufactured in accordance with this Agreement, or (iii) that are otherwise
reasonably determined not to be suitable for use in the manufacture of
parenteral human therapeutic products, (including, but not limited to, such
Buffycoats failing VUSA acceptance testing). Additionally, VUSA may revoke
acceptances because of any event in categories (i), (ii) or (iii) above that
could not reasonably have been known at the time of acceptance, including, but
not limited its reliance on an inaccurate certificate of analysis, or later
discovery of adverse findings of regulatory compliance and quality assurance
audits or inspections of Buffycoat Facilities by VUSA or government agencies.
VUSA shall promptly notify ABC and the PIBC supplying shipments VUSA intends to
reject or revoke the acceptance of and the reasons for such rejection or
revocation.
5.4 Recalls by PIBC. Each PIBC shall immediately notify VUSA of any information
regarding a shipment of Buffycoats from that PIBC that would reasonably suggest
that it does not conform with Specifications or otherwise should not be used
for the manufacture of parenteral use products, in which case such lots of
Buffycoats shall be deemed rejected and any prior acceptance if any shall be
deemed revoked. Such notification shall be promptly confirmed in writing if
first given by other means.
5.5 Rejected or Recalled Buffycoats. Any Buffycoats not accepted by VUSA, or
whose acceptance has been revoked, shall be destroyed by VUSA in accordance
with all applicable laws and VUSA's standard operating procedures (or, if
timely requested by the PIBC, returned to the PIBC at the PIBC's risk and
expense).
5.6 Reimbursement of Rejection and Recall Costs. In the event that VUSA
rightfully rejects or revokes the acceptance of, or any PIBC recalls any
Buffycoats, the PIBC supplying such Buffycoats shall be responsible for and
reimburse VUSA for all costs, liabilities and losses incurred by VUSA in
connection with destruction or return of such Buffycoats and the manufacture
and distribution of products made from Buffycoats that are subject to such
recall ("Recall Costs"), and for any amount paid ABC or the PIBCs by VUSA for
such Buffycoats or, if such Buffycoats cannot be promptly replaced, the cost of
cover ("Refund Amounts"). The PIBC supplying such Buffycoats shall promptly (a)
refund to VUSA or credit the VUSA account with the amount of the Recall Costs,
and (b) as requested by VUSA, refund to or credit the VUSA account with the
amount of the Refund Amounts, or replace the rejected Buffycoats.
Notwithstanding the foregoing, no PIBC shall be obligated to pay VUSA any
Recall Costs or Refund Amounts incurred as a result of a No-Fault Recall. ABC
shall cooperate with VUSA in fulfilling VUSA's rights to obtain Refund Amounts
and Recall Costs as set forth in this Section 5.6, including, without
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limitation, implementing holdbacks, set-offs or refunds against any payments
owed to a PIBC which itself owes VUSA such Recall Costs or Refund Amounts. In
no event shall VUSA withhold any payments to ABC that relate to one PIBC's
supply of Buffycoats because of amounts claimed due from another PIBC.
6. EQUITY INTEREST; SHAREHOLDER PROVISIONS.
6.1 Shares to Be Received by ABC. Upon the expiration of 24 months from the
Effective Date, or whenever the interim cost reimbursement is replaced by an
actual incremental cost reimbursement, whichever is sooner, ABC shall receive
100,000 shares of VUSA common stock ("Shares") as an advance on the first
Buffycoat delivery milestone, unless ABC has already received 100,000 such
Shares based on 6.2. ABC may, subject to the terms of this Agreement,
ultimately receive an equity participation of one (1) million Shares (including
the 100,000 shares described above) based on an aggregate delivery of 5,000,000
Buffycoats by the PIBCs.
6.2 Issuance of Shares. Fully-paid and non-assessable Shares that are free and
clear of all encumbrances except for those restrictions set forth in this
Agreement, Exhibit 3 and Exhibit 4, shall be issued to ABC within 90 days of
the end of each calendar year in increments of 100,000 Shares based on a
formula of 100,000 Shares per 500,000 conforming Buffycoats delivered by PIBCs.
6.3 Transfer of Shares by ABC. Shares may be transferred upon receipt, or at a
later date, from ABC to PIBCs; however, ABC shall pay the actual out-of-pocket
costs associated with transfers that occur at a later date.
6.4 VUSA's Capital Structure. As of the Effective Date, VUSA's authorized
capital consists of 10,000,000 Shares of common stock, $0.01 par value, of
which 5,333,333 Shares are issued and outstanding.
6.5 Stockholder's Agreement. VUSA and ABC agree, simultaneous with the first
issuance of VUSA Shares to ABC, to enter into a mutually agreeable Stockholders
Agreement (including the execution of an Investment letter satisfactory to
VUSA's legal counsel), a copy of which will be attached as Exhibit 3 upon its
execution.
6.6 Listing of VUSA Shares. In the event that VUSA effects a public
registration and offering of its common stock, it shall include at VUSA's
expense and ABC's request all or part the common stock conveyed to ABC under
this Agreement. In the event that VUSA fails to effect a public registration
and offering of its common stock, including the common stock conveyed to ABC
under this Agreement within three (3) years of the Effective Date, ABC and the
PIBCs shall have the right in accordance with applicable law to exchange their
Shares of VUSA common stock to the common stock of Viragen having the same fair
market value at the time of exchange. The fair market value for the Shares
shall be based on an independent evaluation, performed by qualified persons
approved by the VUSA Board of Directors and ABC. The fair market value of the
Viragen stock shall be based on the average closing price of Viragen stock
during a period beginning ninety-five trading days before the conversion date
and ending five days before the conversion date. Prior to any public
registration and offering or exchange, VUSA agrees to (i) provide ABC or its
designated director or observer (if there is one) reasonable financial
information on VUSA on at least a quarterly basis which ABC agrees to hold in
confidence in accordance with this Agreement and (ii) at all times reserve and
keep available, solely for issuance and delivery upon satisfaction of the
conditions for delivery set forth in this Agreement, the number of Shares
issuable to ABC hereunder.
6.7 ABC Right to Designate One Board Member. During the term of this Agreement,
but prior to the first issuance of VUSA shares to ABC, ABC may designate a
non-voting observer to VUSA's Board of Directors. At such time as ABC and/or
the PIBCs own stock in VUSA, ABC shall, at its election, have the
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right to designate one voting director for VUSA's Board of Directors. The
parties agree to vote their shares in accordance with Exhibit 4 to enable the
election to the VUSA Board of any person so designated by ABC. Nothing herein
shall require ABC to designate such persons, and nothing herein shall prevent
ABC from designating such persons at any time after the Effective Date of the
Agreement, provided, that all designees meet VUSA's Board members good and
reasonable criteria as specified from time to time by VUSA. The ABC designated
observer or Director shall be entitled to the same reimbursement for travel to
board meetings as is provided to other VUSA Directors. The ABC designated
Director shall be entitled to the same Director compensation, indemnification
and director's and officers liability insurance as similarly situated VUSA
Directors receive during the period that the ABC designated Director serves on
the Board.
6.8 Fair Market Issuance. VUSA agrees that it shall not issue or sell
(including as a dividend or other distribution on any class of stock)
additional common stock, or securities convertible into such common stock, for
a price below fair market value, as determined by the VUSA Board of Directors
at the time of such issuance or sale, provided that such determination must be
fair and reasonable.
7. MARKETING AND DISTRIBUTION OF OMNIFERON.
The parties acknowledge that the PIBCs may be interested in distributing
Omniferon to the hospital market in the U.S.. VUSA agrees to provide good faith
consideration to any ABC proposal to distribute Omniferon to hospitals or
clinics to which ABC or the PIBC distribute blood products, but VUSA shall have
the right to negotiate and execute definitive marketing and distribution
agreement (s) with any Person(s) and on any terms that VUSA determines in its
sole discretion are appropriate. Notwithstanding the foregoing, VUSA agrees not
to enter into a distribution only agreement with a blood center that is not a
PIBC without first providing ABC with a good faith opportunity to negotiate
distribution only rights for Omniferon on commercially reasonable terms;
provided, however that VUSA, Viragen and their Affiliates are not obligated in
any manner to enter into any such distribution, marketing or other agreements
with ABC or any other Person.
8 INTELLECTUAL PROPERTY & CONFIDENTIAL INFORMATION.
8.1 Restricted Use of Confidential Information. Each party agrees that all
Confidential Information disclosed to it shall be used by it during the Term
and exclusively for the purpose of performing its obligations hereunder. ABC
and the PIBCs shall use VUSA's Buffycoat Specifications and other Confidential
Information during the Term for the sole purpose of supplying Buffycoats to
VUSA and its designated Affiliates or other VUSA designees. The parties intend
and agree that notwithstanding anything to the contrary in this Agreement, no
course of conduct or future authorizations shall be, or be interpreted as
being, an assignment or grant to ABC or the PIBCs of any right, title or
interest in or license to the Specifications or any Confidential Information or
any patent, trade secret, trade dress, copyright, trade mark, materials, or any
other type of intellectual or personal property now or in the future owned or
licensed by Viragen, VUSA or their Affiliates. It is agreed that ABC and the
PIBCs compensation, access to VUSA Confidential Information and technical
assistance under this Agreement is in part in consideration of the rights
granted and obligations undertaken under this Section 7, and that this Section
is a material and negotiated term of the Agreement.
8.2 Confidential Treatment. Each party shall protect the other party's
Confidential Information from unauthorized use, access or disclosure and shall
maintain such Confidential Information under conditions that would reasonably
prevent such unauthorized use, access or disclosure (including effective
controls over physical and electronic access). No party shall, without the
prior written consent of the other party which it may withhold at its sole
discretion, use, disclose, or permit the use or disclosure of such Confidential
Information in any manner whatsoever in whole or in part, except: (i) only for
performance of the party's obligations hereunder; and (ii) only to such
employees and officers of the receiving party to
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the extent that such employees or officers need to know the Confidential
Information for performing the receiving party's obligations hereunder (and
then only such Confidential Information as such employee or officer needs to
know for performance of their assigned tasks); and (iii) all such employees and
officers have been first informed of confidential nature and ownership of the
Confidential Information and have first executed a written confidentiality and
intellectual property assignment agreement enforceable by and satisfactory to
the disclosing party.
8.3 Information Excluded. The receiving party's obligations shall not apply to
any particular Confidential Information to the extent that the receiving party
clearly and convincingly demonstrates that the particular Confidential
Information: (i) was in its possession prior to disclosure to it or its
development through work performed under this Agreement; (ii) was generally and
publicly known and accessible at the time of disclosure or thereafter through
no fault of the receiving party; or (iii) was rightfully furnished to the
receiving party on a non-confidential basis by a third party who was not
directly or indirectly breaching any obligations or duties to ABC, the PIBCs,
Viragen, VUSA or their Affiliates. The exceptions provided under this Section
8.3 shall not apply to any information that is considered to be Confidential
Information by a party because of its selection, organization, aggregation,
format, manner of presentation, or existence in electronic media.
8.4 Required Disclosure. Each party agrees that if it becomes legally compelled
or obligated to disclose any of the other party's Confidential Information, it
will provide such other party with prompt written notice and all lawful and
reasonable assistance to enable the other party to seek a protective order or
other appropriate remedy. If such protective order or other remedy is not
timely obtained, the party compelled to make such disclosure shall only furnish
that portion of the Confidential Information which, on the advice of counsel,
it reasonably determines it is legally required to furnish and will use
reasonable efforts to limit the scope of disclosure and obtain confidential
treatment or protective orders for such disclosed Confidential Information.
8.5 Return on Termination & Notification of Misappropriation. Upon this
Agreement's termination, each party shall return to the other party all
Confidential Information acquired by it from such other party and all copies
and abstracts thereof (whether in electronic, paper or other format). Each
party agrees that it shall immediately notify the other party in writing of any
suspected unauthorized disclosure or use of that party's Confidential
Information in its possession, and shall take and assist such other party in
taking all lawful means, including bringing and diligently prosecuting civil
and criminal complaints, to abate such unauthorized use or disclosure.
8.6 New Inventions. From time to time, new improvements, modifications,
materials, discoveries, works, marks, names, inventions, trade dress, and other
intellectual property may be jointly or separately conceived, reduced to
practice, invented, developed, discovered or made by the parties in connection
with (i) the use of or access to the VUSA/Viragen Confidential Information,
and/or the (ii) assistance of VUSA and Viragen employees, consultants and
contractors, and/or (iii) work performed under this Agreement by the any of the
parties (all of which are collectively the "New Inventions"). ABC or the PIBCs
shall promptly inform VUSA in writing of all such New Inventions upon their
creation and treat them as VUSA's Confidential Information. New Inventions do
not include ABC's proprietary methods, procedures or technology, or
improvements, or modifications thereof, to the extent not based on or derived
from (i) the use of or access to the VUSA/Viragen Confidential Information,
and/or the (ii) assistance of VUSA and Viragen employees, consultants and
contractors.
(i) OWNERSHIP OF NEW INVENTIONS. The parties agree that any and all New
Inventions (whether or not they are patentable, copyrightable or
otherwise protected under existing or future intellectual property
rights) shall be entirely and exclusively owned by VUSA and are
hereby entirely and irrevocably assigned (including all patents and
copyrights) by ABC and the PIBCs to VUSA without reservation or
further obligation or consideration that in any way relate to or
arise out (i) of
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the use or access to the Confidential Information (specifically
including but not limited to the Specifications and means of
manufacturing human source leukocytes), trade secret or patent
(including any unissued patent applications) or (ii) to any VUSA or
Viragen current or contemplated product. VUSA will have the sole
right to determine the treatment of such New Inventions, including
the right to keep it as trade secrets, to file and execute patent
applications on it, to use and disclose it without prior patent
application, to file registrations for copyright or trade or other
marks in its own name, or to follow any other procedure that VUSA
deems appropriate. VUSA shall have the right to a worldwide,
sublicenseable and exclusive, or at its election non-exclusive,
license on commercially reasonable terms to any or all rights ABC or
the PIBCs may have in all other New Inventions.
(ii) ABC AND PIBC OBLIGATIONS. At VUSA's sole cost and expense, ABC and
the PIBCs shall execute and provide, and shall cause its employees,
officers, directors and contractors to execute and provide) all
documents, testimony affidavits, and other reasonable acts and
cooperation as may be necessary for perfection of VUSA's rights under
this Agreement and for the filing, prosecution and enforcement of any
patent applications or patents issued thereon. ABC and the PIBCs
hereby grants the Secretary of VUSA, and his designee, its
irrevocable power-of-attorney and hereby irrevocably appoints same as
its agent to do all acts necessary and execute and file all such
documents as necessary to perfect VUSA any rights, title and
interests under this Section 8, including applying for and obtaining
or registering patents, copyrights, licenses, trade and other marks,
and to enforce VUSA's rights under this Section 8.
(iii)SEPARATE RESEARCH AGREEMENTS; PIBC CONTRIBUTION. If any New Invention
arises from a specific research program undertaken by the parties
under a separate research agreement, the rights of the parties in and
to such New Invention shall be in accordance with the terms of such
separate research agreement. Without prejudice to VUSA's rights under
Section 8.6, to the extent that any New Invention that is to be owned
by VUSA under Section 8.6, has been conceived and reduced to practice
entirely or substantially by PIBC employees, the parties shall in
good faith discuss the extent, if any, to which the PIBC should be
further compensated beyond the terms of this Agreement for its
contribution to such New Invention.
8.7 Notification of Infringement. During the Term a party or a PIBC may become
aware of (i) threatened or actual infringements or misappropriation by a third
party of a proprietary rights or other property that such party knows to be
owned or exclusively licensed by one of the other parties; or (ii) that may be
brought by other Persons against the one of the other parties because of the
activities performed under or in connection with this Agreement (collectively
"Threatened Infringement or Threatened Action"). In the event that a party does
become aware of any Threatened Infringement or Threatened Action, it shall
inform the party owning such rights or so threatened in writing, and, at the
written request and expense of the party owning such rights, shall cooperate
fully and in good faith with the such party in defending or enforcing its
rights and interests.
9. OMNIFERON CLINICAL DEVELOPMENT AND REGULATORY.
9.1 Development of VUSA's Products. VUSA, Viragen and/or the Affiliates (and
their assignees, contractors, and licensees) shall be responsible for the
clinical development of VUSA's products (including Omniferon) including the
preparation of clinical trial protocols, execution of clinical trials and
obtaining regulatory approval for the commercialization of such products in the
U.S., unless otherwise agreed upon by the parties in writing.
9.2 Support and Reference Rights. At VUSA's cost and expense, ABC and the PIBCs
shall provide VUSA and its Affiliates and their designees with any information,
documents, authorizations and rights of references to license applications,
master files and other regulatory submissions, as may be necessary
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to support any state or federal regulatory or other submissions and approvals
sought by VUSA (and its Affiliates and other designees) for the production
testing and use of products made from the Buffycoats, including without
limitation any applications for investigational use under 21 C.F.R. Part 312 or
product and establishment licenses under 21 C.F.R. Part 601, and shall timely
make all such submissions as may be necessary to carry out this agreement and
the product development, testing, manufacture and commercialization
contemplated under Sections 4.6 and 4.7 and this Agreement.
10. TERM AND TERMINATION.
10.1 Term. The initial term of the Agreement shall expire ten (10) years from
the Effective Date. Not later than 12 months prior to the expiration of this 10
year term, the parties shall negotiate in good faith the continuation of their
business relationship on mutually satisfactory terms. If and only if those
negotiations are unsuccessful, and there is no reasonable basis to believe that
they will be successfully completed before the end of the term (and no interim
extension can be reasonably negotiated), then no earlier than 120 days prior to
the end of the initial 10 year term, ABC may send VUSA a written notice of
deadlock. If negotiations are not essentially completed within 30 days of the
delivery of such deadlock notice, then ABC may at that time initiate discussion
and negotiations with other Persons regarding the first and preferential access
to Buffycoats by such other Persons; provided, that prior to the end of that 30
day period ABC shall in no manner offer or discuss such rights with any Person
other than VUSA.
10.2 Right to Terminate If No IND Accepted. ABC shall have the right to
terminate the Agreement if at the end of 30 months from the Effective Date the
U.S. Food and Drug Administration has not accepted an Investigational New Drug
Application (IND) for Omniferon filed by or at the direction of VUSA or an
Affiliate.
10.3 VUSA's Right to Terminate Based on Buffycoats/Available Supply. In the
event that at any time after the second anniversary of the Effective Date, ABC
and the PIBCs are unable to satisfy 90% of the VUSA Rolling Requirements
Forecasts provided under Section 3.1 for any two calendar quarters in any four
calendar quarter period, VUSA may terminate the Agreement on 90 days written
notice. Upon termination, all outstanding orders, forecasts, and compensation
for orders shall be honored as provided in the Agreement.
10.4 VUSA's Right to Reacquire Shares Issued to ABC and the PIBCs. In the event
of any termination hereunder, except for a termination on account of a material
breach by Viragen or VUSA, Viragen or VUSA may at its election repurchase any
shares previously delivered or to be delivered under this Agreement at fair
market value, such valuation to be determined in accordance with 6.6. Notice of
intent to repurchase such shares must be given within 30 days of the
termination.
10.5 ABC Failure to Perform. In the event ABC and the PIBCs fail to fulfill 90%
VUSA's Buffycoat Purchase Orders in any two calendar quarters within any four
calendar quarter period, VUSA may suspend or limit any unfilled, pending or
future Purchase Orders, Purchase Forecasts and Rolling Forecasts until such
time as ABC and the PIBCs have provided VUSA with satisfactory assurances that
they will be able to fully meet it obligations for the remainder of the Term
and during which period the obligations under Section 2.10 shall not be in
effect.
10.6 Material Breach. ABC may terminate this Agreement, and each PIBC
may terminate its Subagreement, in the event of VUSA's material breach of the
terms of this Agreement or a Subagreement, respectively. VUSA may terminate
this Agreement or any of its Subagreements upon a material breach by ABC or any
PIBC, respectively. All such terminations shall become effective upon 90 days
following delivery of a written notice, if the party so notified in of its
breach does not within that 90 days period (i) cure such breach, or (ii)
commence reasonable efforts to cure such material breach and complete the cure
within a reasonable time thereafter; provided that VUSA may immediately suspend
all
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shipments and reject all deliveries from any PIBC which is in actual or
reasonably likely breach of Sections 5.4 or 11. No termination for any reason
whatsoever, however, shall affect any obligation to pay money or take other
actions, which a party may have incurred prior to the termination date, or any
other remedy the parties may have an account of such breach.
10.7 Bankruptcy or Insolvency. A party may terminate this Agreement immediately
upon the entry of a decree or order by a court having jurisdiction adjudging
another party bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of
such party, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by such party of a voluntary case
under any such law, as now or hereafter constituted, or the consent by it to
the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or
relief under any such law, or the consent by it to the filing of such petition
or to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator, or similar official of it or of any substantial part of its
property, or the making by it of an assignment for the benefit of creditors, or
the admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by such other party.
10.8 Effect of Termination. Termination, suspension, or expiration of this
Agreement for any reason shall not relieve the parties of any obligation
accruing prior thereto, nor affect or limit any other remedy otherwise
available to the parties. The obligations and rights, of the parties under
Sections 2.8, 5.3-5.6, 5.4, 8.1-8.6, 9.2, 10.4, 10.8, 14.1-14.4, 15.1-15.14,
and in Exhibits 3 and 4 relating to matters covered therein, shall survive the
termination or expiration of this Agreement for any reason.
11. REGULATORY COMPLIANCE
ABC and each PIBC agree to comply with all laws, rules, regulations, standards
and practices required by the FDA (including cGMPs and the terms of any
undissolved consent decrees) and all other governmental authorities governing
their operations and other actions committed to be taken by them under the
Agreement and the Subagreements, and to maintain all permits, licenses and
approvals necessary to carry out their obligations under this Agreement and the
Subagreements; provided, a failure to comply with such laws or regulations
shall not be considered a material breach of this Agreement if such
non-compliance would not materially affect the regulatory compliance or
regulatory or other liabilities of the other parties, or VUSA's risks or
ability to use the delivered Buffycoats. ABC and each PIBC agree to permit and
cooperate with any audit of inspection by representatives of Viragen, VUSA, FDA
or other governmental authorities conducted to assure the conformance of ABC
and each PIBC with its obligations under this Agreement and the Subagreement
and all applicable laws and regulations.
12. VUSA AND VIRAGEN REPRESENTATIONS AND WARRANTIES.
VUSA and Viragen represent and warrant the following to ABC and the PIBCs:
12.1 Corporate Status. VUSA and Viragen are each corporations duly organized,
validly existing, and in good standing under the laws of the State of Delaware.
12.2 Omniferon. VUSA and Viragen have developed a natural interferon product
called Omniferon, which they believe can be produced more economically than
other natural interferon products, and they believe that no other company holds
patent rights or other intellectual property rights that would prevent the
Commercialization of Omniferon.
12.3 No Conflict. The execution of this Agreement by VUSA and Viragen does not,
and the performance of this Agreement will not, (a) conflict with or violate
its Articles of Incorporation or Bylaws,
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(b) conflict with or violate any laws or any order, award, judgment or decree
of any Governmental Agency applicable to them or by which their properties are
bound or affected, (c) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, insurance policy or other instrument or obligation to which either is a
party, or by which either of them or their properties are bound or affected, or
(d) require any consent, approval, authorization or filing with or notification
to any Governmental Agency or third party.
12.4 Non-Infringement. VUSA and Viragen warrant that neither of them shall
during the Term wrongfully disclose or cause to be disclosed to ABC any third
party trade secrets, and that the use by ABC of the Specifications or other
Confidential Information disclosed by either of them shall not infringe or
misappropriate any third party patent or trade secret, when such Confidential
Information is used in accordance with this Agreement.
12.5 Guaranty. As an inducement to ABC to enter into this Agreement, and to the
PIBCs to enter into Subagreements, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
until such time as VUSA is a publicly traded company, Viragen hereby agrees to
guaranty the obligations of VUSA to ABC, and, where applicable, the PIBCs under
Sections 1.4, 2.10, 2.11, 3.4, 4.1-4.2, 4.4-4.7, 4.10, and 14.1; provided that
it may assert any defense, set-off or right that otherwise would be available
to VUSA. The obligations of Viragen under this paragraph may be enforced
directly against Viragen upon any default by VUSA, and without regard to any
choice of any other remedy that may be selected. The parties agree that
Viragen's obligations under or in relation to the Agreement shall extend only
to those obligations guaranteed by it under this paragraph and such other
obligations that are specifically and expressly stated in this Agreement as
undertakings or warranties by Viragen.
13. ABC AND PIBC REPRESENTATIONS AND WARRANTIES
ABC represents and warrants the following to VUSA and Viragen:
13.1 Corporate Status. ABC is a nonprofit corporation duly organized, validly
existing, and in good standing under the laws of the State of Arizona, and is
authorized by its members Board of Trustees and its charter to take the actions
required of it under the terms of this Agreement.
13.2 No Conflict. The execution of this Agreement by ABC does not, and the
performance of this Agreement will not, (a) conflict with or violate its
Articles of Incorporation or Bylaws, (b) conflict with or violate any laws or
any order, award, judgment or decree of any Governmental Agency applicable to
it or by which its properties are bound or affected, (c) result in any breach
of or constitute a default (or an event which with notice or lapse of time or
both would become a default) under any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, insurance policy or other
instrument or obligation to which ABC is a party, or by which ABC or its
properties are bound or affected, or (d) require any consent, approval,
authorization or filing with or notification to any Governmental Agency or
third party, except in the case of clause (c) above for such conflicts which
would not taken as a whole, have a material adverse effect upon ABC or its
obligations hereunder.
13.3 ABC/PIBC Capacity and Available Supply. ABC represents and warrants that
the annual aggregate Available Supply of the PIBCs is at least 500,000
Buffycoats upon the Effective Date and throughout the term of this Agreement,
the maintaining of such minimum Available Supply level is an essential and
material basis of the Agreement; provided that ABC shall not be in breach of
this warranty if this level is not maintained because of VUSA's termination of
a Subagreement because of a PIBC's breach of its warranty under Section 3.3 of
that PIBC's Subagreement. ABC and each PIBCs represents and warrants that upon
the Effective Date and thereafter during the Term, it shall use its best
efforts to obtain, and thereafter maintain, all necessary approvals, license
amendments and take other actions for
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the PIBC Establishments, so that such PIBC Establishments may be designated as
Buffycoat Facilities. ABC represents and warrants that it will use its best
efforts to reasonably maximize its PIBC Available Supply in a timely manner.
13.4 Non-Infringement, Ability to Provide. ABC and each PIBC warrants that it
shall not during the Term disclose or cause to be disclosed to Viragen or VUSA
any third party trade secrets or any third party patent or proprietary rights,
or use same in the manufacture of the Buffycoats under this Agreement, and
shall not provide to VUSA any Buffycoats which have been manufactured using any
process that infringes or misappropriates any third party patent or trade
secret. ABC's and each PIBCs warranties under this Section 13.4 shall not
extend to any procedure, Specification, method, Confidential Information or
materials provided by VUSA, Viragen or their respective Affiliates.
14. INDEMNIFICATION AND INSURANCE.
14.1 Indemnification by VUSA. VUSA agrees to indemnify, defend, and hold
harmless ABC, the PIBCs, and their trustees, directors, officers, and employees
from and against all liabilities, expenses (including court costs and
reasonable attorneys' fees), and claims for bodily injury, death, or property
damage, which they may incur, suffer, become liable for, or which may be
asserted or claimed against them (all collectively "Claims") to the extent such
Claims result from or arise out of: (a) any negligent or wrongful act or
omission of VUSA, Viragen or their directors, officers, employees, contractors,
or agents as a result of or while performing obligations hereunder, including
any breach by VUSA, Viragen or Affiliates of their respective obligations,
representations or warranties; (b) the development, manufacture, sale,
distribution, or use of any product by VUSA, Viragen and/or Affiliates; or (c)
any claim that any product or process used or provided by VUSA, Viragen or any
Affiliate infringes the patent or trade secret rights of any other Person that
is not a party to this Agreement or its Subagreements solely to the extent that
such claim is brought against such indemnified person because of the supply of
Buffycoats to VUSA under this Agreement or the use by them under this Agreement
of such VUSA, Viragen or Affiliate product or process. Provided, however, that
VUSA shall not be responsible to ABC, the PIBCs or any other indemnitee for
Claims to the extent that such Claims arise from or are caused by any wrongful
or negligent act or omission of ABC, the PIBCs, their trustees, directors,
officers, employees or contractors, or other Persons under their control,
including without limitation the failure of the Buffycoats provided under this
Agreement to conform with the Specifications. The indemnity obligations in this
paragraph shall not apply to amounts paid in settlement of such Claim if such
settlement is effected without the written consent of VUSA (which consent shall
not be unreasonably withheld).
14.2 Indemnification by the PIBCs. Each PIBC shall agree to indemnify, defend,
and hold harmless Viragen, VUSA, and their directors, officers, and employees
from and against all liabilities, expenses (including court costs and
reasonable attorneys' fees), and claims for bodily injury, death, or property
damage, which they may incur, suffer, become liable for, or which may be
asserted or claimed against them (all collectively "Claims") to the extent such
Claims result from or arise out of: (a) any negligent or wrongful act or
omission of the PIBC or its trustees, directors, officers, employees,
contractors or agents as a result of or while performing obligations hereunder;
(b) any failure of the Buffycoats provided under this Agreement and the
Subagreement to conform with the Specifications or any breach by such PIBC of
its obligations, representations or warranties; or (c) any claims of patent
infringement or trade secret misappropriation solely to extent that such claim
arises from the process or methods used by the PIBC other than such processes
or methods provided by VUSA, Viragen or the Affiliates.. Provided, however,
that the PIBC shall not be responsible to VUSA or any other Indemnitee for
Claims to the extent that such Claims arise from or are caused by any wrongful
or negligent act or omission of VUSA, Viragen, their trustees, directors,
officers, employees or contractors, or other persons under their control
(excluding any negligence in relying on a PIBC to perform its obligations, or
in relying on any PIBC's certificate of analysis or in the conduct of any
quality assurance audits of a PIBC, or similar event). The indemnity
obligations in this paragraph shall not apply to amounts paid in settlement of
such Claim if such
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settlement is effected without the written consent of the PIBC (which consent
shall not be unreasonably withheld).
14.3 Indemnification by ABC. ABC shall indemnify, defend, and hold harmless
Viragen, VUSA, and their directors, officers, and employees from and against
all liabilities, expenses (including court costs and reasonable attorneys'
fees), and claims, which they may incur, suffer, become liable for, or which
may be asserted or claimed against them (all collectively "Claims") to the
extent such Claims result from or arise out of: (a) any negligent or wrongful
act or omission of the ABC or its trustees, directors, officers, employees,
contractors or agents as a result of or while performing obligations hereunder,
or (b) for any breach of its warranties; provided, however, that ABC shall not
be responsible to VUSA or any other indemnitee for Claims to the extent that
such Claims arise from or are caused by any wrongful or negligent act or
omission of VUSA, Viragen, their trustees, directors, officers, employees or
contractors, or other persons under their control. The indemnity obligations in
this paragraph shall not apply to amounts paid in settlement of such Claim if
such settlement is effected without the written consent of the ABC (which
consent shall not be unreasonably withheld).
14.4 Indemnification Procedures. As am obligation of the indemnification due
under this Agreement or otherwise, an Indemnified party must: (i) notify the
indemnifying party in writing promptly, and in such period that does not
materially affect the ability of indemnitor to effectively respond, of any
complaint, claim or injury relating to any loss subject or that may be subject
to this indemnification; (ii) provide the indemnifying party with sole control
over the investigation, defense and settlement of any such complaint or
claim(s), including the sole right to select defense counsel and to direct the
defense or settlement of any such claim or suit, and full right of subrogation
of any Claims; and (iii) fully cooperate with the indemnifying party and its
legal representatives in the investigation, defense and settlement of any
Claim. The indemnification obligations may be undertaken by a party with a
reservation of rights.
14.5 Insurance. No later than thirty (30) days before the delivery of
Buffycoats under this Agreement, VUSA and each of the PIBCs shall maintain
commercial general liability insurance, including property and casualty
coverage and products liability coverage (or for VUSA clinical trials liability
during periods prior to commercial sale of PIBC-derived products) in amounts no
less than $1,000,000 per annual aggregate for property and general liability
insurance with limits of not less than $1,000,000 per occurrence, and for
$1,000,000 per annual aggregate for products liability, with limits of not less
than $1,000,000 per occurrence and $1,000,000 per incident. Such insurance
policies shall (a) be issued by an insurer having an A.M. Best rating of at
least A-VIII or that is otherwise acceptable to the other party; (b) name the
other party (and additionally either ABC or Viragen, whichever is appropriate)
as an additional insured; (c) provide such party with thirty (30) days prior
written notice of any cancellation, reduction or modification in its coverage,
and (d) clearly covers or is endorsed to cover the use by VUSA of the
Buffycoats and products made therefrom,. Each party will promptly provide the
other with a certificate of coverage, policy specimen, endorsements, and
statement of policy limitations and exclusions and any other reasonable
evidence demonstrating the performance of its obligations under this paragraph
upon reasonable request.
15. MISCELLANEOUS TERMS.
15.1 Audits by ABC. ABC shall have the right to perform on a periodic basis
reasonable audits, at its expense and on reasonable notice during regular
business hours, of VUSA and Viragen to confirm their compliance with the terms
and conditions of the Agreement including but not limited to 2.2, 2.10-2.12,
4.6-4.8, 5.3, 5.5-5.6, 6.6, and 7. At VUSA or Viragen's request and expense,
such audits shall be carried out on a confidential basis by an independent
auditor that is acceptable to the parties, and that may only provide a report
of conclusions pertinent to the purpose of the applicable section(s) under
which such audit was conducted, but shall not otherwise disclose any VUSA or
Viragen Confidential Information.
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<PAGE> 19
15.2 Audits by VUSA. VUSA shall have the right to perform on a periodic basis
reasonable audits, at its expense and on reasonable notice during regular
business hours, of ABC and any PIBC to confirm their compliance with the terms
and conditions of the Agreement and the Subagreement, including but not limited
to the Specifications, 1.2, 1.4, 2.1, 2.3-2.5, 2.7-2.8, 3.3, 3.7, 4.4, 4.10,
4.11, 5.2-5.4, 5.6, 11, and 13.3, and in the determination of Buffycoat
Capacity, Available Supply and Incremental Buffycoat Production Costs. At ABC's
or any PIBC's request and expense, such audits shall be carried out on a
confidential basis by an independent auditor that is acceptable to the parties,
and that may only provide a report of conclusions pertinent to the purpose of
the applicable section(s) under which such audit was conducted, but shall not
otherwise disclose any ABC or PIBC Confidential Information.
15.3 Disclosures. The parties acknowledge and agree that Viragen and VUSA are,
or may become, required under U.S. federal securities law to make public
disclosure of events or activities material to their operations. This may take
the form of press releases, securities filings and other oral or written
communications. Unless otherwise required by law, the existence and terms and
conditions of the Agreement shall remain confidential. Except as required by
law, Viragen and VUSA shall not cause the name of ABC and/or any PIBC to be
used in written publications or promotional information without the permission
of ABC and/or the PIBC. Similarly, ABC and/or any PIBC shall not cause the name
of Viragen and/or VUSA to be used in written publications or promotional
information without the permission of Viragen and/or VUSA. Permission to use
the other party's name shall not be unreasonably withheld.
15.4 Notices. Any and all notices, designations, consents, offers, acceptances
or other communication provided herein or in the Subagreements shall be given
in writing and delivered by hand or by recorded, registered or certified mail,
return receipt requested, directed to the address shown below, unless notice of
a change of address is furnished:
<TABLE>
<S> <C>
IF TO ABC: IF TO VUSA:
America's Blood Centers Viragen U.S.A., Inc.
725 15th St. N.W. Suite 700 865 SW 78th Avenue, Suite 100
Washington, DC 20005 Plantation, FL 33324
ATTN: Jim MacPherson, ATTN: Charles Fistel,
Executive Director Executive Vice President
Phone: 202-393-5725 Phone: 954-233-8746
Fax: 202-393-1282 Fax: 954-233-1414
IF TO VIRAGEN:
Viragen, Inc.
865 SW 78th Avenue
Suite 100
Plantation, FL 33324
ATTN: Gerald Smith, President
Phone: 954-233-8746
Fax: 954-233-1414
</TABLE>
Communications may be faxed, provided that the fax is followed by a
confirmation copy.
15.5 Entire Agreement. Except as expressly set forth herein, this Agreement
together with its Exhibits constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all other agreements
and undertakings, both written and oral, between the parties with respect to
the subject matters covered in this Agreement and its Exhibits.
15.6 Headings and Statements of Materiality. Headings are for descriptive
purposes only and do not constitute part of the Agreement. The identification
of a term or warranty of this Agreement as being
18
<PAGE> 20
"essential" or "material" is not intended to mean that other terms for which
such statement is not made are not essential or material.
15.7 Non-Assignment. Neither this Agreement nor any of the rights, interest or
obligations hereunder or under any Subagreement, shall be assigned by any party
hereto without the prior written consent of the other party; provided, that (a)
the rights, but not the obligations, of a party herein may be assigned to one
or more of such party's affiliates, (b) any party may cause any affiliate to
perform on its behalf any of such party's obligations, and (c) any party may
assign all of its rights and obligations to any purchaser of all or
substantially all of the assets of that party. No assignment shall relieve any
party of responsibility for any obligation hereunder.
15.8 Third-Party Beneficiaries. This Agreement and all of the provisions hereof
and of its Subagreement shall be binding upon and inure solely to the benefit
of each party hereto (including the PIBCs of each Subagreement), and any
successors in interest. Nothing in this Agreement and the Subagreements,
express or implied, is intended to or shall confer upon any other person (i.e.,
other than the parties and the PIBCs) any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
15.9 Independent Contractor. Each of the parties, and each PIBC, is performing
its duties hereunder and under the Subagreements as an independent contractor,
and nothing herein or in the Subagreements is intended to or shall create any
association, affiliation, partnership, joint venture, agency or other
relationship between the parties, except that ABC shall act as an agent of the
PIBCs to the extent the Agreement so provides.
15.10 VUSA and Viragen Business. VUSA, Viragen and their Affiliates shall have
the right to manage, merge, acquire or engage in any legal enterprise or invest
in any entity in the healthcare, blood-related or other industries. Subject to
the provisions of this Agreement, VUSA, Viragen and their Affiliates shall at
all times have the right in their sole and absolute discretion and without
notice, to enter into Buffycoat supply agreements or arrangements with any
Person.
15.11 Choice of Law; Alternative Dispute Resolution. This Agreement and all
Subagreements shall be governed by, and construed in accordance with, the laws
of the District of Columbia, except that matters related to corporate
governance, stockholders' rights, offering or transfer of stock or other
interests shall be construed in accordance with the laws of the State of
Delaware, regardless of the laws that might otherwise govern under applicable
conflict of laws principles. The parties agree to use good faith best efforts
to resolve disputes prior to the filing of any action or claim. Any action or
claim shall be subject to binding arbitration conducted in the Washington, DC,
before the American Arbitration Association in accordance with its arbitration
rules or as modified by written agreement of the parties. Each party
acknowledges and agrees that any breach or threatened breach by any party of
the provisions of this Agreement, or the Subagreements, would cause immediate
and irreparable harm to the other party(ies), and that the resulting damages
and injuries to such other party would be irremediable in terms of monetary
damages and are incapable of being precisely measured. Accordingly, the parties
agree that in the event of a breach or threatened breach, the other party(ies)
shall be entitled to resort to judicial proceedings in aid of arbitration if
interim injunctive relief from a court is necessary to prevent such irreparable
harm. In the event that any action or claim is brought, the substantially
prevailing party shall be entitled to recover its reasonable attorneys' fees.
15.12 Severability. If any term or provision of this Agreement or any
Subagreement shall be deemed invalid or unenforceable, the remaining terms
hereof shall not be affected but shall be valid and enforceable to the fullest
extent permitted by law. In such event, the parties shall use their best
efforts to substitute a valid, legal and enforceable provision, which insofar
as practical implements the purposes hereof.
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<PAGE> 21
15.13 Force Majeure. If any party's performance (including the performance of
any PIBC) hereunder or under any Subagreement is prevented, restricted or
interfered with by reason of fire, explosion, strike, labor dispute, casualty
or accident, freight embargo, flood, war, civil commotion or acts of God, the
party affected shall be reasonably excused from performance hereunder to the
extent and for the duration of such prevention, restriction or interference;
provided, however, nothing herein shall excuse any party from payment for sums
due and owing at the time of such occurrence nor shall any party be excused
because of any events to the extent that they could or might have been
prevented through the exercise of reasonable commercial judgment, care and
diligence.
15.14 Modifications in Writing. This Agreement, and its Subagreements, may not
be supplemented, modified or amended, except by an instrument in writing signed
by the parties hereto, and for the Subagreement by the affected PIBC. Any
waiver in one instance or for one purpose shall not create an implied
obligation to give a waiver in another instance or for another purpose, with
respect to the same or a different event.
15.15 Enforcement of PIBC Obligations. ABC shall have the primary
responsibility for ensuring, and shall use it best efforts to secure each
PIBC's compliance with that PIBC's obligations under this Agreement and the
PIBC's Subagreement; provided, however, that ABC shall not be responsible for
damages to the extent such damages are caused by that PIBC's breach of its
obligations under this Agreement or the PIBC's Subagreement and not ABC's
breach of its obligations and that any termination of a Subagreement shall be
made by VUSA.
16. CONDITIONS PRECEDENT TO THE AGREEMENT.
This Agreement is subject to the following contingencies, and shall not become
effective until they are met:
16.1 Due Diligence by ABC. ABC has had the opportunity to conduct corporate,
financial, operational, medical/scientific, legal (including patent) and other
due diligence on Viragen, and determines, in its sole discretion, that the
results of the due diligence are satisfactory. ABC's due diligence
determination shall be completed no later than July 31, 1998.
16.2 Due Diligence by VUSA and Viragen. VUSA and Viragen have had the
opportunity to due diligence on ABC and the IBCs and have determined, in their
sole discretion, that the results of the due diligence are satisfactory. VUSA
and Viragen's due diligence determination shall be completed no later than July
31, 1998.
16.3 Commitments from PIBCs. ABC has received commitments and simultaneous
execution of Subagreements from a sufficient number of PIBCs to comply with the
terms of this Agreement and the Subagreement, as determined by ABC in its sole
discretion. This determination shall be made no later than July 31, 1998.
16.4 Executive Committee Approval. The Executive Committee of ABC has approved
this Agreement.
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<PAGE> 22
16.5 Board Approval. The Boards of Directors of VUSA and Viragen have approved
this Agreement.
<TABLE>
<S> <C>
VIRAGEN, INC. VIRAGEN USA., INC.
By /s/ Gerald Smith By /s/ Charles F. Fistel
--------------------------- ------------------------------
Gerald Smith Charles F. Fistel
President Executive Vice President
AMERICA'S BLOOD CENTERS
By: /s/ Byron B. Buhner By: /s/ Jim MacPherson
--------------------------- ------------------------------
Byron B. Buhner Jim MacPherson
President Executive Director
</TABLE>
21
<PAGE> 23
EXHIBIT 1
VUSA BUFFYCOAT SPECIFICATIONS
o Delivery of Buffycoat units to VUSA shall be in less than * hours from
the original time of blood donation (draw).
o Buffycoats shall be made from units satisfactory for transfusion use under
applicable FDA regulations and guidelines.
o Storage, handling and transport of Buffycoats units shall be at
*.
o Hematocrit of * per Buffycoat unit.
o All FDA required and recommended transmissible disease and other testing
on all blood samples (which currently includes testing for the following
infectious diseases: HIV-I/HIV-II, HTLV-I, HBsAg, HBc, HCV, and Syphilis)
and shown to be negative (e.g., non-reactive).
o VUSA recognizes that Buffycoats may from time to time be shipped before
test results are available, in which case they shipped with a provisional
certificate of analysis for the test results and other information that is
available at the time of shipment, and will be promptly followed by a
final certificate of analysis for all test data.
o A unit of Buffycoats will be derived from a unit of whole blood that has a
volume greater than or equal to *, and the whole blood will have an
average of approximately * million white blood cells per ml, and shall
contain on average not less than * billion white blood cells per
delivered Buffycoat unit per * of whole blood source.
o Packaged and labeled for shipping (transport) per the PBIC standard
operating procedures.
o To the extent not specifically required otherwise herein, Buffycoats will
be manufactured (including all steps pertaining thereto, such as, but not
limited to, collection, handling, storage, testing, packaging, labeling,
shipment, and documentation) in compliance with (i) FDA cGMP and other
requirements and recommendations applicable to the manufacture of blood
for transfusion, and (ii) to the extent not in conflict with such FDA
requirements and recommendations, with the PBIC's standard operating
procedures.
* The information redacted herefrom is the subject of a Confidentiality
Request submitted to the Securities and Exchange Commission.
CONFIDENTIAL EXHIBIT 1 7/15/98
<PAGE> 24
EXHIBIT 2
PIBC SUBAGREEMENT FOR SUPPLY OF BUFFYCOATS
This subagreement ("Subagreement") is made and entered into this __ day of
______, ____ by and between ____________________________, a ____________
non-profit corporation with its principal office at
__________________________________ (hereafter "PIBC"), and America's Blood
Centers ("ABC"), an Arizona non-profit corporation with its principal office at
725 15th St., N.W., Suite 700, Washington, DC 20005 and Viragen, U.S.A., Inc.
("VUSA"), a Delaware corporation, having its principal office at 865 SW 78th
Ave., Suite 100, Plantation, FL 33324.
RECITALS
PIBC is a non-profit blood center which holds a valid license from U.S. Food
and Drug and Administration to manufacture and distribute human source
leukocytes and is a member in good standing of America's Blood Centers ("ABC").
VUSA and its Affiliates are engaged in the research, development and production
of products made from human source leukocytes. ABC has entered into an
agreement with VUSA and Viragen for access to human source leukocytes supplied
by ABC members ("the Agreement"). PIBC has thoroughly read and reviewed the
terms of the Agreement, and the parties desire to have the PIBC supply human
source leukocytes in accordance with the terms and conditions of the Agreement
and this Subagreement.
COVENANTS
2.1. INCORPORATION OF AGREEMENT.
1.1 AGREEMENT TERMS AND CONDITIONS. All definitions, terms, covenants,
conditions and exhibits of the Agreement are incorporated herein and made
a part of this Subagreement, and the PIBC, ABC and VUSA agree to be fully
bound by all such terms, covenants, conditions and exhibits of the
Agreement applicable to the PIBC and to Buffycoats supplied by the PIBC,
and to otherwise fully cooperate with ABC and VUSA in the performance of
the Agreement, including all audits of the PIBC which ABC or VUSA may
carry out under the Agreement.
1.2 ABC ROLE. PIBC agrees that ABC shall act as the interface between VUSA and
PIBC to the extent provided in the Agreement, including receipt of
forecasts, purchase orders, and payments from VUSA. PIBC shall not hold
VUSA or its Affiliates responsible for any payments received from VUSA or
its Affiliates and not delivered by ABC to PIBC, or for any ABC
misfeasance or malfeasance in any task ABC is to carry out under the
Agreement or otherwise undertakes.
1.3 OTHER HUMAN SOURCE LEUKOCYTES SUPPLY AGREEMENTS. The parties expressly
recognize that PIBC has the preexisting contractual obligation(s) to
supply human source leukocytes to other Persons as set forth in Exhibit A
hereto, and that such preexisting obligation(s) shall be deemed an
exception to VUSA's First and Preferential Access and to the Available
Supply in accordance with the Agreement.
2. PIBC ADDITIONAL OBLIGATIONS.
2.1. FORECAST OBLIGATION. Upon the Effective Date and thereafter during the
term of-this Subagreement, at least sixty (60) days before the start of
the each subsequent calendar quarter, PIBC shall provide ABC
CONFIDENTIAL 1 7/15/98
<PAGE> 25
with good faith rolling quarterly forecasts of PIBC's anticipated
Available Supply for each of the subsequent four calendar quarters (the
"PIBC Rolling Supply Forecast"). The forecast made in the PIBC Rolling
Supply Forecast of anticipated PIBC Available Supply for the calendar
quarter immediately subsequent to the quarter following the date the
Rolling Forecast is provided shall be the "PIBC's Confirmed Supply
Forecast. PIBC shall immediately inform ABC of any condition that might
adversely affect its Available Supply or its ability to supply the
quantities of Buffycoats specified In any PIBC Rolling Supply Forecast or
PIBC's Confirmed Supply Forecast.
CONFIDENTIAL 2 7/15/98
<PAGE> 26
2.2. SUPPLY OBLIGATION. PIBC shall accept purchase orders for Buffycoats,
up to the PIBC's Confirmed Available Supply, allocated by ABC to the PIBC.
PIBC shall deliver to VUSA the Buffycoats specified in such purchase order
in accordance with the Agreement and the purchase order. PIBC shall
immediately inform ABC (which ABC shall promptly forward such information
to VUSA) of any condition that might adversely affect its Available Supply
or its ability to supply the quantities of Buffycoats specified in any
purchase order; provided, that all information described under Section 5.4
of the Agreement is directly and immediately transmitted to VUSA.
3. PIBC WARRANTIES.
PIBC represents and warrants to VUSA and ABC that:
3.1. CORPORATE ORGANIZATION & AUTHORITY. PIBC is a corporation duly organized,
validly existing, and in good standing under the laws of the ____________,
and has all requisite corporate power and authority to own, lease and
operate its properties and carry on its business as now conducted, to
execute and deliver this Subagreement and to perform the obligations
contemplated hereunder. This Subagreement has been duly and validly
executed and delivered by PIBC and constitutes the legal, valid and
binding obligation of PIBC enforceable against PIBC by VUSA and ABC in
accordance with its terms and that of the Agreement.
3.2. No Conflict, Legal Compliance. The execution and delivery of this
Agreement by PIBC does not, and the performance of this Subagreement by
PIBC during its term shall not (i) conflict with or violate any laws,
regulations, guidelines or any order, award, judgment or decree, or
permit, license or approval of any governmental agency applicable to it or
by which their properties or operations are bound or affected, (ii) result
in any breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under any mortgage,
contract, license, permit, insurance policy or other obligation to which
they are a party, or by which they or their properties are bound or
affected, or (iii) require any consent, approval, authorization or filing
with or notification to any Governmental Agency or third party.
3.3. PIBC AVAILABLE SUPPLY. Its annual Available Supply is at least ___,000
Buffycoats on the Effective Date, and that the Available Supply shall be
maintained at no less than that level during the term of this
Subagreement, except for such reductions from that level to the extent
necessary to meet the PIBC's obligations to supply human source leukocytes
for direct human transfusion. Notwithstanding the foregoing, PIBC
represents and warrants that it will use its reasonable best efforts to
maximize its Available Supply in a timely manner consistent with expected
forecasts.
3.4. NON-INFRINGEMENT, ABILITY TO PROVIDE. PIBC warrants that it shall not
disclose or cause to be disclosed to VUSA or its Affiliates any trade
secrets or any third party patent or proprietary rights, or use same in
the manufacture of the Buffycoats under this Agreement, and shall not
provide to VUSA any Buffycoats which have been manufactured using any
process that infringes or misappropriates any third party patent or trade
secret. PIBC's warranties under this Section 3.4 shall not extend to any
procedure, Specification, method, Confidential Information or materials
provided by VUSA, Viragen or their respective Affiliates.
CONFIDENTIAL 3 7/15/98
<PAGE> 27
4. TERM AND TERMINATION.
4.1. TERM. This Subagreement shall commence on the date of its execution or on
the Effective Date of the Agreement, whichever is later, and shall
continue until the Agreement terminates or until this Subagreement is
terminated, whichever is sooner. Upon termination of this Subagreement,
each party agrees to honor any obligations that, under the Section 10.8 of
the Agreement, continue past termination. This Subagreement shall be
automatically renewed or extended for the duration of any renewal or
extension period of the Agreement; provided, however, that (i) each PIBC
shall have the right not to renew this Subagreement if it provides ABC and
VUSA written notice of its intent not to renew this Subagreement at least
eighteen (18) months prior to expiration of the term of the Agreement, or
(ii) if the renewal or extension of the Agreement provides for any
material changes to the material terms of the Agreement, each PIBC shall
have fifteen (15) days from the date of its receipt of such extended or
renewed Agreement to notify ABC and VUSA in writing that the PIBC will not
extend or renew this Subagreement.
4.2. SEPARATE TERMINATION OF SUBAGREEMENT. Either PIBC or VUSA may terminate
this Subagreement (without terminating the Agreement or any other
Subagreement) in the event of a material breach by the other party of the
Agreement or this Subagreement, provided such Person follows the
procedures in 10.6 of the Agreement. Additionally, VUSA may terminate this
Subagreement immediately (without terminating the Agreement or any other
Subagreement) in the event of (a) PIBC's failure to comply with FDA or
other federal, state, and local government requirements (including the
terms of any undissolved consent decrees) to be a supplier of Buffycoats
or (b) PIBC's bankruptcy or insolvency as defined in 10.7 of the
Agreement. Finally, VUSA may terminate this Subagreement (without
terminating the Agreement), without fault and after consultation with ABC
and PIBC, in the event that PIBC is repeatedly unable to supply conforming
Buffycoats on a basis and quality comparable to other ABC members that
also are supplying Buffycoats under the Agreement, or is unable to
maintain an adequate Available Supply of Buffycoats.
5. MISCELLANEOUS.
5.1. NOTICES. Any and all notices, designations, consents, offers, acceptances
or other communication provided herein shall be given as provided in the
Agreement directed to the address shown below, unless notice of a change
of address is furnished:
IF TO PIBC: IF TO VUSA, VIRAGEN OR ABC:
[PIBC Name] As set forth in the Agreement:
[PIBC Address]
Attn: [Name]
Fax:
ALL NOTICES OF RECALLS OR ANY OTHER MATTER THAT MAY RELATE TO THE SAFETY OF THE
BUFFYCOATS SHALL BE COMMUNICATED BY THE MOST EXPEDIENT METHOD, AND PROMPTLY
CONFIRMED IN WRITING.
5.2. ENTIRE AGREEMENT. Except as expressly set forth herein, this Subagreement
together with the Agreement and their Exhibits constitute the entire
agreement between the parties with respect to the subject matter hereof
and supersede all other agreements and undertakings, both written and
oral, between the parties with respect to the subject matters covered in
the Subagreement, the Agreement
CONFIDENTIAL 4 7/15/98
<PAGE> 28
and the Exhibits. No modification of the terms of this Subagreement, or
any waiver of any breach thereof, shall be effective unless made in
writing and executed by authorized representatives of VUSA, ABC, and the
PIBC.
5.3. CHOICE OF LAW; ALTERNATIVE DISPUTE RESOLUTION. The parties agree that this
Subagreement shall be governed by the choice of law, venue and alternative
dispute provisions of the Agreement.
VIRAGEN USA., INC. [PIBC]
By: By:
------------------------------- ------------------------------------
Charles F. Fistel [Name]
Executive Vice President [Title]
AMERICA'S BLOOD CENTERS
By: By:
--------------------------------- ------------------------------------
Byron B. Buhner Jim MacPherson
President Executive Director
CONFIDENTIAL 5 7/15/98
<PAGE> 29
EXHIBIT 3
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (the "Agreement") is made and entered into
July 15, 1998, by and among American Blood Centers, Inc. ("ABC"), a non-profit
Arizona corporation with its principal offices at 725 15th Street, N.W., Suite
700, Washington, DC 20005 and Viragen. Inc. ("Viragen"), a Delaware
corporation, and Viragen U.S.A., Inc. ("VUSA"), a Delaware corporation and a
wholly-owned subsidiary of Viragen. with their principal offices at 865 S.W.
78th Avenue, Suite 100, Plantation, Florida 33324.
WHEREAS, ABC, Viragen and VUSA are parties to an Agreement dated even
date herewith (the "Agreement");
WHEREAS, pursuant to the Agreement, ABC will be authorized to receive
shares of Common Stock of VUSA ("Shares") in certain events as provided for in
the Agreement; and
WHEREAS, the parties desire to provide for the orderly management of
the business and affairs of VUSA, to place certain restrictions on the transfer
of the Shares by ABC and to provide for a harmonious relationship among
themselves;
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth herein, the parties hereto agree as follows:
1. CERTIFCATES OF STOCK. Each certificate of Shares subject to this
Agreement may have endorsed thereon the followings words:
"This certificate and the shares of stock represented hereby are held
subject to the terms and restrictions of a certain Stockholders
Agreement dated July 15, 1998, by and among American's Blood Centers,
Inc., Viragen, Inc. and Viragen U.S.A., Inc. Said Agreement, among
other things, restricts the disposition of certain shares of stock,
and gives Viragen U.S.A., Inc., and Viragen. Inc. a first option to
buy the stock represented hereby in the event of any termination of
the Agreement or if the holder named herein desires to dispose of the
same. A copy of said Agreement is on file in the office of Viragen
U.S.A., Inc."
2. RESTRICTION ON DISPOSITION OF SHARES.
(a) Neither ABC nor any permitted transferee or assign shall
dispose of any Shares except in accordance with the balance of the terms
hereinafter set forth; provided, however, that ABC is authorized to transfer
and assign, some or all of the Shares to PIBCs (as defined in the Agreement),
and PIBCs are authorized to transfer and assign to other PIBCs or to ABC, upon
ten (10) days written notice to VUSA and subject to such PIBC executing a copy
of this Agreement or comparable stockholders' agreement. As used in this
Agreement, the term "dispose" or "disposition" means a sale, exchange, bequest,
devise. assignment, pledge, encumbrance. hypothecation, contribution to capital
or other disposition, with or without consideration, effective during the term
of this Agreement.
(b) Except as otherwise provided in subsection 2 (a) above or
elsewhere in this Agreement, at any time, ABC may sell all, but not less than
all, of its Shares (hereinafter referred to as the "Offered Shares") to any
person (hereinafter referred to as the "Transferee"), but only upon
satisfaction of all of the conditions set forth in paragraphs (i) through (iv)
below:
(i) The Transferee has delivered to ABC a signed writing setting
forth the terms of the proposed acquisition of the Offered Shares,
including confirmation of the number of the Offered Shares to be acquired
by the Transferee, the price per share to be paid, the cash down payment
and the payment provisions, interest rate or other terms of any promissory
note or other extension of credit (hereinafter referred to as the
"Offer");
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<PAGE> 30
(ii) The Transferee has deposited with an independent escrow agent
an amount equal to twenty percent (20%) of the total purchase price to be
paid for such Offered Shares and has delivered to ABC a writing from such
independent escrow agent evidencing receipt by it of such deposit
(hereinafter referred to as the "Receipt");
(iii) Within ten (10) days following the receipt of the Offer and
of the Receipt, ABC has delivered to the VUSA a true and complete copy of
each (hereinafter referred to as the "Notice").
(iv) Within thirty (30) days following the delivery of the Notice
to VUSA, Viragen or VUSA fails to notify the ABC in writing that it
intends to redeem or purchase the Offered Shares described in the Offer as
provided in subsection (c) of this Section.
If all of the conditions set forth in subparagraphs (i) through (iv)
above are satisfied, and Viragen or VUSA fails to elect to redeem and/or
purchase all of the Offered Shares as provided in subsection (c) of this
Section, then ABC shall sell the Offered Shares to the Transferee at the price
and in accordance with the precise terms and conditions set forth in the Offer.
VUSA shall be under no obligation to recognize the sale or transfer or such
Offered Shares, however, until and unless: (i) ABC or the Transferee shall
furnish to VUSA evidence satisfactory to it that such sale has been or will be
consummated in accordance with the terms set forth in the Offer; and (ii) the
Transferee agrees that it shall be bound by all of the terms and conditions of
this Agreement and any other terms and conditions reasonably imposed by VUSA
(but shall have none of the rights of ABC unless otherwise agreed to herein or
subsequently agreed to in writing by VUSA. If the sale is proposed to be made
at a price or upon terms or conditions which are different from those set forth
in the Offer, then ABC shall again fully comply with the procedures herein
required to be observed in order to sell its Shares.
(c) During the thirty (30) day period described in paragraph (iv)
of subsection (b) of this Section, VUSA shall have the initial right to redeem
an of the Offered Shares at the same price and on the same terms and conditions
set forth in the Offer by notifying ABC in writing of the exercise of such
right. If VUSA fails to agree to redeem all of the Offered Shares, Viragen
shall have the right to purchase all of such remaining Offered Shares at the
same price and on the same terms and conditions set forth in the Offer by so
notifying ABC in a writing delivered by hand within the foregoing thirty (30)
day period. In the event VUSA and Viragen fail to redeem and/or purchase all of
the Offered Shares, ABC shall be free to sell the Offered Shares as
contemplated in subsection (b) of this Section.
(d) VUSA shall redeem, Viragen shall purchase and ABC shall
surrender to VUSA or sell to Viragen the number of Shares subject to the
respective written elections made pursuant to subsection (c) of this Section at
the principal office of VUSA on such date or dates which shal1 be mutually
determined by ABC and VUSA, but which shall not be later than ten (10) days
after the commencement of the thirty (30) day period referred to in subsection
(c) of this Section (hereinafter referred to as a "Closing"). At each Closing,
VUSA and/or Viragen, as the case may be, shall tender the consideration set
forth in the Offer for the Offered Shares to be redeemed or acquired by it, and
ABC shall surrender to VUSA and/or Viragen one or more stock certificates
representing such Offered Shares together with such duly executed stock powers
as are necessary to transfer ownership to such Shares to VUSA and/or Viragen,
as the case may be. If appropriate, the terms of payment set forth in the Offer
shall be apportioned among the Offered Shares to be redeemed or purchased.
(e) The foregoing notwithstanding, in the event that ABC or any
permitted transferee or assign (the "Selling Party") shall desire to dispose of
any of the Shares in an ordinary market transaction following such time as VUSA
shall have completed a public offering of its Common Stock, a public trading
market shall exist for VUSA's Common Stock and the Selling party is eligible
to effect sales of thc Shares as registered shares or in accordance with Rule
144 under the Securities Act of 1933, the following procedures shall apply. The
Selling Party shall send by facsimile written notice to VUSA of its intent to
effect sales of all or some of the Shares (the "Noticed Shares") in an ordinary
market transaction. VUSA shall have seven days from the date of notice to
provide or cause to be provided through a separate buyer cash to the Selling
Party an amount equal to the Purchase Price (as hereinafter defined) multiplied
times the
2
<PAGE> 31
number of Noticed Shares. The purchase price (the "Purchase Price") per share
of Common Stock shall be equal to the closing bid price for VUSA Common Stock
on the securitics exchange or in the principal securities market on the date
that VUSA provides its reciprocal notice of the commitment by VUSA or such
other buyer to purchase the Noticed Shares. In the event VUSA does not so
provide or cause to be provided such amount within seven days of the Selling
Party's notice, then the Selling Party shall be free without restriction for 30
days to sell the Noticed Shares. If the Noticed Shares are not sold during such
subsequent 30-day time period, then the Selling Party prior to any future sale
of the Noticed Shares must again fully comply with all the procedures set forth
herein.
3. TERMINATION. This Agreement shall be effective for a period
beginning with the date hereof and continuing for either the earlier to occur
of (i) ABC or the PIBCs shall no longer beneficially own any shares of Common
Stock of VUSA or (ii) the termination of the Agreement for any reason.
4. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance
with the law of the State of Delaware notwithstanding the laws that might
otherwise govern under applicable principles of conflicts of laws hereof.
(b) Any notice or other communication under this Agreement shall be
in writing and shall be considered given when delivered personally or sent by
facsimile (with a copy by any other means permitted for the giving of notices
under this Agreement), or three days after being mailed by registered mail,
return receipt requested, to the parties at the addresses specified in the
first paragraph or this Agreement.
(c) This Agreement contains a complete statement of all of the
arrangements among the parties with respect to its subject matter, and cannot
be changed or terminated orally.
(d) This Agreement may be executed in two or more counterparts,
each of which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
AMERICAN BLOOD CENTERS, INC., A
NON-PROFIT ARIZONA CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
VIRAGEN, INC., A DELAWARE CORPORATION
By:
-------------------------------------
Gerald Smith, President
VIRAGEN U.S.A., INC., A DELAWARE
CORPORATION
By:
-------------------------------------
Charles F. Fistel, Executive Vice President
3
<PAGE> 32
INVESTMENT LETTER
Viragen U.S.A. Inc.
865 S.W. 78th Avenue
Suite l00
Plantation, Florida 33324
Gentlemen:
The undersigned hereby represents and warrants to Viragen U.S.A., Inc.
(the "Company"), that (i) the ________ shares of the Company's Common Stock,
$.01 par value (the "Securities") which are being acquired by the undersigned
are being acquired from the Company for its own account and for investment and
not with a view to the public resale or distribution thereof; (ii) the
undersigned will not sell, transfer or otherwise dispose of the Securities
except in compliance with the Securities Act of 1933, as amended (the "Act");
and (iii) the undersigned is aware that the Securities are "restricted
securities" as that term is defined in Rule 144 of the General Rules and
Regulations under the Act.
The undersigned acknowledges that it has been furnished with
disclosure documents, including among other things, the Company's financial
statements.
The undersigned further acknowledges that it has had an opportunity to
ask questions of and receive answers from duly designated representatives of
the Company concerning the terms and conditions persuant to which the
Securities are being offered. The undersigned acknowledges that it has been
afforded an opportunity to examine such documents and other information which
it has requested for the purpose of verifying the information set forth in the
documents referred to above.
The undersigned further acknowledges that it is fully aware of the
applicable limitations on the resale of the Securities. These restrictions for
the most part are set forth in Rule 144. The Rule permits sales of "restricted
securities" upon compliance with the requirements of such Rule. If the Rule is
available to the undersigned, the undersigned may make only routine sales of
Securities, in limited amounts, in accordance with the terms and conditions of
that Rule.
By reason of the undersigned's knowledge and experience in financial
and business matters in general, and investments in particular, the undersigned
is capable of evaluating the merits and risks of an investment in the
Securities. The undersigned is capable of bearing the economic risks of an
investment in the Securities and fully understands the speculative nature of
the Securities and the possibility of such loss.
The undersigned's present financia1 condition is such that it is under
no present or contemplated future need to dispose of any portion of the
Securities to satisfy any existing or contemplated undertaking, need or
indebtedness.
1
<PAGE> 33
Any and all certificates representing the Securities, and any and all
Securities issued in replacement thereof or in exchange therefor, shall bear
the following or comparable legends, which the undersigned has read and
understands:
"The Securities represented by this Certificate have not been
registered under the Securities Act of 1933 (the "Act"). The Securities
have been acquired for investment and may not be sold or transferred
in the absence of an effective Registration Statement for the
Securities under the Act unless in the opinion of counsel satisfactory
to the Company, registration is not required under the Act."
"The Securities represented by this Certificate are subject
to the terms of an Agreement dated July 15, 1998 and a related
Stockholders Agreement which provides for the repurchase of the
Securities evidenced by this Certificate under certain conditions. The
Securities represented by this Certificate are also subject to the
terms and conditions of a Stockholders Agreement which provides
certain restrictions on the public resale and transfer of the
Securities evidenced hereby and provides a right of first refusal and
option to purchase the Securities by the Company. A copy of the
Agreement and the Stockholders Agreement may be obtained at the
principal office of the Company."
Very truly yours,
AMERICAN BLOOD CENTERS, INC.
By:
-------------------------------------
Name: Jim MacPherson
-----------------------------------
Its: Exec. Director
-----------------------------------
Dated:
2
<PAGE> 34
EXHIBIT 4
VOTING AGREEMENT
This Voting Agreement (the "Voting Agreement") is made and entered
into July 15, 1998 by and among America's Blood Centers, Inc. ("ABC"), a
non-profit Arizona corporation with its principal offices at 725 15th Street,
N.W., Suite 700, Washington, DC 20005, and Viragen, Inc. ("Viragen"), a
Delaware corporation, and Viragen U.S.A., Inc. ("VUSA"), a Delaware corporation
and a wholly-owned subsidiary of Viragen, with their principal offices at 865
S.W. 78th Avenue, Suite 100, Plantation, Florida 33324.
WHEREAS, ABC, Viragen and VUSA are parties to an Agreement dated even
date herewith (the "Agreement");
WHEREAS, pursuant to the Agreement, ABC will be authorized to receive
shares of Common Stock of VUSA in certain events as provided for in the
Agreement; and
WHEREAS, the parties desire to provide for the orderly management of
the business and affairs of VUSA at such time as ABC receives shares of Common
Stock of VUSA, including the election of one ABC nominee as a VUSA director;
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth herein, the parties hereto agree as follows:
1. Election of ABC's Nominee. Commencing at such time as ABC receives
shares of Common Stock of VUSA under the terms of the Agreement and for the
term of this Voting Agreement, Viragen agrees that it will vote all of its
shares of Common Stock of VUSA to elect to VUSA's Board of Directors a nominee
designated by ABC, who shall meet VUSA Board's good and reasonable criteria as
specified from time to time by VUSA. The number of directors which may be
nominated by ABC shall not be affected by any increase or decrease in the
number of directors constituting the Board of Directors of VUSA.
2. Change of Director. If ABC gives written notice to Viragen of its
desire to remove ABC's designated director for any reason, Viragen shall vote
all of its shares and Viragen and VUSA shall take all other action reasonably
necessary to remove that director. If for any reason any director previously
nominated by ABC ceases to hold office, ABC shall promptly nominate an
individual to fill the vacancy so created for the unexpired term and Viragen
shall vote all of its shares and Viragen and VUSA shall take all other action
reasonably necessary to cause the individual so nominated to fill the vacancy.
3. Termination. This Voting Agreement shall be effective for a period
beginning with the date hereof and continuing for either the earlier to occur
of (i) ABC or the PIBCs (as defined in the Agreement) shall no longer
beneficially own any shares of Common Stock of VUSA or (ii) the termination of
the Agreement for any reason.
4. Miscellaneous.
(a) This Voting Agreement shall be governed by and construed in
accordance with the law of the State of Delaware notwithstanding the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof.
(b) Any notice or other communication under this Voting Agreement
shall be in writing and shall be considered given when delivered personally or
sent by facsimile (with a copy by any other means permitted for the giving of
notices under this Voting Agreement), or three days after being mailed by
registered mail, return receipt requested, to the parties at the addresses
specified in the first paragraph of this Voting Agreement.
(c) This Voting Agreement contains a complete statement of all of
the arrangements among the parties with respect to its subject matter, and
cannot be changed or terminated orally.
1
<PAGE> 35
(d) This Voting Agreement may be executed in two or more
counterparts, each of which shall be considered an original, but all of which
together shall constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Voting
Agreement on the day and year first above written.
AMERICAN BLOOD CENTERS, INC., A
NON-PROFIT ARIZONA CORPORATION
By:
-------------------------------------
Name: Jim MacPherson
-----------------------------------
Title: Exec. Director
----------------------------------
VIRAGEN, INC., A DELAWARE CORPORATION
By:
-------------------------------------
Gerald Smith, President
VIRAGEN U.S.A., INC., A DELAWARE
CORPORATION
By:
-------------------------------------
Charles F. Fistel, Executive Vice President
2
<PAGE> 1
Exhibit(10)(LX)
VIRAGEN--ARC BUFFYCOAT SUPPLY AGREEMENT
This Agreement ("Agreement"), made and entered into as August 12, 1998,
(the "Effective Date") by and between the American National Red Cross, a
charitable and not-for-profit corporation with principal offices in Falls
Church, Virginia 22042 ("ARC"), Viragen, Inc., a Delaware corporation with
principal place of business in Plantation, Florida ("Company"), Viragen U.S.A.,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, also
located in Plantation, Florida ("VUSA").
WHEREAS, ARC's mission is to provide a safe, reliable, and cost effective
supply of blood and blood services;
WHEREAS, ARC is the pre-eminent provider of blood and blood services in the
United States, serving more than 3,000 hospitals through the generous donations
of some 22,000 people daily;
WHEREAS, ARC, as a by-product of its blood collection activities, collects
Buffycoats;
WHEREAS, ARC desires to become a supplier to VUSA of Buffycoats (as that
term is hereinafter defined).
WHEREAS, VUSA desires to become a buyer of Buffycoats from ARC.
WHEREAS, VUSA wishes to purchase from ARC, and ARC wishes to sell to VUSA,
Buffycoats to be used by VUSA in the manufacture, testing, distribution and sale
of VUSA Buffycoat derived products, including human leukocyte-derived alpha
interferon ("Natural Alpha Interferon");
WHEREAS, ARC and VUSA have previously entered into a Confidentiality
Agreement executed and dated January 24, 1996, a Letter of Intent executed and
dated June 5, 1996, and a Heads of Agreement dated July 2, 1997, all of which
are superseded by, and merged into, this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, VUSA and ARC agree as follows:
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"AFFILIATE" of any person shall mean any other person which controls, is
controlled by, or is under common control with such specified person, where
"control," including the terms "controlling" and "controlled," means the power
to direct the management and policies of a person, directly or indirectly,
whether through the ownership of securities or partnership or other ownership
interests, by contract, or otherwise.
________________________________________________________________________________
Confidential 1 of 20 8/18/98
<PAGE> 2
"AVAILABLE SUPPLY" shall mean for each calendar quarter the number of Buffycoats
produced by ARC and available for sale to VUSA.
"BUFFYCOATS" "BUFFYCOAT" shall mean individual shipping units of packaged source
human leukocytes produced by ARC from whole blood unit collections.
"BUFFYCOAT PURCHASE ORDER" shall mean VUSA's firm order for the purchase and
delivery of a specific quantity of Buffycoats meeting the Specifications to be
delivered by ARC during a calendar quarter of the Term in accordance with the
delivery schedule accompanying such purchase order and this Agreement.
"CONFIDENTIAL INFORMATION" shall--
(A) With respect to the Company and VUSA include the Specifications,
trade secrets, private or secret processes, methods, information,
scientific and technical formulas and ideas, as they exist from time to
time, lists concerning VUSA's and the Company (or any of the Company's
or VUSA's Affiliates) products, services, business records and plans,
inventions, product design, product specifications, information,
proprietary equipment, price structure, discounts, costs, computer
programs and listings, source codes and/or object codes, copyrights,
patent rights, moral rights, design rights, trademarks, proprietary
information, formulae, protocols, standard operating procedures, forms,
written, graphic or printed documents, materials and documentation, in
original or duplicate form, procedures, training methods, technical
information, databases, clinical data, algorithms, marketing activities
and procedures, method for operating of VUSA's and the Company's
business, credit and financial data concerning VUSA and the Company (or
any of the Company's or VUSA's Affiliates), and it shall also include
information which is mental, not physical.
(B) With respect to ARC include, trade secrets, private or secret
processes, methods, information, scientific and technical formulas and
ideas, as they exist from time to time, business records and plans,
inventions, product design, product specifications, information,
proprietary equipment, price structure, discounts, costs, computer
programs and listings, source codes and/or object codes, copyrights,
patent rights, moral rights, design rights, trademarks, proprietary
information, formulae, protocols, standard operating procedures, forms,
written, graphic or printed documents, materials and documentation, in
original or duplicate form, procedures, training methods, technical
information, databases, clinical data, algorithms, marketing activities
and procedures, method for operating of ARC's business, credit and
financial data concerning ARC, the terms and conditions of this
Agreement, and it shall also include information which is mental, not
physical.
(C) "Confidential Information" under (a) and (b) above shall include
all information which is provided by (or on behalf of) a party to the
other parties hereunder (through written, electronic, visual, oral or
other means) and (i) is of a type of information indicated or marked as
confidential (or similar legend), or (ii) which the disclosing party
otherwise informs the receiving party is confidential (or similar
status), or (iii) is
________________________________________________________________________________
Confidential 2 of 20 8/18/98
<PAGE> 3
disclosed under circumstance that the receiving party should reasonably
know to be a confidential disclosure, or (iv) is developed through use
of or access to a party's Confidential Information. Confidential
Information shall not include any information which the recipient can
clearly and convincingly demonstrate: (a) was known to the recipient
before receipt under this (and any prior) Agreements, as evidenced by
recipient's written records, (b) is or becomes available to the
receiving party on a non-confidential basis from a source which, to the
receiving party's knowledge and reasonable belief, is not prohibited
from disclosing such information to the receiving party by a legal,
contractual, or fiduciary obligation to the other party, or (c) is or
becomes readily, generally and publicly available other than as a
result of a disclosure by the receiving party or its representatives or
employees.
"REGISTRATION RIGHTS AGREEMENT" shall mean the agreement between ARC and the
Company attached to and incorporated into this Agreement as Exhibit 4b.
"SECTIONS," "SCHEDULES" & "EXHIBITS" All references herein to Sections,
Schedules or Exhibits shall mean Sections of and Schedules and Exhibits to this
Agreement unless otherwise specified.
"SPECIFICATIONS" shall mean the specifications for the Buffycoats developed and
owned by VUSA provided under this Agreement and set forth in Exhibit 1, as
amended by the parties from time to time upon approval by ARC and VUSA. The
Specifications for any shipment of Buffycoats shall be those Specifications in
effect at the time such shipment is ordered, unless ARC and VUSA specifically
agree otherwise in writing.
"SUPPLY PERIOD" shall mean each of the successive two (2) year periods,
beginning with the Effective Date, during which the volume discount price
schedule and rebate program for the two year period is established as set forth
in Exhibit 2 and this Agreement.
"TERM" shall mean the period from the Effective Date hereof to the fifteenth
anniversary of such date, or such earlier date on which this Agreement may be
terminated pursuant to Section 6, or such later date covered by any extensions
or renewals to this Agreement.
"WARRANT AGREEMENT" shall mean the agreement between ARC and the Company, titled
"Warrant for Purchase of Shares of Common Stock" attached to and incorporated
into this Agreement as Exhibit 4a.
TERMS
1. PURCHASE AND SALE OF BUFFYCOATS
1.1 ARC USAGE OF VUSA'S BUFFYCOAT SPECIFICATIONS. ARC agrees to supply
Buffycoats to VUSA in accordance with the Buffycoat Specifications as set forth
in Exhibit 1.
________________________________________________________________________________
Confidential 3 of 20 8/18/98
<PAGE> 4
ARC shall use VUSA's Buffycoat Specifications during the Term of this
Agreement for the sole purpose of supplying Buffycoats to VUSA and/or its
designated Affiliates or designees.
(a) VUSA'S PURCHASE OF ARC BUFFYCOATS. The price per Buffycoat
for such purchases shall be based on the volume discount price schedule
and rebate program for the Supply Period, as provided in Exhibit 2. The
re-negotiation of the volume discount price schedule and rebate program
shall commence six (6) months prior to the expiration of each Supply
Period.
(b) FORECASTS. Thirty (30) days prior the beginning of each
calendar quarter of the Term, VUSA shall provide ARC with a forecast of
its requirements for Buffycoats needed from ARC for manufacture into
Buffycoat derived products for the immediately following and next
subsequent calendar quarters. Thirty (30) days prior the beginning of
each calendar quarter of the Term, ARC shall provide VUSA with a
forecast of its Available Supply for the immediately following and next
subsequent calendar quarters. Such forecasting by ARC and VUSA shall
commence with the Effective Date and continue through the Term. Thirty
(30) days prior to the beginning of each calendar quarter (beginning
with the second calendar quarter of the Term), VUSA at its sole option
and discretion may submit a Buffycoat Purchase Order to ARC for such
calendar quarter. ARC, in its sole discretion, may accept such
Buffycoat Purchase Order. VUSA shall be obligated to assume title to
and take possession of all Buffycoats ordered by VUSA under a Buffycoat
Purchase Order accepted by ARC and produced and delivered by ARC that
conform with the Specifications and delivered and accepted in
accordance with Section 2.
1.2 PAYMENTS. VUSA shall be obligated to pay ARC for Buffycoats ordered and
accepted by VUSA that conform with the Specifications in accordance with payment
requirements and volume discount price schedule and rebate program set forth
herein and in Exhibit 2.
(a) FORM OF PAYMENTS. ARC may, at its option, request in
writing 15 days prior to any invoice due date, payment for Buffycoats
supplied to VUSA in shares of the Company's common stock instead of
cash. If ARC elects to receive payment in shares of Company's common
stock, the formula for the determination of the number of shares of the
Company's common stock to be issued shall be calculated by dividing the
amount of monies due ARC by the product of (i) 100% minus the discount
percentage set forth in Exhibit 3 hereto, and (ii) the average closing
price of the Company's shares for the five (5) trading days prior to
the payment due date. ARC shall have registration rights with respect
to shares received in lieu of cash payments hereunder, as defined in
the Registration Rights Agreement attached hereto as Exhibit 4b and
made a part hereof.
(b) RIGHT TO PURCHASE. The Company or any of its Affiliates or
designees shall have the first right to purchase any or all shares of
common stock of the Company then owned by ARC, or ARC's Affiliates, at
fair market value, in the event
________________________________________________________________________________
Confidential 4 of 20 8/18/98
<PAGE> 5
of any early termination or non-renewal of this Agreement.
Notwithstanding the foregoing, no certificates for shares of common
stock issued to ARC shall contain a legend or other reference to this
Right of Purchase, and nothing shall prohibit ARC from selling or
otherwise disposing of shares of common stock pursuant to the Warrants
Agreement and Registration Rights Agreement prior to the receipt of any
notice of the Right of Purchase hereunder.
(c) REBATES. ARC shall promptly pay VUSA a Rebate in the
amount and on the terms specified in Exhibit 2.
1.3 WARRANTS & REGISTRATION RIGHTS. Upon execution hereof, ARC shall
receive from the Company a warrant (the "Warrant") to purchase shares of its
Common Stock as specified in the Warrant Agreement attached as Exhibit 4a and
made a part hereof. ARC shall be entitled to certain registration rights from
the Company with respect to the shares underlying the Warrant and shares that
may be received by ARC in lieu of cash from Buffycoat purchases made by VUSA.
Such registration rights are specified in the Registration Rights Agreement
attached as Exhibit 4b and made a part hereof.
1.4 RECALL OF BUFFYCOATS. In the event of a recall of Buffycoats initiated
by ARC, VUSA agrees to cooperate fully with ARC in retrieving any affected
Buffycoats. In the event of a recall arising from any breach by ARC of this
Agreement, ARC shall refund to VUSA all amounts paid by or on behalf of VUSA
(including any amount paid in the form of Company Stock), and reimburse VUSA for
all reasonable costs directly incurred in connection with the recall of the
Buffycoats and products made from Buffycoats that are subject to such recall.
2. DELIVERY OF BUFFYCOATS
2.1 SHIPMENT AND ACCEPTANCE OF BUFFYCOATS. Buffycoats shall be shipped at
VUSA's expense from an ARC Blood Services Region (a "Region") to the facility
designated by VUSA (a "VUSA Facility") in such manner as VUSA and ARC shall
agree upon, and in accordance with the Specifications, Exhibit 2, and the
delivery schedule provided with the ARC accepted Buffycoat Purchase Order for
such Buffycoats. Title to Buffycoats shall be transferred to and vest in VUSA at
the time VUSA accepts the Buffycoats.
(a) VUSA shall not be required to accept Buffycoats shipped by
ARC unless each shipment is accompanied, preceded or promptly followed
by a certificate of all test results for such shipment and
certification that the shipment of Buffycoats conforms with its
Specifications, including the date, time and location where such
Buffycoat material was drawn from a blood donor. Any Buffycoats not
accepted or that are rejected, or for which the acceptance is revoked,
by VUSA shall be destroyed by VUSA in accordance with all applicable
laws and ARC requirements and Standard Operating Procedures or, if so
requested by ARC, returned to ARC at ARC's expense and instruction. ARC
shall ensure that VUSA is immediately notified of any information
regarding a shipment of Buffycoats that would reasonably suggest that
it does not conform with Specifications or otherwise should not be used
for the manufacture of parenteral use drug products (including any
adverse observations by
________________________________________________________________________________
Confidential 5 of 20 8/18/98
<PAGE> 6
FDA or other health inspectors of establishments or locations involved
in the manufacture of Buffycoats), in which case (and in the case of
any lots not accepted, or that are rejected or for which the acceptance
is revoked) such lots shall be deemed rejected and amounts paid
(including any amounts paid in the form of Company common stock) shall
be promptly refunded to VUSA or credited to VUSA's account as
designated by VUSA. VUSA, at ARC's instruction, and sole expense and
risk, will return the Buffycoat packing boxes to ARC by ARC's
designated carrier.
(b) VUSA may from time to time test or have tested, for its
own benefit, of the Buffycoat shipments and materials made therefrom.
Any shipment determined to not conform with Specifications, because of
latent defect or otherwise, shall be deemed rejected and amounts paid
(including any amounts paid in the form of Company stock) shall be
promptly refunded or credited to VUSA's account as designated by VUSA.
(c) ARC shall permit and cooperate with representatives of
VUSA, the FDA and other foreign and domestic regulatory authorities, to
audit or inspect its facilities, equipment and documents, and interview
its personnel as may be needed to assure ARC's compliance with this
Agreement and all applicable laws and regulations pertaining to its
operations.
2.2 TIMING OF SHIPMENTS OF BUFFYCOATS. Subject to the delivery schedule
provided with Buffycoat Purchase Order, VUSA and ARC shall cooperate to ensure
that the Buffycoats to be purchased by VUSA from ARC are shipped in an orderly
manner so as to allow VUSA to utilize them efficiently in the manufacture of its
products. Without limiting the generality of the foregoing ARC shall not ship
Buffycoats to be received by VUSA on any day if VUSA gives ARC written notice (a
"No Ship Notice") that the VUSA Facility will not be operating on any day or
days, ARC shall not ship any Buffycoats to be received by VUSA on such day or
days provided that the No Ship Notice is faxed by VUSA to each Region then
shipping Buffycoats to VUSA not later than noon of the day preceding the day
such Buffycoats are collected. ARC shall furnish to VUSA from time to time the
fax numbers of the Regions then shipping Buffycoats to VUSA. ARC shall notify
VUSA as soon as feasible of any event that has a material affect on ARC's
ability to deliver Buffycoats in full accordance with the Buffycoat Purchase
Order.
3. CONFIDENTIAL INFORMATION
3.1 USE. All Confidential Information of a party hereto shall be used by
the other party only during the Term and solely for the purpose of performing
its obligations hereunder. ARC shall use VUSA's Buffycoat Specifications during
the Term as defined herein for the sole purpose of supplying Buffycoats to VUSA
and/or its designated Affiliates or designees. VUSA acknowledges that ARC may
from time to time manufacture Buffycoats in accordance with specifications, that
which may be similar, or substantially the same as the Specifications herein,
and agrees that such manufacture shall not be a breach of confidentiality
provisions hereunder.
________________________________________________________________________________
Confidential 6 of 20 8/18/98
<PAGE> 7
3.2 CONFIDENTIAL TREATMENT. Each party agrees that it will keep
confidential the other party's Confidential Information and shall not, without
the prior written consent of the other party, disclose or permit the disclosure
by it or by its representatives or employees of such Confidential Information,
in any manner whatsoever, in whole or in part, except as specifically
contemplated by this Agreement, and that such party will only reveal the other
party's Confidential Information to such representatives and employees of the
receiving party who need to know the Confidential Information for the purpose of
performing the obligations of the receiving party hereunder and that such
representatives and employees will be informed by the receiving party of and
agree with the receiving party to maintain the confidential nature of the
Confidential Information.
3.3 REQUIRED DISCLOSURE. Each party agrees that, if such party becomes
legally compelled to disclose any of the other party's Confidential Information,
it will provide such other party with prompt notice so that such other party may
seek a protective order or other appropriate remedy. If such protective order or
other remedy is not timely obtained, or such other party waives compliance with
the provisions of this Section 3, the party compelled to make such disclosure
shall only furnish that portion of the Confidential Information which, on the
advice of counsel, it reasonably determines it is legally required to furnish
and will use its commercially reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded such Confidential Information.
3.4 RETURN ON TERMINATION & NOTIFICATION OF MISAPPROPRIATION. Upon
termination of this Agreement, each party shall use its commercially reasonable
efforts to return to the other party all Confidential Information acquired by it
from such other party and all copies thereof. Each party agrees that it shall
immediately notify the other party of any unauthorized disclosure or use of the
other parties' Confidential Information in its possession, and shall take and
assist such other party in taking all lawful means, including bringing and
diligently prosecuting civil and criminal complaints, to abate such unauthorized
use or disclosure.
3.5 INJUNCTIVE RELIEF. Each party hereto acknowledges and agrees that any
breach by such party of the provisions of this Section 3 would cause immediate
and irreparable harm to the other party, and that the resulting damages and
injuries to such other party would be incalculable and irremediable in terms of
monetary damages. Accordingly, the parties agree that, in the event of such
breach, the other party shall be entitled to injunctive relief and specific
performance of the covenants contained herein, without the obligation of posting
bond, in addition to any other remedy to which it may be entitled in law or
equity. The parties obtaining such injunction or equitable relief shall be
entitled to award of the cost of reasonable fees and expense of attorneys and
other experts necessary in enforcing this Agreement.
4. FORCE MAJEURE
Neither party shall be liable for any loss, damage, delay, or failure to
perform hereunder resulting from causes beyond its control, including, but not
limited to, fire, flood,
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Confidential 7 of 20 8/18/98
<PAGE> 8
earthquake, war, embargo, strikes, lockouts, labor troubles, accident,
explosion, riot, insurrection, governmental laws or regulations, taking of its
property by governmental authority, quarantine by governmental authority,
breakdown of equipment, or shortages of materials or labor or supplies of any
kind (other than shortages resulting from a party's failure to order or take
reasonable steps to procure such materials, labor, or supplies); provided, that
no Force Majeure shall apply to any event that arose from the negligent or
wrongful acts of a party, including breach of this Agreement. If either party
becomes aware of any event described in this Section 4 that could reasonably be
expected to affect such party's performance of its obligations hereunder, it
shall promptly give notice thereof to the other parties.
5. REPRESENTATIONS AND COVENANTS
5.1 REPRESENTATIONS BY ARC. ARC represents and warrants as follows:
(a) ARC is a charitable and not-for-profit corporation
chartered by Congress, duly organized and validly existing, with all
requisite corporate power and authority to carry on the business in
which it is engaged and to enter into and perform its obligations under
this Agreement.
(b) All necessary corporate proceedings of ARC have been duly
taken to authorize the execution, delivery, and performance of this
Agreement by ARC. This Agreement has been duly authorized, executed,
and delivered by ARC, constitutes the legal, valid, and binding
obligation of ARC, and is enforceable as to it in accordance with its
terms.
(c) No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any
federal, state, local, or other governmental authority is required by
ARC for its execution, delivery, and performance of this Agreement. No
consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which ARC is a party, or to
which it or any of its businesses, properties, or assets are subject,
is required for the execution, delivery, or performance of this
Agreement; and the execution, delivery, and performance of this
Agreement will not violate, result in a breach of, or conflict with any
such contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate, result in a breach of, or conflict with any
law, rule, regulation, order, judgment, or decree binding on ARC or to
which it or any of its businesses, properties, or assets are subject or
any authorizing statute or corporate bylaws of ARC. No acts taken by or
on behalf of ARC in connection with its manufacture and supply of
Buffycoats or this Agreement shall infringe or misappropriate any
license or any patent, trade secret, copyright or other intellectual
property rights.
(d) ARC will ensure the compliance with all applicable laws,
rules, regulations, and recommendations of the United States Food and
Drug Administration (including any debarment or other restrictions
under the Generic Drug Enforcement Act or other provision of law,
regulation or lawful judicial or administrative order), Environmental
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Confidential 8 of 20 8/18/98
<PAGE> 9
Protection Agency, Occupational Safety and Health Administration, and
any other federal, state, or local regulatory agency ("Agencies")
having jurisdiction over biomedical operations or the manufacturing of
the Buffycoats, and that the Buffycoats shall conform with the
Specifications and any certification of test results provided under
2.1(a), and shall maintain in good and valid effect all permits,
licenses and other approvals necessary for it to lawfully perform its
obligations hereunder, and shall ensure the use of professional and
prudent care in the manufacture and supply of the Buffycoats; provided,
that violations of such laws, rules, regulations, and recommendations
shall not be deemed a breach of this warranty or cause for termination
by VUSA or the Company unless (i) such violations might materially
effect either the supply of Buffycoats under this Agreement or VUSA's
liability for acceptance and use of such Buffycoats, and (ii) such
violations are not promptly remedied by ARC in a time and manner
reasonably satisfactory to VUSA.
(e) ARC further warrants that it is (i) is acquiring the
Common Stock and the Warrant contemplated hereby for the purpose of
investment and not with a view toward any distribution thereof in
violation of the Securities Act, (ii) has had the opportunity to ask
questions of the officers and directors of, and has had access to
information concerning, the issuer and the terms of such Common Stock
and the Warrant, (iii) is an "accredited investor" as defined in Rule
501(a) under the Securities Act, (iv) has such knowledge,
sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the investment in
such Common Stock and the Warrant, (v) has so evaluated the merits and
risks of such investment, (vi) is able to bear the economic risk of
such investment and (vii) is able to afford complete loss of such
investment. ARC will not, directly or indirectly, offer, transfer,
sell, assign, pledge, hypothecate or otherwise dispose of all or any
part of such Common Stock or the Warrant (or solicit any offers to buy,
purchase, or otherwise acquire any of the foregoing), absent
registration or an exemption from registration under the Securities
Act.
5.2 REPRESENTATIONS AND COVENANTS BY VUSA AND THE COMPANY.
The following representations and warranties shall be deemed to be given to
ARC by VUSA and, where specifically indicated, by the Company, on the date first
above written and on the date ARC elects payment in the form of Company common
stock pursuant to Section 1.2(a):
(a) The Company and VUSA are each a corporation duly
organized, validly existing, and in good standing under the laws of
Delaware, with all requisite corporate power and authority to carry on
the business in which it is engaged and to enter into and perform its
obligations under this Agreement. The Company and VUSA are each duly
qualified and in good standing as a foreign corporation in each
jurisdiction in which failure to so qualify would have a material
adverse effect on its business, properties, or assets.
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Confidential 9 of 20 8/18/98
<PAGE> 10
(b) All necessary corporate proceedings of the Company and
VUSA have been duly taken to authorize the execution, delivery, and
performance of this Agreement by the Company and VUSA. This Agreement
has been duly authorized, executed, and delivered by the Company and
VUSA, constitutes the legal, valid, and binding obligation of the
Company and VUSA, and is enforceable as to it in accordance with its
terms. The shares covered by the Warrant and Section 1.2(a) (except as
provided in this Agreement, the Warrant Agreement, and applicable laws
and regulations) have been reserved for issuance and are, and when
issued shall be, duly authorized and, when issued pursuant to the terms
of this Agreement and the Warrant Agreement, shall be duly and validly
issued, fully paid and nonassessable, without any personal liability
attaching to the ownership thereof, and the issuance of such shares
will not violate any preemptive rights of stockholders. ARC (except as
provided in this Agreement, the Warrant Agreement, and applicable laws
and regulations) will receive good title to the shares, when issued,
free and clear of all liens, charges, security interests, encumbrances,
and voting trusts of every kind and nature whatsoever, other than those
arising from the actions or failure to act of ARC. No stockholder
approval is required for the Company to issue and deliver the Shares to
be issued pursuant to this Agreement (except as provided in this
Agreement, the Warrant Agreement, and applicable laws and regulations).
(c) No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any
federal, state, local, or other governmental authority is required by
the Company or VUSA for its execution, delivery, and performance of
this Agreement. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to which the
Company or VUSA is a party, or to which it or any of its businesses,
properties, or assets are subject, is required for the execution,
delivery, or performance of this Agreement; and the execution,
delivery, and performance of this Agreement will not violate, result in
a breach of, or conflict with any such contract, agreement, instrument,
lease, license, arrangement, or understanding, or violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment,
or decree binding on the Company or VUSA or to which it or any of its
businesses, properties, or assets are subject or any provision of
Company or VUSA's certificate of incorporation or bylaws.
(d) As of March 31, 1998, the authorized capital of Company
consists of (i) 75,000,000 shares of Common Stock, of which
approximately 52,710,635 shares are issued and outstanding (and 606,277
held as treasury stock), and (ii) 1,000,000 shares of preferred stock,
3,350of which are issued and outstanding. All outstanding shares of
capital stock are duly and validly issued, fully paid, and
nonassessable.
(e) The Company has delivered to ARC a true and correct copy
of the Company Annual Report on Form 10-K for the fiscal year ended
June 30, 1997 as filed with the Securities and Exchange Commission (the
"Commission"). The Company shall deliver to ARC, promptly as filed, a
true and correct copy of each report filed by the Company with the
Commission on Form 10-K, 10-Q, or 8-K (collectively, "SEC
________________________________________________________________________________
Confidential 10 of 20 8/18/98
<PAGE> 11
Reports"), and shall deliver to ARC promptly as mailed a copy of all
communications distributed to the holders of its Common Stock
(collectively, "Stockholder Communications"). The foregoing obligations
shall remain in effect so long as any shares remain to be issued
pursuant to this Agreement.
(f) The Company has timely filed with the Securities and
Exchange Commission ("SEC") all reports required to be filed under
Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as
amended ("1934 Act"). As of their respective dates, such reports
complied in all material respects with applicable SEC requirements and
did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the Company
shall have no liability for any breach of the representation and
warranty set forth in this sentence unless the Company commits a breach
thereof by making with scienter any such untrue statement of a material
fact or omitting with scienter to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(g) VUSA will ensure the compliance with all applicable laws,
rules, regulations, and recommendations of the U.S. States Food and
Drug Administration, Environmental Protection Agency, Occupational
Safety and Health Administration, and any other federal, state, or
local regulatory agency (collectively "Agencies") having jurisdiction
over the manufacturing of Natural Alpha Interferon; provided, that
violations of laws, rules, regulations, and recommendations shall not
be deemed a breach of this warranty or cause for termination by ARC
unless such violations (i) are cited by such Agencies as posing a
material and continuing threat to the public health, and (ii) are not
promptly remedied by VUSA in a time and manner satisfactory to such
Agencies.
6. TERMINATION
6.1 TERM OF AGREEMENT. The initial term of this Agreement shall be for
fifteen (15) years from the Effective Date.
(a) During the seventh year of this Agreement, any party may
terminate it with or without cause upon delivery to the other parties
of written notice at least ninety (90) days before the seventh
anniversary date, in which case it shall be terminated on, but no
earlier than, the seventh anniversary of the Effective Date.
(b) If the Agreement is not terminated on its seventh
anniversary, then the Agreement shall automatically be extended through
its eleventh anniversary.
(c) Upon the eleventh anniversary of the Effective Date, and
for each year thereafter, this Agreement shall automatically renew,
without limitation, for successive one (1) year periods unless a party
delivers to the other parties written notice at least
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Confidential 11 of 20 8/18/98
<PAGE> 12
ninety (90) days before the subsequent anniversary date that it will
not renew the Agreement.
(d) Six months prior to the end of the initial Supply Period,
the parties agree to negotiate in good faith prices, discounts, rebates
and quantities for the subsequent Supply Period. Notwithstanding
anything to the contrary herein, no party shall be obligated in any
manner whatsoever to agree on any particular terms for prices
discounts, rebates or quantities for the subsequent Supply Period,
other than the terms that such party in its sole commercial discretion
deems acceptable, which may take into account, among other
considerations, the performance of the other parties under this
Agreement, the availability of and terms obtainable from alternative
vendors and suppliers, and future requirements and available supply. A
failure by the parties to agree upon price, discounts, rebates or
quantities for prior to the first two calendar quarters of the Supply
Period for which such negotiations apply shall not serve to negate,
modify or terminate this Agreement. If the parties fail to agree upon
the prices, discounts, rebates and quantities for the subsequent Supply
Period prior to the beginning of Supply Period, then all rights and
obligations of the parties under this Agreement (except for the
confidentiality and quality assurance provisions and the payment of any
amounts or rebates due under this Agreement), shall be temporarily
suspended on a quarterly basis until such time as the parties agree to
such terms; provided, that if the parties do not reach a definitive and
complete agreement on the supply terms for the subsequent Supply Period
prior to the end of the second calendar quarter of such Supply Period
then this Agreement shall at the election of and notice by either party
become immediately terminated.
6.2 RIGHTS TO TERMINATE. This Agreement may be terminated prior to the
scheduled end of the Term by a party (the "terminating party") as follows, by
notice as provided in Section 6.1:
(a) by any party, if another party breaches in any material
respect any of its material obligations or warranties under this
Agreement and such breach, if capable of being cured, shall not have
been cured within 90 days after notice of such breach to the breaching
party from the terminating party or, if such breach is capable of being
cured but not within such 90-day period, then within such period as is
reasonably necessary to effect a cure so long as the breaching party
diligently pursues such cure during such extended period; or
(b) by any party upon the entry of a decree or order by a
court having jurisdiction adjudging the other party a bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment, or composition of or in respect of such other party, under
federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in
effect for a period of 60 days; or the commencement by such other party
of a voluntary case under any such law, as now or hereafter
constituted, or the consent by it to the institution of
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Confidential 12 of 20 8/18/98
<PAGE> 13
bankruptcy or insolvency proceedings against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under
any such law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee,
sequestrator, or similar official of it or of any substantial part of
its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate
action by such other party in furtherance of any such action; or
(c) termination of the Agreement is required for ARC to (i)
comply with its Congressional Charter, or (ii) maintain its status as a
tax exempt entity; or (iii) comply with the regulations or lawful
orders of the U.S. FDA.
6.3 NOTICE OF TERMINATION. Notice of termination in accordance with Section
6.2 may be given by the terminating party, in the case of termination in
accordance with (i) Section 6.2(a), at any time after the end of the period
during which the other party has the right to cure the breach giving rise to
such right of termination and provided such breach has not been cured at the
date of the giving of such notice or (ii) Section 6.2(b), at any time after
occurrence of the event giving rise to such right of termination.
6.4 CONTESTED TERMINATION. If a party shall give notice of termination of
this Agreement pursuant to Section 6.3 and the other party shall, within five
days of receipt of such notice, commence legal proceedings contesting the
terminating party's right to so terminate this Agreement, the parties shall
continue to perform under this Agreement until the resolution of such
controversy.
6.5 EFFECT OF TERMINATION. Termination, expiration, cancellation, or
abandonment of this Agreement through any means or for any reason shall not
relieve the parties of any obligation accruing prior thereto and shall be
without prejudice to the rights and remedies of either party with respect to any
antecedent breach of any of the provisions of this Agreement. The obligations of
the parties in Sections 1.2(b), 1.2(c), 1.5, 2 (with respect to product which
has been delivered to or ordered by VUSA under this Agreement), 3, 4 (with
respect to continuing obligations), 5.1(c), 5.1(d), 5.2(e), 6.4, 7, 8, and 9
shall survive any termination or expiration of this Agreement. The rights and
obligations of the parties under the Warrant Agreement and under the
Registration Rights Agreement in the event of any suspension, termination,
expiration or non-renewal of this Agreement, loss of preferential rights
hereunder, shall be as set forth in those agreement respectively.
7. INDEMNIFICATION
7.1 INDEMNIFICATION BY VUSA AND COMPANY. Irrespective of any due diligence
investigation conducted by ARC or any of its representatives with regard to the
transactions contemplated hereby, VUSA, and the Company so long as VUSA is an
Affiliate of the Company (provided that the Company's indemnification, defense
and hold harmless
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Confidential 13 of 20 8/18/98
<PAGE> 14
obligations shall continue with respect to any Loss to the extent that it arises
out of events, acts or omissions occurring prior to the date VUSA ceases to be
an Affiliate of the Company), agrees to indemnify, defend, and hold ARC and its
directors, officer, employees, volunteers, agents and Affiliates (collectively
"ARC Indemnitees") harmless from and against any and all liabilities,
obligations, damages, losses, demands, claims, actions, causes of action,
deficiencies, costs, penalties, interest and expenses (including, without
limitation, reasonable expenses of investigation and fees and disbursements of
counsel and other professionals) (all collectively, "Losses"), which such ARC
Indemnitees may incur, suffer, become liable for, or which may be asserted or
claimed against them, to the extent that such Losses are a result of--
(a) any misrepresentation or breach of warranty made in this
Agreement by VUSA or the Company; or
(b) the failure of VUSA or the Company to comply with any of
the covenants or other agreements of VUSA or the Company contained in
this Agreement; or
(c) any claims of misappropriation or infringement of any
patent, copyright, trademark, service mark, trade name, trade secret or
similar proprietary rights in any way relating to the Specifications,
Omniferon, or other product manufactured from the Buffycoats, and which
is brought against the ARC Indemnitee because of this Agreement and not
because of such ARC Indemnitee separate acts; or
(d) the use, manufacture, production, advertising, sale, offer
for sale, transfer or other disposition of relating to Omniferon, or
any other product manufactured from the Buffycoats pursuant to this
Agreement, and which is brought against the ARC Indemnitee because of
ARC's supply of Buffycoats under this Agreement and not because of such
ARC Indemnitee separate acts; or
VUSA and the Company shall not be obligated to indemnify, defend or hold the ARC
Indemnitees harmless for any Claims to the extent that such Claims are caused by
or arises out of any wrongful or negligent act or omission of ARC or its
directors, officers, agents, volunteers or employees, including without
limitation the failure of the Buffycoats provided under this Agreement to
conform with the Specifications or their breach of this Agreement or the ARC
warranties.
7.2 INDEMNIFICATION BY ARC. Irrespective of any due diligence investigation
conducted by VUSA and the Company or any of their representatives with regard to
the transactions contemplated hereby, ARC agrees to indemnify, defend, and hold
VUSA, and the Company so long as VUSA is an Affiliate of the Company (provided
that the ARC's indemnification, defense and hold harmless obligations to the
Company shall continue with respect to any Loss to the extent that it arises out
of events, acts or omissions occurring prior to the date VUSA ceases to be an
Affiliate of the Company), and their respective directors, officer, employees,
agents and Affiliates (collectively "VUSA/Company Indemnitees") harmless from
and against any and all Losses (as such term is defined in Section 7.1), which
such VUSA/Company Indemnitees may incur, suffer, become liable for, or which may
be asserted or claimed against them, to the extent that such Losses are a result
of a result of--
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Confidential 14 of 20 8/18/98
<PAGE> 15
(a) any misrepresentation or breach of warranty made in this
Agreement by ARC; or
(b) the failure of ARC to comply with any of the covenants or
other agreements of ARC contained in this Agreement or any certificate
of analysis provided under 2.1(a).
ARC shall not be obligated to indemnify, defend or hold the VUSA or Company
Indemnitees harmless for Claims to the extent that such Claims are caused by or
arise out of a wrongful or negligent act or omission of VUSA or the Company or
their directors, officers, agents, or employees, including without limitation,
their failure to take action upon receipt of a notice by ARC of positive test
results, or their breach of this Agreement or the VUSA or Company warranties,
but excluding any negligence or fault by VUSA/Company Indemnitees in failing to
detect or determine that a shipment of Buffycoats fails to conform with
Specifications.
7.3 RELATIONSHIP WITH THE REGISTRATION RIGHTS AGREEMENT. Each party agrees
that with respect to any litigation or claim covered by the indemnifications in
the Registration Rights Agreement, attached to and incorporated into this
Agreement as Exhibit 4b, the Registration Rights Agreement shall govern and not
this Section 7. Each party agrees that with respect to any litigation or claim
not covered by the indemnifications in the Registration Rights Agreement, this
Section 7 shall govern and not the Registration Rights Agreement.
7.4 INSURANCE. ARC and, collectively, the Company and VUSA shall maintain
during the Term of this Agreement the following policies of insurance (the
"Policies") in the amounts specified:
(a) (1) Commercial general liability insurance in an amount of
at least $5,000,000. (2) Professional Liability Insurance in an amount
not less $5,000,000 specifically insuring claims arising from
performance of services as defined in this Agreement and related
material, including but not limited to, coverage for all expenses
including attorney's fees, incurred in the investigation, negotiation,
arbitration, and defense of any suit or claim for damages including
lost earnings of the other party. The parties agree that in the case of
the Company and VUSA the obligation to obtain such Professional
Liability Insurance shall be satisfied by their obtaining and
maintaining the Clinical Trials Liability and Products Liability
policies as set forth under 7.4(b); provided that such policies cover
claims arising from errors and omissions of the Company and VUSA in the
design, manufacture and testing of their products. (3) Auto Liability
policy in an amount not less than $300,000. (4) Worker's Compensation
coverage covering each party's own employees with statutory limits for
each jurisdiction where the work required under this Agreement is
performed (including monopolistic states if any work is to be performed
in one or more of them) and an employer's liability policy with at
least the following limits: $250,000 per accident; $500,000 per
disease, and $250,000 disease (each employee).
(b) VUSA also shall maintain during the Term of this Agreement
the following policies: (i) Upon initiation and during the conduct of
human clinical studies using
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Confidential 15 of 20 8/18/98
<PAGE> 16
products manufactured from Buffycoats, either a Products Liability or
Clinical Trials Liability Policy specifically insuring claims for
bodily injury, death, or property damage arising from development and
clinical testing of any products manufactured from the Buffycoats in an
amount not less than $5,000,000 per occurrence and in the aggregate.
(ii) Upon initiation of commercial manufacture, distribution or sale
(whichever first occurs) of products manufactured from Buffycoats and
thereafter, VUSA shall maintain a Products Liability Policy in an
amount not less than $10,000,000. The policies required to be
maintained under this Section 7.4(b) shall name ARC as an Additional
Insured and specifically insure claims for bodily injury, death or
property damage arising from the development, creation, manufacture,
distribution or use of any product made, in whole or in part, with
Buffycoats, including, but not limited to, Omniferon.
(c) Each party shall, at its sole expense, keep in force
policies of insurance in the amounts as specified and as required by
statute with carriers reasonably satisfactory to the other, and will be
written as primary policy coverage and not contributing with, or in
excess of any coverage which the other party shall carry with respect
to the work of each party under this Agreement. Certificates of
insurance evidencing all of the above coverages and conditions (types
and amounts) shall be produced upon written request and shall remain in
full force and effect during the Term of this Agreement. Each party's
certificate(s) of insurance shall provide for not less than Thirty-
(30) days written notice, of cancellation, non-renewal or reduction in
terms and conditions that are required herein, to the other party. ARC
acknowledges and agrees that the Policies held by VUSA and/or the
Company satisfy their obligations under this Section 7.4 to the extent
they provide ARC with Certificates of insurance for such Policies and
ARC does not object within a reasonable period of time from the date of
delivery.
8. COMPANY GUARANTEE OF VUSA OBLIGATIONS.
As an inducement to ARC to enter into this Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, until such time as VUSA is not an Affiliate of the Company, the
Company hereby agrees to unconditionally guaranty the obligations of VUSA under
Sections 1.2 and 7. The obligations of the Company under this Section 8 may be
enforced directly against the Company upon any default by VUSA, and without
regard to any choice of other remedy which may be selected. Notwithstanding
anything to the contrary in the Agreement or otherwise, the parties hereby agree
that the Company's obligations under or in relation to the Agreement shall only
extend to those obligations guaranteed by the Company under this Section 8 and
such other obligations that are specifically and expressly stated in this
Agreement as undertakings or warranties by the Company on its own behalf.
9. MISCELLANEOUS
9.1 PAYMENTS. All cash payments to be made hereunder shall be made by check
or wire transfer. In the event a party shall reasonably dispute any amounts
claimed to be owed
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Confidential 16 of 20 8/18/98
<PAGE> 17
hereunder, such amounts shall not be deemed due until such dispute is resolved,
but any amounts not in dispute shall be deemed due.
9.2 FURTHER ACTIONS. At any time and from time to time, each party agrees,
at its expense, to take such actions and to execute and deliver such documents
as may be reasonably necessary to effectuate the purposes of this Agreement.
9.3 NOTICES. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given at the address of such party set forth in the preamble to
this Agreement (or to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 9.3). Any notice or
other communication given by certified mail shall be deemed given five days
after the time of mailing thereof, except for a notice changing a party's
address which will be deemed given at the time of receipt thereof. Any notice
given by other means permitted by this Section 9.3 shall be deemed given at the
time of receipt thereof. Notices shall be provided to the following persons and
addresses, subject to changes properly notified by the party making such change
to the other parties:
THE AMERICAN NATIONAL RED
CROSS BIOMEDICAL SERVICES
1616 N. Fort Myer Dr.
Rosslyn, VA 22209
ATTN: Mr. Brian McDonough,
Chief Operating Officer
Telephone No: 703-312-5642
Fax No.: 703-312-5848
VIRAGEN, INC. VIRAGEN U.S.A., INC.
865 SW 78th Avenue, Suite 100 865 SW 78th Avenue, Suite 100
Plantation, FL 33324 Plantation, FL 33324
ATTN: Gerald Smith, ATTN: Charles F. Fistel,
President Executive Vice President
Telephone No: 954-233-8746 Telephone No: 954-233-8746
Fax No.: 954-233-1412 Fax No.: 954-233-1412
9.4 PARTIES IN INTEREST. Subject to the limitations on assignment in
Section 9.8, this Agreement and all of the provisions hereof shall be binding
upon and inure solely to the benefit of each party hereto, their subsidiaries,
and any successors in interest by reason of any business combination,
reorganization or otherwise. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person (including any Affiliate of a
________________________________________________________________________________
Confidential 17 of 20 8/18/98
<PAGE> 18
party, except to the extent specifically provided otherwise herein) any rights,
benefits, obligations or remedies of any nature whatsoever under or by reason of
this Agreement.
9.5 LIMITATIONS ON LIABILITY. In no event shall any party hereto have any
liability, whether based on contract, tort (including, without limitation,
negligence), or any other legal or equitable grounds, for any loss of interest,
profit or revenue by any other party hereto or of any consequential, indirect,
special, punitive or exemplary damages suffered by any other party hereto.
9.6 HEADINGS. The headings in this Agreement are solely for convenience of
reference and shall be given no effect in the construction or interpretation of
this Agreement.
9.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by either party hereto without the prior
written consent of the other party; provided, that (a) the rights but not
obligations of any party herein may be assigned to one or more of such party's
Affiliates, (b) either party may cause any Affiliate to perform on its behalf
any of such party's obligations, and (c) either party may assign all of its
rights and obligations to any purchaser of all or substantially all of the
assets of the part of such party's or its Affiliates' business which relates to
the subject of this Agreement. No assignment shall relieve either party of
responsibility for the performance of any accrued obligation which such party
then has hereunder.
9.9 MODIFICATION. This Agreement and the Schedules hereto set forth the
entire understanding of the parties with respect to the subject matter hereof,
supersede all existing agreements among them concerning such subject matter, and
may be modified only by a written instrument duly executed by each party.
9.10 SEVERABILITY & INTEGRATION. If any term or provision of this Agreement
shall for any reason be held invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other term
or provision hereof, and this Agreement shall be interpreted and construed as if
such term or provision, to the extent the same shall have been held to be valid,
illegal, or unenforceable, had never been contained herein. This Agreement,
together with its Exhibits, are intended to be the final and full agreement
between the parties, and supersedes all prior discussions, negotiations,
agreements, letters of intent, term sheets, heads of agreements and other
written, oral and other communications; provided that all obligations under the
"Confidentiality Agreement," dated January 24, 1996 between VUSA and ARC, shall
be deemed to be continued and merged into the obligations under this Agreement.
9.11 WAIVER. Any waiver by either party of a breach of any term of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of that term or of any breach of any other term of this Agreement,
whether of the same or different nature or
________________________________________________________________________________
Confidential 18 of 20 8/18/98
<PAGE> 19
circumstance. The failure of a party to insist upon strict adherence to any term
of this Agreement on one or more occasions will not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. The provision hereunder of one or
remedies, shall be additive to all other remedies available to the parties under
this agreement or applicable law, and the exercise of such remedy shall not
limit a party in seeking or obtaining such other a remedies. Any waiver must be
in writing signed by a person who is authorized by the party making such waiver
to execute such document.
9.12 JURISDICTION. Each of the parties hereby irrevocably consents to the
jurisdiction of the courts of the State of Florida or the Commonwealth of
Virginia and of any federal court located in such State or Commonwealth in
connection with any action or proceeding arising out of or relating to this
Agreement or a breach of this Agreement. All disputes under this Agreement shall
be determined in accordance with Virginia law; provided, that disputes
pertaining securities, corporate governance and any rights or obligations
relating to the stock or warrants of VUSA or the Company shall be determined
under Delaware, and, where applicable, Federal law. The party materially and
substantively prevailing in any litigated or arbitrated dispute is entitled to
award of its costs, including the fees and expense of attorneys and other
professionals, in connection with litigating such dispute. No provision of this
Agreement shall be construed against any party by reason of that party having
drafted the same.
9.13 PUBLIC ANNOUNCEMENTS. Neither party shall issue any press release or
otherwise make any public statement with respect to this Agreement or any of the
transactions contemplated hereby without first consulting with and (unless such
press release or statement is required by applicable law or the requirements of
any listing agreement with any applicable stock exchange or inter-dealer
quotation system, or other requirement to identify its suppliers of human
leukocytes) obtaining the consent of the other party, which consent shall not be
unreasonably withheld.
9.14 NO USE OF RED CROSS NAME/EMBLEM OR OTHER MARKS. The Company and VUSA
recognizes that the "American Red Cross" name and emblem represents ARC's most
valuable assets and that substantial recognition and goodwill is associated with
this name, emblem and other various trademarks and service marks of ARC. The
Company, and VUSA shall not use the "American Red Cross" name, emblem or any
other trademarks or service marks of ARC without the prior written authorization
from ARC. Nothing in this Agreement, exclusive of Section 9.13 with respect to
the name "American Red Cross" or "ARC", constitutes such authorization.
9.15 INDEPENDENT CONTRACTORS. Each Party is performing its duties hereunder
an independent contractor and vendor-customer, and nothing herein shall create
any association, affiliation, partnership or joint venture or other relationship
between the parties hereto or any employer-employee relationship.
________________________________________________________________________________
Confidential 19 of 20 8/18/98
<PAGE> 20
9.16 LIMITATIONS. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THERE ARE
NO OTHER WARRANTIES, EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
THE AMERICAN NATIONAL RED VIRAGEN U.S.A., INC.
CROSS BIOMEDICAL SERVICES
By: /s/ Niall Conway By: /s/ Charles Fistel
Niall Conway Charles Fistel
Vice President, Manufacturing Executive Vice President
Date: August 19, 1998 Date: August 18, 1998
--------------- ---------------------
VIRAGEN, INC.
ONLY AS TO BE BOUND BY THE OBLIGATIONS
SPECIFICALLY APPLICABLE TO VIRAGEN, INC.
UNDER SECTIONS 1.3, 5.2,7.1, 7.4 & 8
By: /s/ Gerald Smith
Gerald Smith
President
Date: August 18, 1998
________________________________________________________________________________
Confidential 20 of 20 8/18/98
<PAGE> 21
EXHIBIT 1
VUSA BUFFYCOAT SPECIFICATIONS
o Delivery of Buffycoat units to VUSA shall be in less than [*] hours
from the original time of blood donation (draw).
o Buffycoats shall be made from units satisfactory for transfusion use
under applicable FDA regulations and guidelines.
o Storage, handling and transport of Buffycoats units shall be at
[*.]
o Hematocrit of [*] per Buffycoat unit.
o All FDA required and recommended transmissible disease and other
testing on all blood samples (which currently includes testing for the
following infectious diseases: HIV-I/HIV-II, HTLV-I, HBsAg, HBc, HCV,
and Syphilis) and shown to be negative (e.g., non-reactive).
o VUSA recognizes that Buffycoats may from time to time be shipped before
test results are available, in which case they shipped with a
provisional certificate of analysis for the test results and other
information that is available at the time of shipment, and will be
promptly followed by a final certificate of analysis for all test data.
o A unit of Buffycoats will be derived from a unit of whole blood that
has a volume greater than or equal to [*], and the whole blood will
have an average of approximately [*] million white blood cells per ml,
and shall contain on average not less than [*] billion white blood
cells per delivered Buffycoat unit per [*] of whole blood source.
o Packaged and labeled for shipping (transport) per ARC standard
operating procedures.
o To the extent not specifically required otherwise herein, Buffycoats
will be manufactured (including all steps pertaining thereto, such as,
but not limited to, collection, handling, storage, testing, packaging,
labeling, shipment, and documentation) in compliance with (i) FDA cGMP
and other requirements and recommendations applicable to the
manufacture of blood for transfusion, and (ii) to the extent not in
conflict with such FDA requirements and recommendations, with ARC's
standard operating procedures.
Exhibit 1
* The information redacted herefrom is the subject of a Confidentiality Request
submitted to the Securities and Exchange Commission.
<PAGE> 22
EXHIBIT 2
VOLUME DISCOUNT PRICE SCHEDULE AND REBATE PROGRAM #1
(FOR THE PERIOD EXTENDING 24 MONTHS FROM THE DATE OF
EXECUTION HEREOF)
PAYMENT TERMS:
FOB VUSA 1% 10 Net 30 from date of invoice to VUSA (Payment
due date); with invoices delivered to VUSA once each month during the Term of
the Agreement.
BUFFYCOATS PER YEAR PRICE PER BUFFYCOAT
------------------------------------------- -------------------
0 - 10,000 [*]
10,000 - 100,000 [*]
100,000 - 250,000 [*]
250,000 - 500,000 [*]
VUSA REBATE PROGRAM ON BUFFYCOAT PURCHASES
VUSA shall be entitled to receive a rebate on Buffycoat purchases (in dollars),
up to a maximum of 20% of the ARC's net gain (appreciation minus selling
expenses) on the Company's shares from the Warrant, based on the percentage net
gain accrued by ARC through the receipt of the Warrant, as follows:
VUSA REBATE
ARC NET GAIN ON VIRAGEN SHARES ON BUFFYCOAT PURCHASES
------------------------------ ----------------------
0% to 10% No Discount
10% to 25% 4%
25% to 50% 8%
50% to 75% 12%
75% to 100% 16%
Greater than 100% 20%
The rebate on actual net gains resulting from the sale of the Company's
common stock received by ARC through the exercise of the Warrant shall be paid
to VUSA in the quarter following the sale of the stock.
The rebate on unrealized net gains resulting from the increase in the
Company's share price on shares purchased or vested under the Warrant shall be
as follows:
1. The rebate for each of the four blocks of common stock underlying the
Warrant will apply specifically to the two-year period of time to which
the shares are linked (through the volume discount price schedule). The
rebate on unrealized net gains will apply to each of the four blocks of
common stock under the Warrant only once, at the end of the two-year
period linked to the common stock through the price agreement. No
rebate for unrealized gains shall be due any shares for which a rebate
based on realized gains has been paid, and no rebate for realized gains
shall be due any shares for which a rebate based on unrealized gains
has been paid.
Exhibit 2 Page 1
<PAGE> 23
2. The net unrealized gain on the shares of common stock will be
calculated at the end of each two-year period linked to each of the
four blocks of common stock under the warrant.
3. The calculation of the net unrealized gain will be based on the
increase in the Company's share price over the stated exercise price.
The Company's share price will be defined as the average of the closing
price of its common stock for the four calendar quarters preceding the
end of the two-year period. Since the shares of common stock will not
have been sold, an estimate will be made of the future selling expenses
to calculate the net unrealized gain.
4. The rebate will be applied by VUSA to its ARC account on the later of
the dates that the shares linked to the two-year period are registered
with the SEC, or three (3) months after the end of the two-year period.
Exhibit 2 Page 2
<PAGE> 24
EXHIBIT 3
DISCOUNT ON SHARES OF COMMON STOCK AS PAYMENT FOR
BUFFYCOATS
Discount from Market Price - [*]
Exhibit 3
<PAGE> 25
EXHIBIT 4
WARRANTS AND REGISTRATION RIGHTS AGREEMENT
EXHIBIT 4A
The Warrant Agreement
EXHIBIT 4B
The Registration Rights Agreement
ATTACHED AND TO BE SEPARATELY EXECUTED BY THE COMPANY
AND ARC
Exhibit 4a & 4b
<PAGE> 26
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES. ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, transferred
OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THE
SECURITIES ACT OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS OBTAINED
STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM
SUCH REGISTRATION.
August 12, 1998
VIRAGEN, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
--------------------------------------------------
ARC-1
FOR VALUE RECEIVED, VIRAGEN, INC. (the "Company"), a Delaware
corporation, having its principal offices at 865 S.W. 78th Avenue, Suite 100,
Plantation, Florida 33324, grants to THE AMERICAN NATIONAL RED CROSS, a
charitable and not-for-profit corporation having its principal offices in Falls
Church, Virginia 22042 (the "Holder"), the right to purchase from the Company up
to 500,000 fully paid and non-assessable shares of Common Stock at a price per
share (the "Exercise Price"), term and vesting schedule and conditions
hereinafter set forth.
This Warrant is issued pursuant to that certain Agreement made and
entered into as of August 12, 1998 by and among the Holder, Viragen U.S.A.,
Inc., ("VUSA") and the Company (the "Agreement"). Certain terms and conditions
pertaining to the vesting of the right to purchase shares of Common Stock of the
Company are predicated on the parties to the Agreement agreeing to certain
additional conditions as set forth in the Agreement. In addition, Section 1.2(b)
of the Agreement provides the Company or its affiliates or designees with a
right of first refusal under certain conditions as provided therein.
The term "Common Stock" means the Common Stock, par value $.01 per
share, of the Company. The number of shares of Common Stock to be received upon
the exercise of this Warrant may be adjusted from time to time as hereinafter
set forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter referred to as "Warrant Stock." The
term "Other Securities" means any other equity or debt securities that may be
issued by the Company in addition thereto or in substitution for the Warrant
Stock. The term "Company" means and includes the corporation named above as well
as (i) any immediate or more remote successor corporation resulting from the
merger or consolidation of such corporation (or any immediate or more remote
successor corporation of such corporation) with
1
<PAGE> 27
another corporation, or (ii) any corporation to which such corporation (or any
immediate or more remote successor corporation of such corporation) has
transferred its property or assets as an entirety or substantially as an
entirety.
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held subject to, all of the conditions,
limitations and provisions of the Agreement to which this Warrant is attached
and as set forth herein.
1. WARRANT SCHEDULE AND EXERCISE PRICES. This Warrant shall vest for
the number of shares of Warrant Stock, for the term and at Exercise Prices set
forth as follows:
<TABLE>
<CAPTION>
GRANT DATE VEST DATE # OF SHARES TERM EXERCISE PRICE
---------- --------- ----------- ---- --------------
<S> <C> <C> <C> <C>
August 12, 1998 August 12, 1998 50,000 2 years from vest $ 5.50/share
August 12, 1998 August 12, 2000 100,000 2 years from vest $ 7.50/share
August 12, 1998 August 12, 2002 150,000 3 years from vest $ 9.00/share
August 12, 1998 August 12, 2004 200,000 4 years from vest $11.00/share
</TABLE>
The vesting schedule for the above Warrant Stock in the Agreement is
contingent upon the Holder and VUSA executing mutually agreeable two-year
buffycoat pricing schedules and rebate program by the respective vesting dates
for the applicable Warrant Stock as provided for in Section 6.1(d) of the
Agreement. Specifically, the 100,000 block of Warrant Stock is conditioned upon
price agreement for the years (i.e. 24-month period) 2000-2002; the 150,000
block of Warrant Stock is conditioned upon price agreement by the parties for
the years 2002-2004; and the 200,000 block of Warrant Stock is conditioned upon
price agreement for the years 2004-2006. In addition, the 200,000 block of
Warrant Stock is further conditioned upon extension of the Agreement prior to
the end of year 7 as provided in Section 6.1(b) of the Agreement. The foregoing
notwithstanding, in the event the Holder and VUSA shall have failed to come to
an agreement with regard to the pricing schedule and rebate program for the
applicable two-year period supporting the vesting of the Warrant Stock by the
aforementioned vest date, then commencing with each of the respective vest dates
and for each three-month period following the vest date that the Holder and VUSA
have failed to reach such pricing and rebate agreement, one eighth (1/8) of the
proposed Warrants to be vested for that applicable two-year period shall become
null and void.
2. EXERCISE OF WARRANT. Following vesting, this Warrant may be
exercised as to the specified amount of Warrant Stock, in whole or in part, but
if in part, in minimum increments of 50,000 shares at any time, or from time to
time during the period commencing on the vesting date and expiring 5:00 p.m.
Eastern Time on the date of expiration or termination of the Agreement to which
this Warrant is attached (the "Expiration Date") or, if such day is a day on
which banking institutions in New York are authorized by law to close, then on
the next succeeding day that shall not be such a day, by presentation and
surrender of this Warrant to the Company at its principal office with the
Warrant Exercise Form attached hereto duly executed and accompanied by payment
(either in cash or by certified or official bank check, payable to the order of
the Company or by delivery of the Holder's Promissory Note in the form attached
as Exhibit A) of the Exercise Price for the number of shares specified in such
form and instruments of transfer, if appropriate, duly executed by the Holder or
its duly authorized attorney. If this Warrant should be exercised in part
2
<PAGE> 28
only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the shares purchasable hereunder. Upon receipt by the
Company of this Warrant, together with the payment of the Exercise Price at its
office in proper form for exercise, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder. The Company shall pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on exercise of this Warrant.
3. REGISTRATION RIGHTS. The Company has provided registration rights
with respect to the Warrant Stock as provided in that certain Registration
Rights Agreement dated even date herewith.
4. RESERVATION OF SHARES. The Company will at all times reserve for
issuance and delivery upon exercise of this Warrant all shares of Common Stock
or other shares of capital stock of the Company (and Other Securities) from time
to time receivable upon exercise of this Warrant. All such shares (and Other
Securities) shall be duly authorized and, when issued upon such exercise, shall
be validly issued, fully paid and non-assessable and free of all preemptive
rights.
5. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise Of this Warrant, but the
Company shall pay the holder an amount equal to the fair market value of such
fractional share of Common Stock in lieu of each fraction of a share otherwise
called for upon any exercise of this Warrant. For purposes of this Warrant, the
fair market value of a share of Common Stock shall be determined as follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the NASDAQ system, the current market value shall
be the last reported sale price of the Common Stock on such exchange or
system on the last business day prior to the date of exercise of this
Warrant or, if no such sale is made on such day, the average of the
closing bid and asked prices for such day on such exchange or system;
or
(b) if the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean
of the last reported bid and asked prices reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of
the exercise of this Warrant; or
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the current market value shall be an amount, not less than
book value thereof as at the end of the most recent fiscal year of the
C6mpany ending prior to the date of the exercise of the Warrant,
determined in such reasonable manner as may be prescribed by the Board
of Directors of the Company.
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
3
<PAGE> 29
7. ANTI-DILUTION PROVISIONS.
7.1 ADJUSTMENT FOR RECAPITALIZATION. If the Company shall at any time
subdivide its outstanding shares of Common Stock (or Other Securities at the
time receivable upon the exercise of the Warrant) by recapitalization,
reclassification or split-up thereof, or if the Company shall declare a stock
dividend or similar distribution of shares of Common Stock to its stockholders,
the number of shares of Common Stock subject to this Warrant immediately prior
to such subdivision shall be proportionately increased, and the Exercise Price
shall be proportionately decreased, and if the Company shall at any time combine
the outstanding shares of Common Stock by recapitalization, reclassification or
combination thereof, the number of shares of Common Stock subject to this
Warrant immediately prior to such combination shall be proportionately
decreased, and the Exercise Price shall be proportionately increased. Any such
adjustments pursuant to this Section 7.1 shall be effective at the close of
business on the effective date of such subdivision or combination, or if any
adjustment is the result of a stock dividend or distribution, then the effective
date for such adjustment based thereof shall be the record date therefor.
7.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case
of any reorganization of the Company (or any other a corporation, the securities
of which are at the time receivable on the exercise of this Warrant), or in case
after such date the Company (or any such other corporation) shall consolidate
with or merge into another corporation or convey all or substantially all of its
assets to another corporation, then, and in each such case, the Holder of this
Warrant upon the exercise thereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation, merger or conveyance shall
be entitled to receive, in lieu of the securities and property receivable upon
the exercise of this Warrant prior to such consummation, the securities or
property to which such Holder would have been entitled upon such consummation if
such Holder had exercised this Warrant immediately prior thereto; in each such
case, the terms of this Warrant shall be applicable to the securities or
property receivable upon the exercise of this Warrant after such consummation.
7.3 NOTIFICATION AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock receivable on the exercise of the Warrant,
the Company at its expense will promptly compute such adjustment in accordance
with the terms of the Warrant and will notify the Holder in writing of such
adjustment within 30 days of the effective date of such adjustment. When
appropriate, notice may be given in advance as part of notices required to be
mailed to the Holder pursuant to Section 7.5 hereof.
7.4 OTHER ISSUANCES. Except as otherwise expressly provided herein, the
issuance by the Company of shares of its capital stock of any class, or
securities convertible into shares of capital stock of any class, either in
connection with a direct sale or upon the exercise of rights or warrants to
subscribe therefore, or upon conversions of shares or obligations of the Company
convertible into such shares or other securities, or as compensation or
otherwise, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of or the exercise price of the Shares that remain
unexercised under the Warrant.
4
<PAGE> 30
Without limiting the generality of the foregoing, the existence of
unexercised Shares under the Warrant shall not affect in any manner the right or
power of the Company to make, authorize or consummate (i) any issuances as
described above, (ii) any or all adjustments, recapitalizations, reorganizations
or other changes in the Company's capital structure or its business; (iii) any
merger or consolidation of the Company; (iv) any issue by the Company of debt
securities, or preferred or preference stock that would rank above the Shares
issuable upon exercise of the Warrant; (v) the dissolution or liquidation of the
Company; (vi) any sale, transfer or assignment of all or any part of the assets
or business of the Company; or (vii) any other corporate act or proceeding,
whether of a similar character or otherwise.
7.5 NOTICES OF RECORD DATE, ETC. In case:
(a) the Company shall take a record of the holders of its
Common Stock (or Other Securities at the time receivable upon the exercise of
the Warrant) for the purpose of entitling them to receive any dividend (other
than a cash dividend at the same rate as the rate of the last cash dividend
theretofore paid) or other distribution, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities,
or to receive any other right; or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company to another corporation; or
(c) of any voluntary or involuntary dissolution, liquidation
or winding up of the Company, then, and in each such case, the Company shall
mail or cause to be mailed to each Holder of the Warrant at the time outstanding
a notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, or (ii) the date
on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
(or such Other Securities at the time receivable upon the exercise of the
Warrant) shall be entitled to exchange their shares of Common Stock (or such
Other Securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger conveyance, dissolution,
liquidation or winding up. Such notice shall be mailed at least 20 days prior to
the date therein specified, and the Warrant may be exercised prior to said date
during the term of the Warrant.
8. TRANSFER TO COMPLY WITH THE SECURITIES ACT. The Warrant Stock or
Other Securities may not be sold, transferred, pledged, hypothecated or
otherwise disposed of except as follows: (a) in a transaction exempt from
registration under the Securities Act including pursuant to Rule 144 thereunder;
(b) to a person who, in the opinion of counsel to the Company, is a person to
whom this Warrant or the Warrant Stock or Other Securities may legally be
transferred without registration and without the delivery of a current
prospectus under the Securities Act with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of this
5
<PAGE> 31
Warrant with respect to any resale or other disposition of such securities; or
(c) to any person upon delivery of a prospectus then meeting the requirements of
the Securities Act relating to such securities and the offering thereof for such
sale or disposition.
9. LEGEND. Unless the shares of Warrant Stock or Other Securities have
been registered under the Securities Act, upon exercise of any of the Warrants
and the issuance of any of the shares of Warrant Stock, all certificates
representing shares will bear on the face thereof substantially the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED
FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED
PURSUANT TO THE PROVISIONS OF THAT ACT OR UNLESS AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY IS OBTAINED STATING THAT SUCH DISPOSITION IS IN
COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
10. NOTICES. All notices required hereunder shall be in writing and
shall be deemed given when telegraphed, delivered personally or within two days
after mailing when mailed by certified or registered mail, return receipt
requested, to the Company or the Holder, as the case may be, for whom such
notice is intended at the address of such party as set forth on the first page,
or at such other address of which the Company or the Holder has been advised by
notice hereunder.
11. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the laws of the State
of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of the
day and year first above written.
VIRAGEN, INC.
By:
-------------------------------
Gerald Smith, President
6
<PAGE> 32
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing __________ shares of Common Stock at an
exercise price of $_________ per share of Common Stock of Viragen, Inc., a
Delaware corporation, and hereby makes payment of $__________ in payment
therefor.
----------------------------------
Signature
----------------------------------
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(If in a name other than to the registered holder of the within Warrant)
Name
- -------------------------------------------------------------------------------
(Please typewrite or print in block letters)
Address:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Social Security or
Taxpayer Identification Number:
- -------------------------------------------------------------------------------
7
<PAGE> 33
EXHIBIT A
PROMISSORY NOTE
$ _________________ [DATE]
FOR VALUE RECEIVED, THE AMERICAN NATIONAL RED CROSS, a District of
Columbia Corporation ("Maker"), having an address at 1616 N. Fort Myer Drive,
Arlington, Virginia 22209, hereby promises to pay to the order of VIRAGEN, INC.,
a Delaware corporation ("Holder"), having an address at 865 S.W. 78th Avenue,
Suite 100, Plantation, Florida 33324, the principal sum of
__________________________________ ($___________), together with simple interest
thereon at the annual rate equal to THE WALL STREET JOURNAL prime rate published
on the date hereof, at the address of Holder set forth above. The entire
principal amount of this Note, together with accrued interest thereon, shall be
payable one (1) year from the date hereof (the "Maturity Date").
Maker may prepay this Note, in whole or in part, at any time or from
time to time, without premium or penalty; provided, however, that any prepayment
will be applied first to pay accrued and unpaid interest and then in reduction
of principal.
Maker hereby waives presentment, demand, protest, notice of dishonor,
notice of nonpayment, notice of protest and diligence in collection. The
non-exercise by Holder of any of Holder's rights hereunder in any particular
instance shall not constitute a waiver thereof in that or any subsequent
instance. Any waiver of any right, term or condition hereby by Holder must be in
writing to be valid. Maker acknowledges that no oral waiver shall be binding,
nor shall Maker have the right to rely on any oral statement purporting to be a
waiver.
This Note shall inure to the benefit of Holder and Holder's successors
and assigns. This Note shall be binding upon Maker and Maker's successors and
assigns.
THE AMERICAN NATIONAL RED CROSS,
a District of Columbia corporation
By:
-------------------------------
Name:
------------------------------
Its:
-------------------------------
<PAGE> 34
EXHIBIT 4B
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of the 12th day of August, 1998, by and between THE
AMERICAN NATIONAL RED CROSS, a charitable and not-for-profit corporation having
its principal offices in Falls Church, Virginia 22042 ("ARC") and VIRAGEN, INC.,
a Delaware corporation having its principal offices at 865 SW. 78th Avenue,
Suite 100, Plantation, Florida 33324 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Registration Rights Agreement, ARC, the Company and Viragen U.S.A., Inc.
("VUSA") are entering into an Agreement made and entered into as of August 12,
1998, (the "Agreement"), which provides, INTER ALIA, for ARC to have the right
to receive payments for ARC buffycoats in cash or shares of Common Stock of the
Company (such shares of Common Stock as may be issued pursuant to such election
by ARC is hereinafter be referred to as the "Shares"), and for the issuance of
up to 500,000 shares of Common Stock upon exercise of a warrant dated even date
therewith (the "Warrant") upon the terms and conditions set forth in the
Agreement and the Warrant (such shares of Common Stock as may be issued upon
exercise of the Warrant is hereinafter referred to as the "Warrant Stock"); and
WHEREAS, the Company desires to grant to ARC the registration rights
set forth here in with respect to the Shares and the Warrant Stock:
1. REQISTRABLE SECURITIES. As used herein the term "Registrable
Security" means collectively, the Shares and the Warrant Stock; provided,
however, that with respect to any particular Registrable Security, such security
shall cease to be a Registrable Security when, as of the date of determination,
(i) it has been effectively registered under the Securities Act of 1933, as
amended (the "Securities Act") and disposed of pursuant thereto, or (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security. The term "Registrable Securities" means
any and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Article 1.
2. PIGGYBACK REGISTRATION. If, at any time, the Company proposes to
prepare and file with the Securities and Exchange Commission (the "Commission")
a registration statement covering equity or debt securities of the Company, or
any such securities of the Company held by its stockholders (in any such case,
other than in connection with a merger, acquisition or pursuant
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to Form S-8 or successor form) (for purposes of this Article 2, collectively, a
"Registration Statement"), it will give written notice of its intention to do so
by registered mail ("Notice") at least thirty (30) days prior to the filing of
each such Registration Statement to ARC. Upon the written request of ARC, made
within twenty (20) days after receipt of the Notice, that the Company include
any of the Shares and/or Warrant Stock in the proposed Registration Statement
(provided in the case of a request with regard to the Shares that VUSA and ARC
have executed mutually agreeable two-year buffycoat pricing schedules and rebate
programs as contemplated in the Agreement), the Company shall use its best
efforts to effect the registration under the Securities Act of the resale of the
Shares and/or Warrant Stock which it has been so requested to register
("Piggyback Registration"), at the Company's sole cost and expense and at no
cost or expense to ARC except as provided in Section 4E) hereof.
Notwithstanding the provisions of this Article 2, (i) the Company shall
have the right at any time after it shall have given written notice pursuant to
this Article 2 (irrespective of whether any written request for inclusion of the
Shares shall have already been made) to elect not to file any such proposed
Registration Statement, or to withdraw the same after the filing but prior to
the effective date thereof; (ii) if the Company's managing underwriter, if any,
of the offering for which a Registration Statement has been filed so requests in
writing, the Shares shall not be offered or sold until the expiration of a date
not to exceed 90 days from the effective date of the offering that gave rise to
the Piggyback Registration, but any such request and deferral of the offer and
sale shall not affect the Company's obligation to register for resale under the
Securities Act the Shares.
In the event of the termination of the Agreement by the Company and/or
VUSA pursuant to Section 6.2 thereof, the registration rights provided by this
Article 2 shall simultaneously terminate; and in the event of suspension of the
Agreement pursuant to Section 6.1(d) thereof, such registration rights shall be
correspondingly suspended. The termination or suspension of this Agreement shall
not affect the Company's and/or VUSA's obligations hereunder with respect to (i)
Warrant Stock that ARC has a vested right to acquire and/or Shares or (ii)
Warrant Stock and/or Shares subject to a then effective Registration Statement.
3. DEMAND REGISTRATION. As set forth in the Warrant, there is provided
to ARC the right to purchase up to 500,000 Shares of Common Stock of the Company
which shall vest as to certain shares of Warrant Stock at various dates
commencing with August 12, 1998 through August 12, 2004. At the time of vesting
of each tranche of Warrant Stock as provided in the Warrant, ARC shall have the
right (which right is in addition to the Piggyback Registration provided for
under Article 2 hereof), exercisable by written notice to the Company (the
"Demand Registration Request"), to have the Company prepare and file with the
Commission on one occasion as to the Warrant Stock included in the tranche which
shall have vested, at the sole expense of the Company (except as provided in
Section 4(b)), a Registration Statement so as to permit a public offering and
sale of the Warrant Stock.
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<PAGE> 36
As set forth in the Agreement, ARC has the right to receive certain
payments for ARC buffycoats in Shares. ARC shall have the right upon each
election to receive such Shares (which right is in addition to the Piggyback
Registration provided for in Article 2 hereof), and in the event the Company has
not theretofore included the Shares in any other current Registration Statement,
to have the Company prepare and file with the Commission, at the sole expense of
the Company (except as provided in Section 4(b)), a Registration Statement so as
to permit a public offering and sale of the Shares.
Once effective, the Company will be required to maintain the
effectiveness of the Registration Statement with respect to each tranche of the
Warrant Stock or Shares registered in connection therewith until the earlier of
(i) the date that all of the Warrant Stock and/or the Shares have been sold, or
(ii) the date that all holders of Warrant Stock and/or Shares receive an opinion
of counsel to the Company that all of the Warrant Stock and/or Shares may be
freely traded without registration under the Securities Act, under Rule 144
promulgated under the Securities Act or otherwise. If ARC shall give notice to
the Company at any time of its desire to exercise the registration right granted
pursuant to this Article 3, then the Company shall use its best efforts to
effect, as soon as practicable and in any event within the time period specified
in Section 4(a)(i) hereof, the registration under the Securities Act of all
Warrant Stock and/or the Shares that ARC may request to be so registered.
If ARC indicates that it intends to distribute the Warrant Stock and/or
the Shares covered by its Demand Registration Request by means of an
underwriting, ARC shall so advise the Company as a part of the notice given
pursuant to this Section 3. In the event of any underwritten public offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering. The underwriter will be selected by ARC and shall be an underwriter
reasonably acceptable to the Company.
If at any time the Company registers any Warrant Stock and/or the
Shares under the Securities Act pursuant to this Section 3, the sale or other
disposition of such Warrant Stock and/or the Shares by ARC may be made pursuant
to a Registration Statement on Form S-3 under the Securities Act as in effect on
the date hereof or any registration form under the Securities Act subsequently
adopted by the Commission that permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the
Commission, such Registration Statement shall be filed as a "shelf" registration
statement pursuant to Rule 415 under the Securities Act (or any successor rule).
Any such shelf registration shall cover the disposition of the Warrant Stock
and/or the Shares in one or more underwritten offerings, block transactions,
broker transactions, at-market transactions and in such other manner or manners
as may be specified by ARC. The Company shall use its best efforts to keep such
"shelf" registration continuously effective as long as the delivery of a
prospectus is required under the Securities Act in connection with the
disposition of the Warrant Stock and/or the Shares registered thereby and in
furtherance of such obligation, shall supplement or amend such Registration
Statement if, as and when required by the rules, regulations and instructions
applicable to the form used by the
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Company for such registration or by the Securities Act or by any other rules and
regulations thereunder applicable to shelf registrations.
Nothing herein shall require the Company to undergo an audit, other
than in the ordinary course of business.
In the event of the termination of the Agreement by the Company and/or
VUSA pursuant to Section 6.2 thereof, or in the event of the early termination,
non-renewal or suspension of the Agreement pursuant to Section 6.1 thereof, the
registration rights provided by this Article 3 shall simultaneously terminate or
be suspended, as the case may be. The termination or suspension of this
Agreement shall not affect the Company's and/or VUSA's obligations hereunder
with respect to (i) Warrant Stock that ARC has a vested right to acquire and/or
Shares or (ii) Warrant Stock and/or Shares subject to a then effective
Registration Statement.
4. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company
covenants and agrees as follows:
(a) (i) In connection with any registration under Articles 2
and 3 hereof, the Company shall use its best efforts to file the Registration
Statement as expeditiously as possible, but in no event later than forty-five
(45) days following receipt of any Notice or Demand Registration Request
therefor. The Company shall use its best efforts to cause the Registration
Statement to become effective as promptly as possible and, if any stop order
shall be issued by the Commission or order suspending qualification or
registration in any state in connection therewith, to use its reasonable efforts
to obtain the removal of such order. Following the effective date of a
Registration Statement, the Company shall, upon the request of ARC, forthwith
supply such reasonable number of copies of the Registration Statement,
preliminary prospectus and prospectus meeting the requirements of the Securities
Act, any supplements or amendments thereto, and other documents necessary or
incidental to the public offering of the Registrable Securities, as shall be
reasonably requested by ARC to permit ARC to make a public distribution of ARC's
Registrable Securities. ARC shall furnish the Company in a timely manner with
all information required by the applicable rules and regulations of the
Commission concerning the proposed method of sale or other disposition of such
Registrable Securities and such other information as may be reasonably requested
by the Company in writing properly to prepare and file such Registration
Statement, or any prospectus, supplement or amendment thereto in accordance with
the applicable provisions of the Securities Act.
(ii) The Company shall prepare and file with the
Commission such amendments (including post-effective amendments) and supplements
to such Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement.
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(iii) Prior to filing the Registration Statement or a
prospectus or any amendments or supplements thereto, the Company shall furnish
ARC with copies of all such documents proposed to be filed, which documents will
be made available, on a timely basis, for review by ARC and its counsel, and ARC
and its counsel shall furnish comments thereon, if any, within five business
days of receipt of such Registration Statement, prospectus, amendments or
supplements.
(iv) The Company shall promptly advise ARC and
confirm such advice in writing, (1) when such Registration Statement or the
prospectus included therein or any prospectus amendment or supplement or
post-effective amendment has been filed, and, with respect to such Registration
Statement or any post-effective amendment, when the same has become effective,
(2) of any comments by the Commission, by the National Association of Securities
Dealers, Inc. ("NASD"), and by the blue sky or securities commissioner or
regulator of any state with respect thereto or any request by any such entity
for amendments or supplements to such Registration Statement or prospectus or
for additional information, (3) of the issuance by the Commission of any stop
order suspending the effectiveness of such Registration Statement or the
initiation or threatening of any proceedings for that purpose, (4) if at any
time the representations and warranties of the Company contained herein cease to
be true and correct in all material respects, (5) of the receipt by the Company
of any notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, or (6) at any time when a
prospectus is required to be delivered under the Securities Act, that such
Registration Statement, prospectus, prospectus amendment or supplement or
post-effective amendment, or any document incorporated by reference in any of
the foregoing, contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they are made, not
misleading.
(v) Notwithstanding the provision under Section
4(a)(i) hereof, if, at the time the Demand Registration Request is given to the
Company under Article 3 hereof, the Company is negotiating a merger,
consolidation, acquisition or sale of all or substantially all of its assets or
similar transaction and in the written opinion of counsel to the Company, the
Registration Statement would be required to include information concerning such
transactions or the parties thereto that is not available at the time, the
Company shall promptly so advise ARC and, at the Company's election, to be set
forth in such notice ("Notice of Postponement"), the filing of the Registration
Statement may be postponed for a period not to exceed ninety (90) days from the
date the Demand Registration Request is given to the Company under Article 3
hereof (notwithstanding the provisions of Section 4(a)(i) to the contrary);
provided, however, that the Company shall not be permitted to give any such
Notice of Postponement and to so postpone the filing of the Registration
Statement more than once in any 365 day period; and provided, further, that in
the event of such postponement, ARC may withdraw the notice of Demand
Registration during the 60-day period following the date Notice of Postponement
is given by the Company and will thereafter continue to be entitled to one (1)
Demand Registration Request pursuant to Article 3 hereof.
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(b) The Company shall pay all costs, fees and expenses in
connection with all Registration Statements filed pursuant to Article 2 or
Article 3 hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, and blue sky fees and expenses; provided,
however, that ARC shall be solely responsible for the fees of any counsel
retained by ARC in connection with such registration and any transfer taxes or
underwriting discounts, commissions or fees applicable to the Registrable
Securities sold by ARC pursuant thereto.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Registrable Securities included in a
Registration Statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the holders of such
securities, provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction.
(d) The Company shall cooperate with ARC to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold (in such denominations and registered in such names as ARC
may request) and not bearing any legends restricting the transfer thereof under
the Securities Act, except as may be required by law.
(e) The Company shall cause all Registrable Securities to be
listed or accepted for listing or quotation on each securities exchange or
interdealer quotation system on which the Company's Common Stock then trades.
(f) The Company shall provide a CUSIP number for all
Registrable Securities covered by the Registration Statement.
(g) Otherwise use best efforts to comply with all applicable
provisions of the Securities Act, and rules and regulations of the Commission,
and make available to its security holders, as soon as reasonably practicable,
an earnings statement covering a period of at least twelve months which shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder.
5. INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless ARC, any
underwriter (as defined in the Act) for ARC and each person, if any, who
controls ARC or underwriter within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "1934
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Act"), against any losses, claims, damages or liabilities joint or several) to
which they may become subject under the Securities Act, or the 1934 Act, or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by me
Company of the Securities Act, the 1934 Act, any state securities law or any
rule or regulation promulgated under the Securities Act, or the 1934 Act or any
state securities law; and the Company will pay to ARC, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action, including without limitation any governmental
investigation relating to any such alleged Violation; provided however, that the
indemnity agreement contained in this Section 5 shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable to any indemnitee
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished by such indemnitee expressly for
use in connection with such registration.
(b) ARC will indemnify and hold harmless the Company, each of
its directors, each of its officers who has signed the Registration Statement,
each person, if any, who controls the Company within the meaning of the Act, any
underwriter, and any controlling person of any such underwriter against any
losses, claims, damages, or liabilities joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, or the 1934 Act,
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by ARC expressly for use in connection with such registration; and ARC
will pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this Section 5, in connection with
investigating or defending any such loss, claim, damage, liability or action
provided however, that the indemnity agreement contained in this Section 5 shall
not apply to amounts paid in settlement of any such loss, claim damage,
liability or action if such settlement is effected without the consent of ARC,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any indemnity obligation under this Section 5 (together with any
obligation to contribute under subsection (d) hereof) exceed the gross proceeds
from the offering received by ARC.
(c) Promptly after receipt by an indemnified party under this
Section 5 of notice of the commencement of any action (including any
governmental action or investigation), such indemnified party will, if a claim
in respect thereof is to be made against any indemnifying party under this
Section 5, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and to the extent the
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indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
5, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 5.
(d) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 5 but is
found in a final judicial determination, not subject to further appeal, that
such indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Securities Act,
the Exchange Act or otherwise, then the Company (including for this purpose any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed any such Registration Statement and any controlling
person of the Company), as one entity, and ARC (including for this purpose any
contribution by or on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and ARC in connection
with the facts which resulted in such losses, liabilities, claims, damages, and
expenses - The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by ARC, and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, alleged statement, omission, or alleged
omission. The Company and ARC agree that it would be unjust and inequitable if
the respective obligations of the Company and ARC for contribution were
determined by pro rata or per capital allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if ARC and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 5. In no case shall ARC be responsible for a portion of the
contribution obligation in excess of its pro rata share based on the number of
shares of Common Stock owned (or which would be owned upon exercise of all
Registrable Securities) by it and included in such registration as compared to
the number of shares of Common Stock owned (or which would be owned upon
exercise of all Registrable Securities) by all holders and included in such
registration. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 5, each person, if any, who controls any underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the 1934 Act and each
officer, director, partner, employee and agent of ARC, underwriter or control
person shall have the same rights to contribution as ARC, underwriter
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or control person and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the 1934 Act, each officer
of the Company who shall have signed any such Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 5. Anything in
this Section 5 to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent, provided that such consent may not be unreasonably
withheld. This Section 5 is intended to supersede any right to contribution
under the Securities Act, the 1934 Act or otherwise.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in. the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in this Agreement
shall control.
(f) The obligations of the Company and ARC under this Section
5 shall survive the completion of any offering of Registrable Securities in a
Registration Statement or the termination or suspension of this Agreement.
6. 1934 ACT REGISTRATION; RULE 144 REPORTING. The Company covenants and
agrees that until such time as ARC no longer holds any Registrable Securities it
will:
(a) If required by law, use its best efforts to maintain an
effective Registration Statement (containing such information and documents as
the Commission shall specify) with respect to its Common Stock under Section 12
of the 1934 Act;
(b) Use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144 under the Act,
even if the Company subsequently ceases to be subject to such reporting
requirements;
(c) Use its best efforts to file with the Commission in a
timely manner all reports and documents required of the Company under the Act
and the 1934 Act;
(d) Furnish to ARC promptly upon request (i) a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144 and of the Act and the 1934 Act, (ii) a copy of the most recent annual
or quarterly report of the Company, and (iii) such other reports and documents
of the Company and other information in the possession of or reasonably
attainable by the Company as ARC may reasonably request in availing itself of
any rule or regulation of the Commission allowing ARC to sell any such
Registrable Securities without registration.
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(e) The Company represents and warrants to ARC that any
information, document or report filed with the Commission in connection
therewith or any information so made public shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements contained therein
not misleading. The Company agrees to indemnify and hold harmless (or to the
extent the same is not enforceable, make contribution to) ARC, its partners,
officers, directors, employees and agents, each broker, dealer or underwriter
(within the meaning of the Act), if any, acting for ARC in connection with any
offering or sale of Registrable Securities or any person controlling (within the
meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act) ARC
and any such broker, dealer or underwriter from and against any and all losses,
claims, damages, liabilities or expenses (or actions in respect thereof) arising
out of or resulting from any breach of the foregoing representation or warranty,
all on terms and conditions comparable to those set forth in Section 5.
7. ADDITIONAL TERMS.
(a) Neither the filing of a Registration Statement by the
Company pursuant to this Agreement nor the making of any request for
prospectuses by ARC shall impose upon ARC any obligation to sell ARC's
Registrable Securities.
(b) ARC, upon receipt of notice from the Company that an event
has occurred which requires a Post-Effective Amendment to the Registration
Statement or a supplement to the prospectus included therein, shall promptly
discontinue the sale of Registrable Securities until ARC receives a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(c) If the Company fails to keep the Registration Statement
referred to in Article 2 and Article 3 above continuously effective during the
requisite period, then the Company shall, promptly upon the request of ARC, use
its best efforts to update the Registration Statement or file a new registration
statement covering the Registrable Securities remaining unsold, subject to the
terms and provisions hereof.
(d) ARC agrees to provide the Company with any information or
undertakings reasonably requested by the Company in order for the Company to
include any appropriate information concerning ARC in the Registration Statement
or in order to promote compliance by the Company or ARC with the Securities Act.
10 of 12
<PAGE> 44
8. GOVERNING LAW. This Registration Rights Agreement shall be governed
as to validity, interpretation, construction, effect and in all other respects
by the internal substantive laws of the State of Delaware, without giving effect
to the choice of law rules thereof.
9. AMENDMENT. This Registration Rights Agreement may only be amended by
a written instrument executed by the Company and ARC.
10. ENTIRE AGREEMENT. This Registration Rights Agreement constitutes
the entire agreement of the parties hereto with respect to the subject matter
hereof, and supersedes all prior agreements and understandings of the parties,
oral and written, with respect to the subject matter hereof.
11. EXECUTION IN COUNTERPARTS. This Registration Rights Agreement may
be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same document.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed duly given when delivered by
hand or mailed by registered or certified mail, postage prepaid, return receipt
requested, as follows:
If to ARC, to its address set forth on the first page of this
Registration Rights Agreement.
If to the Company, to the address set forth on the first page of this
Registration Rights Agreement.
13. BINDING EFFECT; BENEFITS. This Registration Rights Agreement shall
inure to the benefit of, and be binding upon, the parties hereto and their
respective heirs, legal representatives and successors. Nothing herein.
contained, express or implied, is intended to confer upon any person other than
the parties hereto and their respective legal representatives and successors,
any rights or remedies under or by reason of this Registration Rights Agreement.
14. HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Registration Rights
Agreement.
15. SEVERABILITY. Any provision of this Registration Rights Agreement
which is held by a court of competent jurisdiction to be prohibited or
unenforceable in any jurisdiction(s) shall be, as
11 of 12
<PAGE> 45
to such jurisdiction(s), ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this
Registration Rights Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction.
IN WITNESS WHEREOF, this Registration Rights Agreement has been
executed and delivered by the parties hereto as of the date first above written.
VIRAGEN, INC.
By: /s/ Gerald Smith
---------------------------------
Gerald Smith, President
AMERICAN NATIONAL RED CROSS
By: /s/ Naill M. Conway
---------------------------------
Name: Naill M. Conway
------------------------------
Its: V.P. Manufacturing
------------------------------
12 of 12
<PAGE> 46
TRANSMITTAL SHEET
APPROVALS/CONCURRENCES
AGREEMENT FOR THE VIRAGEN-ARC BUFFYCOAT SUPPLY AGREEMENT.
DATED AUGUST 12, 1998.
Using Office Review and Approval /s/ Niall Conway
------------------------------------------
(Signature)
NIALL CONWAY, VICE PRESIDENT, MANUFACTURING
8/13/98
-----------------
(Date)
Office of General Counsel Review /s/ Julia Soyars-Berman
and Approval ------------------------------------------
(Signature)
JULIA SOYARS-BERMAN, COUNSEL, OFFICE OF
GENERAL COUNSEL
8/12/98
--------------------
(Date)
Vice President, Finance Review /s/ Joel Polster
and Approval ------------------------------------------
(Signature)
JOEL POLSTER, ACTING VICE PRESIDENT,
BIOMEDICAL FINANCE
8/14/98
---------------------
(Date)
VIRAGEN, INC. VIRAGEN USA, INC.
--------------- -------- ---------------------- -------
By: Gerald Smith Date By: Charles F. Fistel Date
President Executive Vice President
<PAGE> 1
Exhibit 10.(lxvii)
Viragen, Inc. 865 SW 78th Avenue Suite 100
Plantation, Florida 33324-3212
954.233.VRGN FAX 954.233.1414
www.viragen.com
March 23, 1998
VIA FACSIMILE: 603-262-1333
VIA INTERNATIONAL FEDERAL EXPRESS
Managing Director-Southern Health SDN.BHD
12 Jalan P. Ramlee
Apt. 23C
Kuala Lumpur
MALAYSIA 50250
Dear Sir:
Thank you for your fax of January 5, 1998. This Letter of Agreement sets forth
the material terms and conditions to be contained in a Manufacturing and
Distribution License Agreement (the "Master License") by, between and among
Viragen, Inc., ("Viragen"), Viragen Technology, Inc. ("VTI") and Southern Health
SDN.BHD ("Southern"). The parties agree to use their best efforts to complete
the Master License in good faith as soon as is reasonably practicable, execute
confidentiality agreements and agree to incorporate, among other things, the
terms and conditions set forth herein:
1. GRANT OF OPTION
Viragen, through its wholly owned subsidiary, VTI ("the Licensor") hereby agrees
to grant to Southern an exclusive Option to purchase the Master License for the
countries listed below (the "Option"). This Option shall become effective and in
full force and effect upon Southern's execution of this Letter of Agreement and
payment to the Licensor of the non-refundable Option amount of TWO HUNDRED
THOUSAND U.S. DOLLARS (US$200,000) which shall be received by the Licensor in
cleared funds no later than April 3, 1998. In the event the parties do not
consummate the Master License for any reason prior to the expiration date, the
Licensor shall forthwith refund one-half of the Option amount (ONE HUNDRED
THOUSAND U.S. DOLLARS) (US$100,000) and, in that event, no party hereto shall
have any claim upon the other party.
2. OPTION TERM AND TERRITORIES
The Option shall extend until September 30, 1998, 5:00 p.m., EST (the
"Expiration Date") and shall be exclusive as to the following countries:
Malaysia, Indonesia, Philippines, Thailand, Taiwan, Korea, Singapore, Australia
and New Zealand, hereinafter referred to as "the Territory".
<PAGE> 2
3. MASTER LICENSE FEE, TERM AND ROYALTY
Upon execution of the Master License and simultaneously therewith, Southern
shall pay in cleared funds to the Licensor the Master License Fee in the amount
of TWENTY MILLION U.S. DOLLARS (US$20,000,000) on or before the Option's
Expiration Date. Southern and/or its SUBLICENCEES shall additionally pay to the
Licensor a continuing Royalty of TWELVE PERCENT (12%) of gross revenues derived
by Southern or by or through its SUBLICENSEES from the sale of the Licensor's
natural alpha interferon product ("THE LICENSED PRODUCT"). Such Royalty shall be
paid to the Licensor by Southern and/or its SUBLICENSEES in U.S. dollars by wire
transfer by the fifteenth (15th) day of each month which amount shall represent
the preceding month's Royalty. Costs related to bank charges, wire transfers or
currency transactions and any taxes on Royalty payments shall be borne by
Southern which shall also stand liable for timely and accurate Royalty
collections from its SUBLICENSEES and payment thereof to the Licensor. The
Licensor shall have the right to access all books and records and appoint a
certified public accounting firm, or comparable, at the Licensor's expense, to
review Master Licensee's or subLicensee's books, records and inventory
facilities and equipment at any time during normal business hours by giving five
(5) days written notice. The term of the Master License shall extend for a
period of TWENTY-FIVE (25) YEARS from the date of its execution.
4. MASTER LICENSE KEY PROVISIONS AND TERM
OBLIGATIONS OF SOUTHERN. Among other provisions, the Master License shall
provide that Southern shall manufacture and distribute THE LICENSED PRODUCT in
accordance with all applicable laws, rules and regulations promulgated by the
appropriate regulatory agencies within the Territory in accordance with current
Good Manufacturing Practices (cGMP) as promulgated by the United Kingdom's
Medicine Control Agency ("MCA") or the United States' Food and Drug
Administration ("FDA") or comparable Tier I Country's regulatory agency.
Southern shall commence the building of at least one (1) manufacturing facility
at Southern's cost within two (2) years from the date of grant of the Master
License and such facility shall be built and operated in compliance with the
Licensor's specifications. Southern's manufacturing facility shall reach
commercial production levels within four (4) years from the date of execution of
the Master License. Southern agrees to follow all of the Licensor's
manufacturing procedures, including the Licensor's Standard Operating Practices
(SOPs), Protocols and Procedures. Southern shall cause to appear on or within
all advertising, instructional, informational, promotional or display material
either bearing or incorporating THE LICENSED PRODUCT, all required legal notices
pursuant to international copyright, trademark and patents laws and/or
regulatory requirements and/or as required from time to time by the Licensor.
Southern agrees that it shall, at its cost, register such patent, copyright,
trademark and/or service mark in the appropriate class, in the name of the
Licensor within the Territory.
Southern shall be responsible for arranging for and collecting human white blood
cells ("buffy coats") from qualified blood collection agencies within the
Territory according to the Licensor's specifications. Southern has been advised
that between 1 million to 2 million buffy coats (human white blood cell
collections or "leukocytes") are needed to support one (1) manufacturing
facility for THE LICENSED PRODUCT which is forecast to produce about
US$100,000,000 in annual gross retail
2
<PAGE> 3
sales assuming a US $10 price per one million international units and comparable
manufacturing costs as experienced in Scotland and other commercial factors. The
cost of manufacturing one million international units can range between US $3.25
to $6.00. Additionally, Southern shall have the exclusive right to distribute
THE LICENSED PRODUCT as defined in the Master License, within its Territory in
accordance with the rules, laws and regulations established by each
jurisdiction.
Southern recognizes that THE LICENSED PRODUCT is technically classified as an
experimental drug until clinical trials have been completed and the drug
approved for commercialization by the regulatory authorities either in the
United Kingdom, United States or other Tier I country. Southern may elect to
obtain regulatory or governmental approval within its Territory for the use of
THE LICENSED PRODUCT for any disease state at Southern's cost including, costs
relating to clinical trials that it may wish to undertake in its own behalf
within the Territory.
Southern may sublicense to qualified third parties within the Territory in
accordance with the terms and conditions contained in the Master License which
shall require the reasonable consent of the Licensor, in which event Southern
shall retain any and all sublicense fees derived therefrom. Southern shall
maintain complete control of all of the Licensor's proprietary manufacturing
technology and shall not disclose or transfer to any subLicensee or any third
party whomsoever any of the Licensor's Standard Operating Practices, Protocols
and Procedures and Confidential Information. Southern will operate any and all
manufacturing facilities within its Territory in compliance with the Licensor's
specifications.
Southern shall be responsible for the costs of policing and enforcing the
licensed patents, trade secret rights and sublicense agreements in the
Territory, including the costs of any patent prosecution or license
registration.
OBLIGATIONS OF THE LICENSOR. The Licensor shall provide Southern with the
"know-how and show-how" as to the Licensed Patent Rights, the Licensed
Manufacturing Protocols, Procedures and Processes and all related Confidential
Information and Data (which shall include information relating to the
manufacturing equipment). The Licensor shall disclose its proprietary
manufacturing technology to Southern (which shall include the training of
Southern's designated manufacturing personnel on site) at no additional cost to
Southern. The Licensor shall also provide continuing consultative and support
services as reasonably required exclusively to Southern for a period of two (2)
years from the date of execution of the Master License at no additional cost to
Southern except travel, room and board expenses for the Licensor's related
personnel. Further, the Licensor shall provide to Southern all clinical trial
protocols which it may have developed from time to time for specific disease
states for testing THE LICENSED PRODUCT so that Southern may elect to execute
clinical trials within its Territory.
5. PROVIDING THE LICENSED PRODUCT TO SOUTHERN
The Licensor shall use its best efforts in order to obtain THE LICENSED PRODUCT
from its manufacturing facility in Edinburgh, Scotland, at the earliest
opportunity. Any obligation to supply THE LICENSED PRODUCT to Southern shall
terminate at such time as Southern's first manufacturing facility becomes
operational. In this regard, a separate agreement would necessarily be
negotiated between Southern and Viragen (Europe) Ltd., ("VERP"), which would
provide for a preferred
3
<PAGE> 4
discounted price to Southern and would be subject to all laws, rules and
regulations of the United Kingdom. All Royalty payments arising from the sale of
THE LICENSED PRODUCT within the Territory from VERP-produced product will be
waived.
6. PROHIBITION AGAINST USE OF CORPORATE NAME, TRADENAMES, SERVICE MARKS AND
COPYRIGHTS
Southern shall be prohibited from using the words "Viragen" and/or OMNIFERON in
any form and in any way.
7. INSURANCE AND INDEMNITY
Southern shall fully indemnify Viragen and the Licensor against any and all
claims, damages, and losses including attorney fees and other costs arising in
connection with or in relation to the Master License or any actions taken
pursuant to it, and shall obtain sufficient insurance in forms and amounts
acceptable to the Licensor and Viragen to cover such liabilities.
8. GOVERNING LAW
This agreement shall be governed by and interpreted in accordance with the laws
of the State of Florida, U.S.A., and shall be enforceable in Florida courts
except for provisions pertaining to conflicts of laws.
9. INVESTMENT BANKING FEE
The Licensor agrees to pay an investment banking fee of SIX PERCENT (6%) of the
Master License Fee or ONE MILLION TWO HUNDRED THOUSAND U.S. DOLLARS
(US$1,200,000) to HPC Corporate Services upon receipt by the Licensor of the
Master License Fee in cleared funds on or before September 30, 1998 and receipt
of a fully executed Master License.
10. ASSIGNMENT OF MASTER LICENSE AND TERRITORIAL RESTRICTION
Southern has advised the Licensor that it intends to assign the Master License
to a newly-formed company, VIRAGEN ASIA (MALAYSIA) PLC. ("VASIA") which
assignment is contingent upon VASIA being listed on the Malaysian Stock Exchange
and/or Australian Stock Exchange (ASX) and being capitalized in the sum of not
less than FIFTY MILLION U.S. DOLLARS (US$50,000,000). The Licensor hereby agrees
to such assignment subject to the Licensor conducting reasonable due diligence
relating to both Southern and VASIA as long as Southern complies with paragraph
6 above. Southern, its assignees, nominees, designees, subsidiaries, joint
venturers, licensees and sublicensees and any and all entities which benefit
from THE LICENSED PRODUCT shall warrant and ensure that THE LICENSED PRODUCT
will not be manufactured, sold or distributed outside of the Territory.
By signing in the space provided below, the signatories represent that they have
the express authority to bind their respective entities.
4
<PAGE> 5
Yours very truly
ACCEPTED AND AGREED TO AS OF
THE ____DAY OF MARCH 23, 1998
VIRAGEN, INC. and SOUTHERN HEALTH SDN.HND
VIRAGEN TECHNOLOGY, INC.
BY: /s/ GERALD SMITH, PRES. BY: /s/ DAVID RIGOLL
--------------------------------- ------------------------------
Gerald Smith, President David Rigoll, Director (Title)
GS:js
cc: Management Committee
5
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 3 on Form S-1 Registration Statement to Form S-3 Registration
Statement (Form S-1 No. 333-75749) and related Prospectus of Viragen, Inc. for
the registration of 11,000,000 shares of its common stock and to the inclusion
therein of our report dated September 17, 1999, with respect to the
consolidated financial statements of Viragen, Inc. included in its Annual
Report (Form 10-K) for the year ended June 30, 1999, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Miami, Florida
October 18, 1999
