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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-10252
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VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of 59-2101668
incorporation or organization) (I.R.S. Employer Identification No.)
865 SW 78TH AVENUE, SUITE 100,
PLANTATION, FLORIDA 33324
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code:
(954) 233-8746
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the common stock on September 24,
1999 was approximately $48,400,000.
As of September 24, 1999, the Company had outstanding 75,400,430 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Amendment No. 2 to Registration Statement on Form S-3, filed on July 16,
1999 (File No. 333-75749).
Proxy Statement on Form DEF 14A, No. 99642501, dated June 4, 1999.
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VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1999
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation and Employment Agreements............ 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 32
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PART I
ITEM 1. 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.
You may obtain additional information about us on our internet website
www.viragen.com.
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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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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On September 22, 1998 we entered into an equity line financing agreement
for a maximum offering amount of $20 million, subsequently reduced to $15
million, over three years. The equity line agreement provided that we could put
shares of common stock to the investor, following an effective registration
statement, at a put share price, which was discounted from the market price.
In October 1998, we filed a registration statement on Form S-3 (File No.
333-65119) with the Securities and Exchange Commission, subsequently amended in
November 1998, to register shares underlying the equity line agreement. The
Securities and Exchange Commission raised certain issues regarding the structure
of the transaction making it unlikely that the transaction, as initially
structured, would be approved. As a result of the Securities and Exchange
Commission's concerns and due to certain terms of an agreement with new
investors, Isosceles and Cefeo, in March 1999, we withdrew the registration
statement related to the equity line and terminated the equity line agreement.
In April 1998, we 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, later 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 production process. The option agreement
provided for an initial cash licensing fee of $20 million and a continuing
royalty of 12% of Southern Health's related revenues. Southern Health paid
Viragen a $200,000 option fee.
On March 31, 1999, the option agreement expired, without being exercised.
Under the terms of the option agreement, we recognized one-half of the fee, or
$100,000, as revenue, and the balance was refunded to Southern Health in April
1999.
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.
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. 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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<PAGE> 11
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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<PAGE> 12
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.
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<PAGE> 13
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.
ITEM 2. 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.
ITEM 3. 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> 14
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual shareholders' meeting was held in Davie, Florida on June 29,
1999. Due to a lack of quorum, the meeting was adjourned until July 19, 1999,
when a quorum was present. Shareholders voted:
1. To elect three directors to the board of directors, who were
classified as class A directors, to serve for the term of their designated
class and until their successors have been elected and qualified;
2. To approve the possible issuance of in excess of 19.99% of the
presently issued and outstanding common stock of Viragen;
3. To authorize the board of directors to effect up to a 1-for-8
reverse stock split of Viragen's outstanding common stock and
simultaneously reduce the number of shares of common stock Viragen is
authorized to issue;
4. In the event the board of directors decides not to implement a
reverse stock split and reduction in capital, to amend Viragen's
certificate of incorporation to increase the number of authorized shares of
common stock; and
5. To ratify the appointment Viragen's independent auditors.
With a majority of the outstanding shares voting either by proxy or in
person, the proposals were approved by stockholders with the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ---------- ---------
<S> <C> <C> <C>
Proposal 1.
Election of directors............................. 55,757,064 -- 1,169,619
Proposal 2.
Possible issuance of 19.99% additional common
stock.......................................... 25,680,094 3,895,680 388,731
Proposal 3.
Authorization for up to a 1-for-8 reverse stock
split.......................................... 45,545,256 10,916,349 465,078
Proposal 4.
Increase in authorized shares..................... 51,279,382 4,946,442 700,859
Proposal 5.
Appointment of independent auditors............... 55,394,189 1,105,868 426,626
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 September 10, 1999, we had approximately 2,700 stockholders of
record. At that date, the closing price of the common stock was $0.64 per share.
We have not paid any dividends on our common stock since incorporating in
1980. Since we have experienced losses since inception (see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"), 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.
ITEM 6. SELECTED 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.................... (.19) (.21) (.37) (.15) (.12)
Weighted average shares outstanding.............. 60,109 50,503 39,135 36,198 32,138
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding 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 the date hereof,
and we assume no obligation to update any of our forward looking statement. It
is important to note that actual results could differ materially from those
contained in forward looking statements. Among the factors that could cause our
actual results to differ materially are the factors detailed below and the risks
discussed in the "Risk Factors" section included in our Registration Statement
Form S-3, as filed with the Securities and Exchange Commission on July 16, 1999.
You should also consult the risk factors listed from time to time in Viragen's
reports on Forms 10-Q, 10-Q/A, 8-K, S-3, S-3/A, 10-K, 10-K/A and annual reports
to the stockholders.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect the our financial condition or results of operations.
Our future success depends in part upon 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
with 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. We amended this agreement on June
16, 1999. This amendment reduced the conversion price, waived first refusal
rights for an interim financing and provided certain other waivers to Viragen.
The purchase agreement:
- describes the terms under which 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;
- requires us to indemnify Isosceles, Cefeo and their officers, directors
and affiliates from any damages they experience if we breach the purchase
agreement; and
- gives Isosceles a right of first refusal to participate in private equity
financing 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 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.
THE NOTES
We issued Isosceles and Cefeo 8% convertible promissory notes in the
aggregate principal amount of $2,000,000 under the purchase agreement. The
principal amount of the notes accrues interest at a rate of 8% annually.
MANDATORY REDEMPTION. At our annual meeting of stockholders we have
received authorization to reverse split our common stock or increase the
authorized common stock of Viragen. The promissory note agreements provided that
if we did not obtain the approval of our stockholders to complete an up to a 1
for 4 reverse stock split of our outstanding common stock by June 30, 1999, the
note holders may require us to redeem an amount of the notes, or any shares of
our common stock issued to the note holders upon conversion of the notes,
necessary to permit:
- conversion of the remaining note(s);
- re-sale of the shares of our common stock issuable upon conversion of the
notes;
- issuance of additional shares; and
- exercise of the warrants
Any redemption we would be required to make would be at a cash price equal
to the greater of 125% of the face amount of the notes or the aggregate
conversion price paid for the shares of our common stock issuable on conversion
of the notes being redeemed plus all other fees described below.
CONVERSION. 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. The number of shares of our common stock that was
issued to each note holder was determined by dividing the principal balance and
accrued interest on the notes by the $.50 per share conversion price in effect
on each conversion date.
In addition to the shares issuable 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 is to ensure that the investors
have a return
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<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.
The number of additional shares or reset shares the note holders were
entitled is 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 is reduced by 1. The resulting
number is then multiplied by the shares issued on the first or second conversion
dates, as appropriate. A negative number results in zero additional shares. The
formula is as follows:
((applicable rate x $0.644/future price) -1) x (shares issued)
As a result of this provision, we issued 546,990 shares and 551,203 shares
under the first and second reset provision, respectively.
DEFAULT. If we default on our obligations under the purchase agreement,
the note holders may require us to immediately pay no less than, and possibly
more than, 130% of the principal balance plus the accrued interest and any other
sums due the note holders under the notes. Under an alternative default
calculation, the payment could exceed 130% based on the valuation of our common
stock assuming the notes had been converted into shares of our common stock. If
we fail to make the payment within five business days of written notice that the
payment is due, the note holders may, in lieu of the payment, require us to
immediately issue a number of shares of our common stock equal to the default
payment amount divided by the conversion price for the notes then in effect.
THE WARRANTS
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 the lower of $0.50 or the lowest closing
bid price of our common stock during the ten consecutive trade days immediately
preceding the conversion dates of the notes. 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 $.40, the selling shareholders
could use 400 shares with a market value of $400 to pay for the exercise of the
warrants. The holder would receive 600 shares net, as a result of the cashless
exercise.
We must 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. 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.
REGISTRATION RIGHTS
The registration rights agreement we entered into with Isosceles and Cefeo
requires us to pay Isosceles and Cefeo a fee if any of the following events
occur:
- We fail to have a registration statement registering the shares of common
stock issuable on the exercise or conversion of the notes and warrants
effective on or before July 7, 1999;
- We fail to maintain the effectiveness of the registration statement
registering such shares; or
- Our common stock is de-listed from trading on NASDAQ.
The amount of the fee for each separate default is two percent (2%) monthly
of the principal amount of the notes converted plus the exercise price paid for
warrants exercised plus the principal amount of outstanding unconverted notes.
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<PAGE> 19
We are also obligated to redeem for cash all notes, warrants and common
stock issued upon exercise or conversion of either, if beginning September 13,
1999, the registration statement ceases to be effective for a period of 30
consecutive business days or 60 business days during any 12 month period. The
redemption price is equal to the greater of:
- The number of shares of our common stock issuable upon conversion of the
notes or exercise of the warrants (less the exercise price of the
warrants) by the selling security holders multiplied by the high trade
price of our common stock on the day we receive redemption notice from
the selling security holders; or
- 115% of the principal amount of the notes, the aggregate exercise price
paid for the exercise of the warrants plus any other fees described above
owed to the selling security holder.
ADDITIONAL WARRANTS
We also issued warrants to purchase an aggregate of up to 155,339 shares of
our commons stock at $.773 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 issued to Ballsbridge,
Elliot Layne and Ven Gua are exercisable 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
us. We also 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.
As of September 24, 1999, the number of common shares held directly or
indirectly including common shares underlying warrants from this transaction
was:
<TABLE>
<S> <C>
The Isosceles Fund Limited.................................. 4,606,838
Cefeo Investments Limited................................... 1,535,613
Ballsbridge Finance, Limited................................ 19,418
Elliott Layne & Associates, Inc............................. 29,126
Ven-Gua Capital Markets Ltd................................. 29,126
</TABLE>
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 at
$0.50 per share. Viragen received proceeds of $1,375,000 from the sale of these
shares.
On September 22, 1998 we entered into an equity line financing agreement
for a maximum offering amount of $20 million, subsequently reduced to $15
million, over three years. Provisions of the equity line agreement provided that
at our option, we could put shares of our common stock to the investor,
following an effective registration statement, at a put share price, which was
discounted from the market price.
In October 1998, we filed a registration statement on Form S-3 (File No.
333-65119) with the Securities and Exchange Commission, subsequently amended in
November 1998, to register shares underlying the equity line agreement. The
Securities and Exchange Commission raised certain issues regarding the structure
of the transaction making it unlikely that the transaction, as initially
structured, would be approved. As a result of the Securities and Exchange
Commission's concerns and due to terms of an agreement with new investors,
Isosceles and Cefeo, in March 1999 we withdrew the registration statement
related to the equity line and terminated the equity line agreement.
In April 1998, we 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 December 31, 1998 and then
to March 31, 1999, an exclusive private-label manufacturing and distribution
license 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. The option agreement covered Malaysia, Indonesia,
the Philippines, Thailand, Taiwan, Korea, Singapore, Australia and New Zealand.
17
<PAGE> 20
On March 31, 1999, the option agreement expired, without being exercised.
Under the terms of the option agreement we recognized one-half of the fee, or
$100,000, as revenue, and the balance was refunded to Southern Health in April
1999.
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 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
19
<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.
ITEM 7A. 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.
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<PAGE> 24
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. 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
Chief Financial Officer,
Dennis W. Healey.................. 51 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> 25
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. 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> 26
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.
24
<PAGE> 27
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.
ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth information concerning the compensation and
employment agreements of the chief executive officers of 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.
25
<PAGE> 28
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.
26
<PAGE> 29
(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.
27
<PAGE> 30
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 AD 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 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.
28
<PAGE> 31
Officers, directors, key employees and consultants of Viragen and its
subsidiaries are eligible to receive Non-Qualified Options under the Plans. Only
officers, directors and employees who are employed by Viragen or by any
subsidiary thereof 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 Audit, Finance and Compensation Committee may
amend, suspend or terminate the plans at any time, except that no amendment can
be made which (i) changes the minimum purchase price (except in either case in
the event of adjustments due to changes in Viragen's capitalization), (ii)
affects outstanding plan options or any exercise right, (iii) extends the term
of any plan option beyond ten years, or (iv) extends the termination date of the
plans. Unless the plans have been suspended or terminated by the board of
directors, the 95 Stock Option Plan will terminate on May 15, 2005 and the 97
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 Amended Stock Option Plan and 3,574,000 options have
been issued and are outstanding under the 1997 Stock Option Plan.
29
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows certain information regarding Viragen's common
stock beneficially owned at September 24, 1999, (i) 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, (ii) by each of Viragen's directors, and (iii)
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
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(5) 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
</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 (i) 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 (ii) 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 (i) 550,000 shares owned directly by Mr. Smith; (ii) 1,400,000
options exercisable at $.50 per share granted Mr. Smith's October 6, 1995
employment agreement; (iii) 1,000,000 options exercisable at $3.22 per
share granted pursuant to Mr. Smith's March 1, 1997 Employment Agreement
and (iv) 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 (i) 1,000,000 common stock purchase options
exercisable at $.96 per share pursuant to Mr. Zeiger's May 9, 1995
employment agreement and (ii) 50,000 options exercisable at $3.22 granted
to all directors in February 1997.
(5) Mr. Singer is a director of Viragen. Includes (i) 79,500 shares owned
directly by Mr. Singer and (ii) 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 (i) 375,000 shares held in
Mr. Healey's name; (ii) 300,000 options exercisable at $.50 per share
granted pursuant to Mr. Healey's October 6, 1995 employment agreement;
(iii) 300,000 options exercisable at $3.22 per share granted with Mr.
Healey's March 1, 1997 employment agreement and (iv) 50,000 options
exercisable at $3.22 granted to all directors in February 1997.
(7) Mr. Fischbein is a Director. Includes (i) 125,000 shares held in Mr.
Fischbein's name; (ii) 50,000 options exercisable at $1.00 per share
granted to all Directors in August 1994; (iii) 25,000 options exercisable
at $.50 per share granted in October 1995; (iv) and 50,000 options
exercisable at $3.22 granted to all Directors in February 1997.
(8) Mr. Dworkin is a Director. Includes (i) 175,244 shares owned directly by
Mr. Dworkin and his wife; (ii) 50,000 options exercisable at $1.00 per
share granted to all Directors in August 1994; (iii) 100,000 options
exercisable at $.50 per share granted in October 1995; and (iv) 50,000
options exercisable at $3.22 granted to all Directors in February 1997.
30
<PAGE> 33
(9) Mr. Simons was elected a Director of the Company in July 1998. Includes (i)
10,000 shares owned directly by Mr. Simons and (ii) 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 (i) 5,000 shares owned directly and (ii) 25,000 options
exercisable at $.75 granted December 27, 1998.
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 VUSA 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 VUSA 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 VUSA options into options of Viragen or a publicly
traded subsidiary with equal value to Mr. Rothberg's VUSA 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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.
31
<PAGE> 34
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 the greater of (i) 3.5% or (ii) the Mid-Term
Applicable Federal Rate (as defined in Section 1274 of the Internal Revenue Code
of 1986), 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). 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 the greater of (i) 3.5% or (ii) the Mid-Term Applicable Federal Rate
(as defined in Section 1274 of the Internal Revenue Code of 1986), 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.
32
<PAGE> 35
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) THE FOLLOWING IS A LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL
REPORT.
1. All financial statements See Index to Consolidated Financial
Statements
2. Exhibits
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(i) Plan of Merger between Florida Immunological Institute, Inc. and
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to the
Company's registration statement on Form S-2, dated October 24, 1986, as
amended File No. 33-9714 ("1986 Form S-2"), Part II, Item 16, 2.1)
(ii) Articles of Merger of Florida Immunological Institute into
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to
1986 Form S-2, Part II, Item 16, 2.2)
(3) (i) Articles of Incorporation and By-Laws (incorporated by reference to
the Company's (ii) Amended Certificate of Incorporation (incorporated by
reference to 1986 Form S-2, Part II, Item 16, 4.2)
(4) Instruments defining the rights of security holders, including
indentures
(i) Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part II, Item 16, 4.4)
(ii) Specimen Certificate for Unit (Series A Preferred Stock and Class
A Warrant) (incorporated by reference to 1986 Form S-2, Part II, Item 15,
4.5)
(iii) Omitted
(iv) Omitted
(v) Omitted
(vi) Omitted
(vii) Omitted
(viii) Form of three years 8.5% Convertible Subordinated Debenture
(incorporated by reference to the Company's Current Report on Form 8-K
dated November 17, 1993)
(ix) Form of Stock Option Agreement dated November 19, 1993, issued to
Messrs. Dennis W. Healey and Peter D. Fischbein (incorporated by reference
to the Company's Current Report on Form 8-K dated November 17, 1993)
(x) 1995 Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8 filed June 9, 1995)
(xi) Certificate of Designation of Series B Preferred Stock
(incorporated by reference to the Company's Current Report on Form 8-K
dated June 7, 1996)
(10) Material contracts
(i) Research Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, File No. 2-89390, dated February 10, 1984
("Medicore's S-1"), Part II, Item 16(a) (10) (xxxiii))
(ii) License Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, Part II, Item 16 (a) (10) (xxxiv))
33
<PAGE> 36
(iii) Omitted
(iv) Royalty Agreement between the Company and Medicore, Inc. dated
November 7, 1986 (incorporated by reference to the November 1986 Form 8-K,
Item 7(c)(i))
(v) Amendment to Royalty Agreement between the Company and Medicore,
Inc. dated November 21, 1989 (incorporated by reference to the Company's
Current Report on Form 8-K dated December 6, 1989, Item 7(c) (i))
(vi) Promissory Note from the Company to Medicore, Inc. dated August
6, 1991 (incorporated by reference to the Company's 1991 Form 10-K, Part
IV, Item 10(a) (10) (xx))
(vii) Loan Agreement between the Company and Medicore, Inc. dated
January 31, 1991 (incorporated by reference to the Company's Current Report
of Form 8-K dated February 26, 1991, Item 79c) (ii))
(viii) Amendment to Loan Agreement between the Company and Medicore,
Inc. dated August 6, 1991 (incorporated by reference to the Company's 1991
Form 10-K, Part IV, Item 14(a) (10) (xxi))
(ix) Florida Real Estate Mortgage and Security Agreement from the
Company to Medicore, Inc. dated August 6, 1991 (incorporated by reference
to the Company's 1991 Form 10-K, Part IV, Item 14(a) (10) (xxii))
(x) Omitted
(xi) Omitted
(xii) Promissory Note to Equitable Bank dated August 2, 1991
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the second quarter ended June 30, 1991 ("June, 1991 Form 10-Q"), Part
II, Item 6(a) (28) (i))
(xiii) Mortgage and Security Agreement issued to the Equitable Bank
dated August 2, 1991 (incorporated by reference to the Company's June, 1991
Form 10-Q, Part II, Item 6(a) (28) (ii))
(xiv) Acquisition Agreement between the Company and Medicore, Inc.
dated August 2, 1991 (incorporated by reference to the Company's 1991 Form
10-K, Part II, Item 14(a) (10) (xxiii))
(xv) Lease between the Company and Medicore, Inc. dated December 8,
1992 (incorporated by reference to the Company's Current Report on Form
8-K, dated January 21, 1993 ("January 1993 Form 8-K"), Item 7(c) (10) (i))
(xvi) Addendum to Lease between the Company and Medicore, Inc. dated
January 15, 1993 (incorporated by reference to the Company's January 1993
Form 8-K, Item 7(c) (10) (ii))
(xvii) Agreement for Sale of Stock between the Company and Cytoferon
Corp. dated February 5, 1993 (incorporated by reference to the Company's
Current Report on Form 8-K dated February 11, 1993 Item 7(c) (28))
(xviii) Addendum to Agreement for Sale of Stock between the Company
and Cytoferon Corp. dated May 4, 1993 (incorporated by reference to the
Company's Current Report on Form 8-K dated May 5, 1993, Item 7(c) (28) (i))
(xix) Amendment No. 2 to the Royalty Agreement between the Company and
Medicore, Inc. dated May 11, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a) (10) (xix))
(xx) Note and Mortgage Modification Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xx))
34
<PAGE> 37
(xxi) Amendment No. 2 to the Loan Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxi))
(xxii) Amendment to Acquisition Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxii))
(xxiii) Marketing and Management Services Agreement between the
Company and Cytoferon Corp. dated August 18, 1993 (incorporated by
reference to the Company's June 30, 1993 Form 10-K, Part IV, Item
14(a)(10)(xxiii))
(xxiv) Agreement for Sale of Stock between Cytoferon and the Company
dated November 19, 1993 (incorporated by reference to the Company's June
30, 1994 Form 10-K, Part IV, Item 14(a)(10)(xxiv))
(xxv) Employment Agreement between Gerald Smith and the Company dated
November 19, 1993 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxv)) as amended by modified Employment
Agreement dated December 15, 1994 (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxv))
(xxvi) Common Stock Purchase Warrant Agreement between Northlea
Partners Ltd. and the Company dated January 6, 1994 (incorporated by
reference to the Company's June 30, 1994 Form 10-K, Part IV, Item
14(a)(10)(xxvi))
(xxvii) Management Consulting Agreement between the Company, Medvest,
Inc. and Dr. John Abeles dated January 6, 1994 (incorporated by reference
to the Company's Current Report on Form 8-K, dated November 17, 1993)
(xxviii) Employment Agreement between Dennis W. Healey and the Company
dated April 8, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part IV, Item 14(a)(10) (xxvii) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 SB-2, Part II, Item 27(10)(xxvii))
(xxix) Promissory Note between the Company and Gerald Smith dated
April 18, 1994 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxviii))
(xxx) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part V, Item 14(a)(10) (xxix)) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 Form SB-2, Part II, Item 27(10)(xxix))
(xxxi) Placement Agent Agreement and Common Stock Purchase Warrant
issued to Laidlaw Equities, Inc. and designees (incorporated by reference
to the Company's 1995 Form SB-2, Part II, Item 27(10)(xxxi))
(xxxii) Amendment No. 1 to Agreement for Sale of Stock with Cytoferon
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxii))
(xxxiii) Modified Sale of Stock and Stock Option Agreement with Peter
D. Fischbein incorporated by reference to the Company's 1995 Form SB-2,
Part II, Item 27(10)(xxxiii))
(xxxiv) Agreement with Moty Hermon (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxxiv))
(xxxv) Agreement with University of Nebraska-Medical Center
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxv))
(xxxvi) License and Manufacturing Agreement with Common Services
Agency (incorporated by reference to the Company's 1995 Form SB-2, Part II,
Item 27(10)(xxxvi))
35
<PAGE> 38
(xxxvii) Agreed Motion for Consent Final Order and Settlement
Agreement dated August 29, 1995 (incorporated by reference to the Company's
June 30, 1995 Form 10-KSB)
(xxxviii) Agreement and Plan of Reorganization dated November 8, 1995
and Amendment thereto (incorporated by reference to the Company's
Post-Effective Amendment No. 1 to Registration Statement on Form SB-2)
(xxxix) Securities Purchase Agreement dated June 7, 1996 (incorporated
by references to the Company's current report on Form 8-K dated June 7,
1996).
(xl) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1996 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996)
(xli) Stock Option Agreement between the Company and Fred D. Hirt
dated August 2, 1996 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996)
(xlii) Form of Private Securities Subscription Agreement dated
November 27, 1996 and related Registration Rights Agreement and Common
Stock Purchase Warrant (incorporated by reference to the Company's Current
Report on Form 8-K dated February 14, 1997)
(xliii) Private Securities Subscription Agreement dated February 3,1
997 and related Regulation Rights Agreement, Common Stock Purchase Warrant
and related agreements (incorporated by reference to the Company's Current
Report on Form 8-K dated February 14, 1997)
(xliv) Securities Purchase Agreement dated as of December 31, 1996 and
related Registration Rights Agreement (incorporated by reference to the
Company's Current Report on Form 8-K dated March 6, 1997)
(xlv) Employment Agreement between Gerald Smith and the Company dated
March 1, 1997 (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997)
(xlvi) Employment Agreement between Dennis W. Healey and the Company
dated March 1, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(xlvii) Employment Agreement between Robert C. Rech and the Company
dated May 19, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(xlviii) 11 month 10% Promissory Note dated July 1, 1997 (incorporated
by reference to the Company's Current Report on Form 8-K dated August 28,
1997)
(xlix) Employment Agreement between Robert H. Zeiger and the Company
dated August 1, 1997 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
(l) Certificate of Designations, Preferences and Rights of the Series
F Convertible Preferred Shares (incorporated by reference to the Company's
Current Report on Form 8-K dated August 28, 1997)
(li) Certificate of Designations, Preferences and Rights of 10%
Cumulative Convertible Preferred Stock, Series G (incorporated by reference
to the Company's Current Report on Form 8-K dated August 28, 1997)
(lii) Series F Convertible Preferred Stock Exchange Agreement, dated
July 23, 1997 (incorporated by reference to the Company's Current Report on
Form 8-K dated August 28, 1997)
(liii) Series G Convertible Preferred Stock Exchange Agreement, dated
August 27, 1997 (incorporated by reference to the Company's Current Report
on Form 8-K dated August 28, 1997)
36
<PAGE> 39
(liv) 10% Promissory Note to Clearwater Fund IV, Ltd. (incorporated by
reference to the Company's current Report on Form 8-K dated September 22,
1997, Item 7 (c)1)
(lv) Omitted.
(lvi) Series H Convertible Preferred Stock, Form of Subscription
Agreement dated February 17, 1998 and related Registration Agreement and
Common Stock Purchase Warrants (incorporated by reference to the Company's
Registration Statement on Form S-3 dated April 17, 1998)
(lvii) Series I Convertible Preferred Stock, Form of Subscription
Agreement dated April 2, 1998 and related Registration Rights Agreement and
Common Stock Purchase Warrants (incorporated by reference to the Company's
Registration Statement on Form S-3 dated April 17, 1998)
(lviii) Cooperation and Supply Agreement between the Company, Viragen
Deutschland GmbH and German Red Cross dated March 19, 1998 (incorporated by
reference to the Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998, except for related exhibits filed herein) (Certain portions
of this exhibit have been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission)
(lix) Buffycoat Supply Agreement between America's Blood Centers and
the Company dated July 15, 1998 (incorporated by reference to the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998) (Certain
portions of this exhibit have been redacted pursuant to a Confidentiality
Request submitted to the Securities and Exchange Commission)
(lx) Agreement between the Company and the American Red Cross dated
August 18, 1998 (incorporated by reference to the Company's Annual Report
on Form 10-K/A for the year ended June 30, 1998, except for related
exhibits filed herein) (Certain portions of this exhibit have been redacted
pursuant to a Confidentiality Request submitted to the Securities and
Exchange Commission)
(lxi) Strategic Alliance Agreement between the Company and
Inflammatics, Inc. and Inflammatics Inc. Series A Convertible Preferred
Stock Purchase Agreement (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998)
(lxii) Common Stock Private Equity Line Subscription Agreement,
Registration Rights Agreement, Private Placement Agreement, Placement Agent
Warrant and Investor Warrant dated September 22, 1998 (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
June 30, 1998)
(lxiii) Gerald Smith Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxiv) Gerald Smith Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxv) Dennis W. Healey Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxvi) Dennis W. Healey Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998).
(lxvii) Southern Health SDN. BHD Option to Purchase Master License
dated March 23, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998). (Certain portions
of this exhibit have been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission).
37
<PAGE> 40
(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.
(lxx) Employment Agreement between the Company and Dennis W. Healey
dated March 1, 1999.
(lxxi) Memorandum of Agreement between the Isoceles Fund and the
Company dated March 17, 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
(23) Consent of Independent Certified Public Accountants.
(27) Financial Data Schedule (for Securities and Exchange Commission use
only)
(b) Reports on Form 8-K filed during the fourth quarter
None
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIRAGEN, INC.
By: /s/ DENNIS W. HEALEY
----------------------------------
Dennis W. Healey
Executive Vice President,
Treasurer
Principal Financial Officer
Dated: September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ GERALD SMITH Chairman of the Board of Directors, September 27, 1999
- --------------------------------------------------- Principal Executive Officer and
Gerald Smith President
/s/ ROBERT H. ZEIGER Vice Chairman of the Board September 27, 1999
- ---------------------------------------------------
Robert H. Zeiger
/s/ CARL N. SINGER Director and Chairman of the September 27, 1999
- --------------------------------------------------- Executive Committee
Carl N. Singer
/s/ DENNIS W. HEALEY Executive Vice President, Treasurer, September 27, 1999
- --------------------------------------------------- Principal Financial Officer and
Dennis W. Healey Director
/s/ CHARLES J. SIMONS Director and Chairman of the Audit, September 27, 1999
- --------------------------------------------------- Finance and Compensation Committee
Charles J. Simons
/s/ PETER D. FISCHBEIN Director September 27, 1999
- ---------------------------------------------------
Peter D. Fischbein
/s/ SIDNEY DWORKIN Director September 27, 1999
- ---------------------------------------------------
Sidney Dworkin
/s/ ROBERT C. SALISBURY Director September 27, 1999
- ---------------------------------------------------
Robert C. Salisbury
/s/ JOSE I. ORTEGA Controller and Principal Accounting September 27, 1999
- --------------------------------------------------- Officer
Jose I. Ortega
</TABLE>
39
<PAGE> 42
FORM 10-K -- ITEM 8
VIRAGEN, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen, Inc. and
subsidiaries are included:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated balance sheets -- June 30, 1999 and 1998....... F-3
Consolidated statements of operations -- Years ended June
30, 1999, 1998 and 1997................................... F-4
Consolidated statements of stockholders' equity - Years
ended June 30, 1999, 1998 and 1997........................ F-5
Consolidated statements of cash flows -- Years ended June30,
1999, 1998 and 1997....................................... F-8
Notes to consolidated financial statements.................. F-10
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
elated instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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......................................... $195,753 $ 55,222
VAT tax refund receivable................................ 119,352 256,504
-------- --------
Other current assets..................................... 8,672 219,224
-------- --------
$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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if any, which could ultimately be realized on the promissory note. Accordingly,
the entire amount due under the note with related accrued interest of
approximately $10,000 was been written-off as uncollectable on June 30, 1998.
Management intends to pursue collection efforts relative to this transaction.
On July 31, 1998, we held our 1997 annual shareholders meeting. Certain
directors did not seek reelection to serve as directors of the company. In
appreciation of their past service, Viragen waived the requirement to exercise
outstanding stock options within 90 days of their last day as directors. All
outstanding stock options will expire under their normal terms. We recognized
approximately $199,000 in compensation expense upon waiving the 90-day
expiration clause.
During fiscal 1999, certain directors and former officer exercised
1,160,000 options to purchase common stock at prices ranging between $0.30 and
$1.19 per share. The options were exercised through the issuance of promissory
notes payable to Viragen with related pledge and escrow agreements. The
promissory notes bear interest at rates ranging between 5.06% and 5.47%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes pursuant to
the provisions of the pledge and escrow agreements.
NOTE I -- COST REDUCTION PLAN
During fiscal 1999, Viragen began implementing a cost-reduction plan
targeted to reduce domestic and research costs. These changes in operations
reflect our shift from developing our product in our domestic laboratories to
scale-up development and clinical research in our European facility.
SFAS No. 121 -- "Accounting for the Impairment of Long-Lived Assets"
requires impairment losses to be recorded on long-lived assets when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less then the assets' carrying amount. EITF 94-3
- -- "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity" requires restructuring costs to be accrued under
specific guidelines.
No losses or exit costs have been accrued by Viragen. We have not done so
because the criteria for recognizing losses and exit costs, as specified in SFAS
121 and EITF 94-3, have not been met.
Much of the savings to be realized from personnel reductions comes from the
elimination of positions where employment agreements have expired. Accordingly,
these individuals are not receiving severance pay. Of the remaining positions to
be eliminated, management has not yet approved any severance packages to be
offered.
Viragen is not aware of any impairment of its equipment, and accordingly,
we have not recognized any loss due to impairment on our long-lived laboratory
equipment or facility. Upon termination of research activities in our domestic
facility, equipment considered to be useful to our Scottish operations will be
transferred to our Scottish facility, where it will be used in continuing
research activity, as well as manufacturing and quality assurance operations.
Equipment identified for disposal, if any, will be sold for the highest bid.
Viragen has not yet identified any equipment for disposal, and accordingly, has
not recognized any impairment. We are currently in the process of trying to sell
the domestic research facility, but no impairment has been recorded because an
independent appraisal performed has valued the land, building and related
improvements above its net book value.
F-26
<PAGE> 68
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
F-27
<PAGE> 69
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
F-28
<PAGE> 70
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.
F-29
<PAGE> 1
EXHIBIT 10 (lXIX)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of March 1, 1999 (the "Effective Date") by and
between VIRAGEN, INC., a Delaware corporation ("Employer or the "Company"), and
GERALD SMITH ("Employee").
W I T N E S S E T H:
WHEREAS, Employer desires to employ the Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and
WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.
NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:
1. EMPLOYMENT
Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.
2. TERM
Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Agreement shall commence on the Effective Date and shall
end as of the close of business on February 28, 2001 (the "Employment Term").
The term "first year", as used herein, means the period commencing on the
Effective Date and ending as of the close of business on February 28, 2000, the
term "second year", as used herein, means the period commencing on March 1, 2000
and ending as of the close of business on February 28, 2001, and the term
"year", as used herein, means, as the context requires, the first year or the
second year. Notwithstanding any of the foregoing to the contrary, if this
Employment Agreement is terminated prior to the expiration of the Employment
Term, a year shall mean, with respect to the year during which termination
occurs, the period commencing on the first day of such year and ending as of the
close of business of the day of termination of Employee's employment, and
"Employment Term" shall mean the period commencing on the Effective Date and
ending as of the close of business of the day of termination of Employee's
employment.
<PAGE> 2
3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES
Employee represents and warrants to Employer that he is free
to accept employment with Employer as contemplated herein and has no other
written or oral obligations or commitments of any kind or nature which would in
any way interfere with his acceptance of employment pursuant to the terms hereof
or the full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder.
4. DUTIES AND EXTENT OF SERVICES
Employee shall be employed as Employer's President and Interim
Chief Executive Officer, as such, shall, subject to the direction of Employer's
Board of Directors, supervise the conduct of all of Employer's operations and
affairs, and perform such other duties and responsibilities as may be assigned
to Employee from time to time consistent with such title by Employer's Board of
Directors. Employee agrees to devote sufficient time, skill, attention and
energy diligently and competently to perform the duties and responsibilities
reasonably assigned to him hereunder or pursuant hereto to the best of his
abilities. Employee shall use his best efforts to be loyal and faithful at all
times and constantly endeavor to improve his ability and his knowledge of the
business of Employer in an effort to increase the value of his services for the
mutual benefit of Employer and Employee. Employee agrees not to enter into any
other employment agreement, other than with subsidiaries and/or affiliates of
the Company as may be approved by the Company's Board of Directors, during the
term hereof.
5. COMPENSATION
Employee shall receive an annual salary during the Employment
Term of $282,000. Employee's salary shall be payable in accordance with the
Company's normal payroll process, currently bi-weekly. Additional consideration
payable to Employee hereunder consists of fringe benefits, if any, that shall be
made available to Employee further described herein.
6. FRINGE BENEFITS AND EXPENSES
A. EMPLOYEE PLANS. Employee shall be eligible (subject to the
terms and conditions of particular plans and programs) to participate in such
medical, hospitalization, group health, accident, disability and life insurance
programs and plans, such pension, 401K, profit sharing, stock option, incentive
compensation and stock purchase plans and such other employee benefit programs
to the same extent such plans and programs are made generally available from
time to time by Employer to all of its other similarly-situated employees;
provided, however, Employer shall be under no obligation to make any of such
plans or programs available to its employees or continue any which currently or
in the future exist, except as otherwise required by law.
2
<PAGE> 3
B. AUTOMOBILE. For the term of this Agreement, Employer shall
provide to Employee an automobile and shall pay all gas, maintenance, insurance
and other expenses related thereto, for performance of Employee's duties on
behalf of Employer as specified herein.
C. OTHER EXPENSES. Employer shall promptly pay directly or
reimburse Employee for his reasonable out-of-pocket costs and expenses incurred
in connection with the performance of his duties and responsibilities hereunder
subject to the submission by Employee of appropriate invoices, receipts and
other supporting documentation, consistent with Employer's customary
reimbursement policies and procedures.
7. VACATIONS
Employee shall be entitled to normal vacation (of not less
than two weeks) taken by other members of senior management during each
twelve-month period of the Employment Term. Employee shall not be entitled to be
compensated for any unused vacation upon termination of this Agreement. The
periods during which Employee will be absent from work shall be determined by
Employee taking into account the needs of Employer's business.
8. FACILITIES
Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, supplies and personnel as it
reasonably determines is adequate for Employee's performance of his duties and
responsibilities under this Agreement.
9. TERMINATION OF EMPLOYMENT
A. TERMINATION EVENTS. Notwithstanding any provisions of this
Agreement to the contrary, Employee's employment may be terminated by Employer
with Cause (as hereinafter defined) effective upon the delivery of written
notice to Employee. In addition, Employee's employment shall terminate (i) upon
Employee's death or (ii) upon Employee becoming Disabled (as hereinafter
defined).
B. DEFINITION OF DISABLED. For purposes of this Agreement,
Employee shall be deemed to be "Disabled" when, by reason of physical or mental
illness or of injury, he is unable to perform substantially all of the duties
and responsibilities required of him in connection with his employment
hereunder. No disability shall be deemed to exist until after Employee shall be
unable to perform his duties hereunder for ninety (90) consecutive days (the
"Disability Period"). If Employee shall have been under a disability but shall
have returned to work prior to the end of the Disability Period, any new
disability commencing within thirty (30) days of the termination of the prior
disability shall be a continuation of the prior disability, and the period of
all such disabilities shall be added together to determine whether, or how much
of, the Disability Period has elapsed.
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C. DEFINITION OF CAUSE. For purposes of this Agreement,
"Cause" shall be: (a) conviction for fraud or criminal conduct (other than
conviction of, or a plea of guilty to, a traffic violation), from which no
appeal can be taken; (b) habitual drunkenness or drug addiction; (c)
embezzlement; (d) material sanctions against Employee in his capacity as an
employee of Employer by regulatory agencies governing Employer or against
Employer because of wrongful acts or conduct of Employee which have a material
adverse affect upon the Employer and its business; (e) material breach or
default by Employee of any of the material terms or conditions of this
Agreement, and the continuation of such material breach or default by Employee
for a period of seven (7) days following the date of receipt of written notice
from Employer specifying the breach or default of Employee; or (f) the
resignation or quitting of Employee prior to the end of the Employment Term (in
this last event, Employee's employment shall be deemed terminated with Cause on
the date that he resigns or quits).
If Employee's employment is terminated by Employer without
Cause as defined in this Section, Employee shall be given sixty (60) days
written notice of termination by Employer and be entitled to receive the greater
of (i) two years compensation and fringe benefits/expenses as provided for in
Sections 5 & 6 hereof or (ii) compensation and fringe benefits/expenses as
provided for in sections 5 & 6 payable through the remainder of the Employment
Term as provided for in Section 2 hereof. Additionally, in the event of
termination without Cause, or non-renewal of this Agreement at the end of the
Employment Term, any outstanding but unexercised stock options or warrants
granted to Employee shall continue to be fully exercisable through their stated
respective Exercise Period(s).
D. TERMINATION FOLLOWING A CHANGE OF CONTROL.
i. In the event that a "Change of Control" as hereinafter defined,
and the occurrence of a "Good Reason" as hereinafter defined, of the Company
shall occur at any time during the Employment Term, the Employee shall have the
right to terminate the Employee's employment under this Agreement upon thirty
(30) days written notice given at any time within one year after the occurrence
of such events, and such termination of the Employee's employment with the
Company pursuant to this Subsection 9D, then, in any such event, such
termination shall be deemed to be a Termination by the Company Other than for
Cause and the Employee shall be entitled to such Compensation and Benefits as
set forth in Subsection 9C of this Agreement.
ii. For purposes of this Agreement, a "Change of Control" of the
Company shall mean a change in control (A) as set forth in Section 280G of the
Internal Revenue Code or (B) of a nature that would be required to be reported
in response to Item 1 of the current report on Form 8K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"); provided that, without limitation, such a change in
control shall be deemed to have occurred at such time as:
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(a) any person (as such term is used in Section 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then having the right to vote at elections
of directors; or,
(b) the individuals who at the commencement date of this
Agreement the Board of Directors cease for any reason to constitute a majority
thereof unless the election, or nomination for election, of each new director
was approved by a vote of at least two thirds of the directors then in office
who were directors at the commencement of this Agreement;
(c) there is a failure to elect five or more (or such number
of directors as would constitute a majority of the Board of Directors)
candidates nominated by management of the Company to the Board of Directors; or
(d) the business of the Company for which the Employee's
services are principally performed is disposed of by the Company pursuant to a
partial or complete liquidation of the Company, a sale of assets (including
stock of a subsidiary of the Company) or otherwise.
Anything herein to the contrary notwithstanding, this Subsection 9D will not
apply where the Employee gives the Employee's explicit written waiver stating
that for the purposes of this Subsection 9D a Change in Control shall not be
deemed to have occurred. The Employee's participation in any negotiations or
other matters in relation to a Change in Control shall in no way constitute such
a waiver which can only be given by an explicit written waiver as provided in
the preceding sentence.
Anything to the contrary notwithstanding, termination shall not be deemed
Termination without Cause if there shall not have also occurred at or around a
change in control a second event.
The second event is that the Employee is given "Good Reason" for choosing to
terminate. Good Reason means, without the Employee's express written consent,
the occurrence of any of the following events after a Change in Control:
I. a reduction by the Employer of the Employee's rate of annual
compensation,
II. the failure of the Employer to continue in effect any Employee
benefit plan or compensation plan in which the Employee
participating following the Change in Control, unless the
Employee is permitted to participate in other plans providing
substantially comparable benefits, or the taking of any action by
the Employer which would adversely affect the Employee's
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participation in or materially reduce benefits under any such
plan, PROVIDED, HOWEVER, that changes affecting the participation
or benefits of all similarly situated Employee's shall not be
treated as Good Reason hereunder,
III. a materially adverse change in the level of the Employee's
employment responsibilities, PROVIDED, however, that changes in
title or changes in the affiliate of the Employer which employs
the Employee shall not be treated as Good Reason hereunder,
IV. a relocation of Employers offices such that Employee would be
required to relocate his primary residence to provide for a
reasonable daily travel distance to such new location.
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
A. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee
has been informed that it is the policy of Employer to maintain as secret and
confidential all information relating to (i) the financial condition, businesses
and interests of Employer and its affiliates, (ii) the systems, know-how,
products, services, costs, inventions, patents, patent applications, formulae,
research and development procedures, notes and results, computer software
programs, marketing and sales techniques and/or programs, methods,
methodologies, manuals, lists and other trade secrets heretofore or hereafter
acquired, sold, developed and/or used by Employer and its affiliates and (iii)
the nature and terms of Employer's and its affiliates' relationships with their
respective customers, clients, suppliers, lenders, vendors, consultants,
independent contractors and employees (all such information being hereinafter
collectively referred to as "Confidential Information"), and Employee further
acknowledges that such Confidential Information is of great value to Employer
and its affiliates and, in and by reason and as a result of Employee's
employment by Employer, Employee will be making use of, acquiring and/or adding
to such Confidential Information. Therefore, Employee understands that it is
reasonably necessary to protect Employer's and its affiliates' trade secrets,
good will and business interests that Employee agree and, accordingly, Employee
does hereby agree, that Employee will not directly or indirectly (except where
authorized by the Board of Directors of Employer for the benefit of Employer
and/or its affiliate(s) and/or as required in the course of his employment) at
any time hereafter divulge or disclose for any purpose whatsoever to any
persons, firms, corporations or other entities other than Employer or its
affiliates (hereinafter referred to collectively as "Third Parties"), or use or
cause or authorize any Third Parties to use, any such Confidential Information,
except as otherwise required by law.
B. EMPLOYER'S MATERIALS. In accordance with the foregoing,
Employee furthermore agrees that (i) Employee will at no time retain or remove
from the premises of Employer or its affiliates any research and development
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materials, drawings, notebooks, notes, reports, formulae, software programs or
discs or other containers of software, manuals, data, books, records, materials
or documents of any kind or description for any purpose unconnected with the
strict performance of Employee's duties with Employer and (ii) upon the
cessation or termination of Employee's employment with Employer for any reason,
Employee shall forthwith deliver or cause to be delivered up to Employer any and
all research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Employee's
possession or under Employee's control relating to any Confidential Information
or any property or information which is otherwise the property of Employer or
its affiliates.
11. COVENANT-NOT-TO-COMPETE
In view of the Confidential Information to be obtained by or
disclosed to Employee, because of the know-how acquired and to be acquired by
Employee, and as a material inducement to Employer to enter into this Agreement
and continue to employ Employee, Employee covenants and agrees that, so long as
Employee is employed by Employer and for a period of two (2) years after
Employee ceases for any reason to be employed by Employer, Employee shall not,
directly or indirectly, (i) divert business from, (ii) solicit or transact any
business competitive with Employer or its affiliates with, or (iii) sell any
products or services sold or offered by Employer or its affiliates to, any
customer or former customer of Employer or its affiliates. In addition, Employee
covenants and agrees that, so long as Employee is employed by Employer and for a
period of two (2) years after Employee ceases for any reason to be employed by
Employer, Employee hereby agrees to refrain from, anywhere in the world (the
"Geographical Area"), directly or indirectly owning, managing, operating,
controlling or financing, or participating in the ownership, management, control
or financing of, or being connected with or having an interest in, or otherwise
taking any part as a stockholder (other than deminimus amounts as a passive
investor), director, officer, employee, agent, consultant, partner or otherwise
in, any business competitive with that engaged in or being developed by Employer
or its affiliates during Employee's term of employment. Without limitation of
the foregoing, Employer's business is acknowledged to include the development,
manufacture and sale of human leukocyte interferon therapy and products and
other natural or recombinant technologies aimed at enhancing the human immune
system. Employee acknowledges that Employer's business is anticipated to be
international in scope, that a similar business could effectively compete with
Employer's and its affiliates businesses from any location in the world, and
that, therefore, the restricted Geographical Area is reasonable in scope to
protect Employer's and its affiliates' trade secrets and legitimate business
interests.
12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 & 11
Employee covenants and agrees that if Employee shall violate
or breach any of Employee's covenants or agreements provided for in Sections 10
or 11 hereof, Employer and/or its affiliates shall be entitled to an accounting
and repayment of all profits, compensation, commissions, remunerations or
benefits which Employee directly or indirectly has realized or realizes as a
result of, growing out of or in connection with any such violation or breach. In
addition, in the event of a breach or violation or threatened or imminent breach
or violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other costs
incurred in connection with any such litigation, both before and at trial and at
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all tribunal levels. Resort by Employer and/or its affiliates to such injunctive
or other equitable relief shall not be deemed to waive or to limit in any
respect any other rights or remedies which Employer or its affiliates may have
with respect to such breach or violation.
13. REASONABLENESS OF RESTRICTIONS
A. REASONABLENESS. Employee acknowledges that any breach or
violation of Sections 10 or 11 hereof will cause irreparable injury and damage
and incalculable harm to Employer and its affiliates and that it would be very
difficult or impossible to measure the damages resulting from any such breach or
violation. Employee further acknowledges that Employee has carefully read and
considered the provisions of Sections 10, 11 and 12 hereof and, having done so,
agrees that the restrictions and remedies set forth in such Sections (including,
but not limited to, the time period, geographical and types of restrictions
imposed) are fair and reasonable and are reasonably required for the protection
of the business, trade secrets, interests and goodwill of Employer and its
affiliates.
B. SEVERABILITY. Employee understands and intends that each
provision and restriction agreed to by Employee in Sections 10, 11 and 12 hereof
shall be construed as separate and divisible from every other provision and
restriction and that, in the event that any one of the provisions of, or
restrictions in, Sections 10, 11 and/or 12 hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof and restrictions therein shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable provisions or restrictions had not been included therein, and any
one or more of such valid provisions and restrictions may be enforced in whole
or in part as the circumstances warrant. In the event that any such provision
relating to time period and/or geographical and/or type of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum or
permissible time period, geographical area or type of restriction such court
deems reasonable and enforceable, said time period and/or geographical and/or
type of restriction shall be deemed to become and shall thereafter be the
maximum time period and/or geographical restriction and/or type of restriction
which such court deems reasonable and enforceable.
C. SURVIVABILITY. The restrictions, acknowledgments, covenants
and agreements of Employee set forth in Sections 10, 11, 12 and 13 of this
Agreement shall survive any termination of this Agreement or of Employee's
employment (for any reason, including expiration of the Employment Term).
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D. COMPARABLE RESTRICTIONS. Employer agrees that it will use
its best efforts to have other senior executives execute and observe agreements
containing similar provisions as are contained in Sections 10, 11 and 12 hereof.
14. EMPLOYEE'S DISCLOSURES & REPRESENTATIONS
& WARRANTIES.
Employee hereby acknowledges, represents and warrants to,
and/or agrees with, Employer as follows:
(a) Subject to Employee's right to designate family
members to own the stock acquired through exercise of the Options, if any, that
Employee is acquiring the Options for his own account, for investment purposes
only, and not with a view to the public sale or distribution thereof, except as
applicable under the Form S-8 Registration to be filed by the Company covering
the Shares underlying the Options.
(b) That Employee has full right, power and authority
to perform all obligations
under this Agreement.
(c) Employee hereby agrees to indemnify and hold
harmless Employer and its shareholders, directors, officers, employees and
agents from and against any and all loss, damage, liability, cost or expense
(including reasonable attorneys' and paralegals' fees and costs before and at
trial and at all appellate levels) due to or arising out of any material
inaccuracy in, or material breach of, any material representation, warranty or
covenant of Employee contained herein.
15. INDEPENDENT COUNSEL
Employer and Employee agree that each of them have been, or
were advised and fully understand that they are entitled to be represented by
independent legal counsel with respect to all matters contemplated herein from
the commencement of negotiations at all times through the execution hereof.
16. LAW APPLICABLE
This Agreement shall be governed by and construed pursuant to
the laws of the State of Florida, without giving effect to conflicts of laws
principles.
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17. NOTICES
Any notices required or permitted to be given pursuant to this
Agreement shall be sufficient, if in writing, and if personally delivered or
sent by certified or registered mail, return receipt requested, to his
residence, in the case of Employee, or to its then principal office, in the case
of Employer.
18. SUCCESSION
This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective legal representatives, heirs,
assignees and/or successors in interest of any kind whatsoever; provided,
however, that Employee acknowledges and agrees that he cannot assign or delegate
any of his rights, duties, responsibilities or obligations hereunder to any
other person or entity.
19. ENTIRE AGREEMENT
This Agreement constitutes the entire final agreement between
the parties with respect to, and supersedes any and all prior agreements, both
oral and written, between the parties hereto, except as related to rights of the
Employee and obligations related thereto of Employer regarding previously
granted stock options and previously purchased stock, as may have been modified
from time to time. The subject matter hereof may not be amended, modified or
terminated except by a writing signed by the parties hereto.
20. SEVERABILITY
If any provision of this Agreement shall be held to be invalid
or unenforceable, and is not reformed by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision and shall not
in any way affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if such invalid or
unenforceable provision were not contained herein.
21. NO WAIVER
A waiver of any breach or violation of any term, provision or
covenant contained herein shall not be deemed a continuing waiver or a waiver of
any future or past breach or violation. No oral waiver shall be binding.
22. ATTORNEYS' FEES
In the event that either of the parties to this Agreement
institutes suit against the other party to this Agreement to enforce any of his
or its rights hereunder, the prevailing party in such action shall be entitled
to recover from the other party all reasonable costs thereof, including
reasonable attorneys' and paralegals' fees and costs incurred before and at
trial and at all tribunal levels.
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23. COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be an original, but both of which together shall constitute one and the
same instrument.
24. INDEMNITY OF EMPLOYEE
Employer shall indemnify and hold harmless Employee from and
against any and all claims, judgments, fines, penalties, liabilities, losses,
costs and expenses (including reasonable attorneys' fees and costs) asserted
against or incurred by Employee as a result of acts or omissions of Employee
taken or made in the course of performing his duties for Employer or by reason
of Employee acting or having acted as a director or officer of Employer, to the
maximum extent permitted by law, including Section 607.0850, Florida Statutes
(including the advancement of expense provisions thereof); provided, however,
that such indemnity shall not apply to acts or omissions of Employee which
constitute misconduct, gross negligence or which were intended by Employee to
personally benefit Employee, directly or indirectly, at the expense of Employer,
unless the matter which benefits Employee was first fully disclosed to the Board
of Directors of Employer and approved by said Board.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on
the day and year first above written.
VIRAGEN, INC.
By: ___________________________
DENNIS W. HEALEY
Executive Vice President
EMPLOYEE
___________________________
GERALD SMITH
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EXHIBIT 10(lxx)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of March 1, 1999 (the "Effective Date") by and between
VIRAGEN, INC., a Delaware corporation ("Employer or the "Company"), and DENNIS
W. HEALEY ("Employee").
W I T N E S S E T H:
WHEREAS, Employer desires to employ the Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and
WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.
NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:
1. EMPLOYMENT
Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set forth.
2. TERM
Subject to the provisions for earlier termination set forth in Section
9 hereof, this Agreement shall commence on the Effective Date and shall end as
of the close of business on February 28, 2001 (the "Employment Term"). The term
"first year", as used herein, means the period commencing on the Effective Date
and ending as of the close of business on February 28, 2000, the term "second
year", as used herein, means the period commencing on March 1, 2000 and ending
as of the close of business on February 28, 2001, and the term "year", as used
herein, means, as the context requires, the first year or the second year.
Notwithstanding any of the foregoing to the contrary, if this Employment
Agreement is terminated prior to the expiration of the Employment Term, a year
shall mean, with respect to the year during which termination occurs, the period
commencing on the first day of such year and ending as of the close of business
of the day of termination of Employee's employment, and "Employment Term" shall
mean the period commencing on the Effective Date and ending as of the close of
business of the day of termination of Employee's employment.
<PAGE> 2
3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES
Employee represents and warrants to Employer that he is free to accept
employment with Employer as contemplated herein and has no other written or oral
obligations or commitments of any kind or nature which would in any way
interfere with his acceptance of employment pursuant to the terms hereof or the
full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder.
4. DUTIES AND EXTENT OF SERVICES
Employee shall be employed as Employer's Executive Vice President and
Chief Financial Officer and, as such, shall, subject to the direction of
Employer's President, supervise the conduct the Employer's operations and
affairs as assigned by the President, and perform such other duties and
responsibilities as may be assigned to Employee from time to time consistent
with such title by Employer's President. Employee agrees to devote sufficient
time, skill, attention and energy diligently and competently to perform the
duties and responsibilities reasonably assigned to him hereunder or pursuant
hereto to the best of his abilities. Employee shall use his best efforts to be
loyal and faithful at all times and constantly endeavor to improve his ability
and his knowledge of the business of Employer in an effort to increase the value
of his services for the mutual benefit of Employer and Employee. Employee agrees
not to enter into any other employment agreement, other than with subsidiaries
and/or affiliates of the Company as may be approved by the Company's Board of
Directors, during the term hereof.
5. COMPENSATION
Employee shall receive an annual salary during the Employment Term of
$252,000. Employee's salary shall be payable in accordance with the Company's
normal payroll process, currently bi-weekly. Additional consideration payable to
Employee hereunder consists of fringe benefits, if any, that shall be made
available to Employee further described herein.
6. FRINGE BENEFITS AND EXPENSES
A. EMPLOYEE PLANS. Employee shall be eligible (subject to the terms and
conditions of particular plans and programs) to participate in such medical,
hospitalization, group health, accident, disability and life insurance programs
and plans, such pension, 401K, profit sharing, stock option, incentive
compensation and stock purchase plans and such other employee benefit programs
to the same extent such plans and programs are made generally available from
time to time by Employer to all of its other similarly-situated employees;
provided, however, Employer shall be under no obligation to make any of such
plans or programs available to its employees or continue any which currently or
in the future exist, except as otherwise required by law.
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B. AUTOMOBILE. For the term of this Agreement, Employer shall provide
to Employee an automobile, acceptable to the Employer's President, at a cost not
to exceed $600.00 per month, and shall pay all gas, maintenance, insurance and
other expenses related thereto, for performance of Employee's duties on behalf
of Employer as specified herein.
C. OTHER EXPENSES. Employer shall promptly pay directly or reimburse
Employee for his reasonable out-of-pocket costs and expenses incurred in
connection with the performance of his duties and responsibilities hereunder
subject to the submission by Employee of appropriate invoices, receipts and
other supporting documentation, consistent with Employer's customary
reimbursement policies and procedures.
7. VACATIONS
Employee shall be entitled to normal vacation (of not less than two
weeks) taken by other members of senior management during each twelve-month
period of the Employment Term. Employee shall not be entitled to be compensated
for any unused vacation upon termination of this Agreement. The periods during
which Employee will be absent from work shall be determined by Employee taking
into account the needs of Employer's business.
8. FACILITIES
Employer shall provide and maintain (or cause to be provided and
maintained) such facilities, equipment, supplies and personnel as it reasonably
determines is adequate for Employee's performance of his duties and
responsibilities under this Agreement.
9. TERMINATION OF EMPLOYMENT
A. TERMINATION EVENTS. Notwithstanding any provisions of this Agreement
to the contrary, Employee's employment may be terminated by Employer with Cause
(as hereinafter defined) effective upon the delivery of written notice to
Employee. In addition, Employee's employment shall terminate (i) upon Employee's
death or (ii) upon Employee becoming Disabled (as hereinafter defined).
B. DEFINITION OF DISABLED. For purposes of this Agreement, Employee
shall be deemed to be "Disabled" when, by reason of physical or mental illness
or of injury, he is unable to perform substantially all of the duties and
responsibilities required of him in connection with his employment hereunder. No
disability shall be deemed to exist until after Employee shall be unable to
perform his duties hereunder for ninety (90) consecutive days (the "Disability
Period"). If Employee shall have been under a disability but shall have returned
to work prior to the end of the Disability Period, any new disability commencing
within thirty (30) days of the termination of the prior disability shall be a
continuation of the prior disability, and the period of all such disabilities
shall be added together to determine whether, or how much of, the Disability
Period has elapsed.
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C. DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall
be: (a) conviction for fraud or criminal conduct (other than conviction of, or a
plea of guilty to, a traffic violation), from which no appeal can be taken; (b)
habitual drunkenness or drug addiction; (c) embezzlement; (d) material sanctions
against Employee in his capacity as an employee of Employer by regulatory
agencies governing Employer or against Employer because of wrongful acts or
conduct of Employee which have a material adverse affect upon the Employer and
its business; (e) material breach or default by Employee of any of the material
terms or conditions of this Agreement, and the continuation of such material
breach or default by Employee for a period of seven (7) days following the date
of receipt of written notice from Employer specifying the breach or default of
Employee; or (f) the resignation or quitting of Employee prior to the end of the
Employment Term (in this last event, Employee's employment shall be deemed
terminated with Cause on the date that he resigns or quits).
If Employee's employment is terminated by Employer without Cause as
defined in this Section, Employee shall be given sixty (60) days written notice
of termination by Employer and be entitled to receive the greater of (i) two
years compensation and fringe benefits/expenses as provided for in Sections 5 &
6 hereof or (ii) compensation and fringe benefits/expenses as provided for in
sections 5 & 6 payable through the remainder of the Employment Term as provided
for in Section 2 hereof. Additionally, in the event of termination without
Cause, or non-renewal of this Agreement at the end of the Employment Term, any
outstanding but unexercised stock options or warrants granted to Employee shall
continue to be fully exercisable through their stated respective Exercise
Period(s).
D. TERMINATION FOLLOWING A CHANGE OF CONTROL.
i. In the event that a "Change of Control" as hereinafter defined,
and the occurrence of a "Good Reason" as hereinafter defined, of the Company
shall occur at any time during the Employment Term, the Employee shall have the
right to terminate the Employee's employment under this Agreement upon thirty
(30) days written notice given at any time within one year after the occurrence
of such events, and such termination of the Employee's employment with the
Company pursuant to this Subsection 9D, then, in any such event, such
termination shall be deemed to be a Termination by the Company Other than for
Cause and the Employee shall be entitled to such Compensation and Benefits as
set forth in Subsection 9C of this Agreement.
ii. For purposes of this Agreement, a "Change of Control" of the
Company shall mean a change in control (A) as set forth in Section 280G of the
Internal Revenue Code or (B) of a nature that would be required to be reported
in response to Item 1 of the current report on Form 8K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"); provided that, without limitation, such a change in
control shall be deemed to have occurred at such time as:
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(a) any person (as such term is used in Section 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then having the right to vote at elections
of directors; or,
(b) the individuals who at the commencement date of this
Agreement the Board of Directors cease for any reason to constitute a majority
thereof unless the election, or nomination for election, of each new director
was approved by a vote of at least two thirds of the directors then in office
who were directors at the commencement of this Agreement; or
(c) there is a failure to elect five or more (or such number of
directors as would constitute a majority of the Board of Directors) candidates
nominated by management of the Company to the Board of Directors; or
(d) the business of the Company for which the Employee's services
are principally performed is disposed of by the Company pursuant to a partial or
complete liquidation of the Company, a sale of assets (including stock of a
subsidiary of the Company) or otherwise.
Anything herein to the contrary notwithstanding, this Subsection 9D will not
apply where the Employee gives the Employee's explicit written waiver stating
that for the purposes of this Subsection 9D a Change in Control shall not be
deemed to have occurred. The Employee's participation in any negotiations or
other matters in relation to a Change in Control shall in no way constitute such
a waiver which can only be given by an explicit written waiver as provided in
the preceding sentence.
Anything to the contrary notwithstanding, termination shall not be deemed
Termination without Cause if there shall not have also occurred at or around a
change in control a second event.
The second event is that the Employee is given "Good Reason" for choosing to
terminate. Good Reason means, without the Employee's express written consent,
the occurrence of any of the following events after a Change in Control:
I. a reduction by the Employer of the Employee's rate of annual
compensation,
II. the failure of the Employer to continue in effect any Employee
benefit plan or compensation plan in which the Employee
participating following the Change in Control, unless the Employee
is permitted to participate in other plans providing substantially
comparable benefits, or the taking of any action by the Employer
which would adversely affect the Employee's participation in or
materially reduce benefits under any such plan, PROVIDED, HOWEVER,
that changes affecting the participation or benefits of all
similarly situated Employee's shall not be treated as Good Reason
hereunder,
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III. a materially adverse change in the level of the Employee's
employment responsibilities, PROVIDED, HOWEVER, that changes in
title or changes in the affiliate of the Employer which employs the
Employee shall not be treated as Good Reason hereunder,
IV. a relocation of Employers offices such that Employee would be
required to relocate his primary residence to provide for a
reasonable daily travel distance to such new location.
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
A. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee has
been informed that it is the policy of Employer to maintain as secret and
confidential all information relating to (i) the financial condition, businesses
and interests of Employer and its affiliates, (ii) the systems, know-how,
products, services, costs, inventions, patents, patent applications, formulae,
research and development procedures, notes and results, computer software
programs, marketing and sales techniques and/or programs, methods,
methodologies, manuals, lists and other trade secrets heretofore or hereafter
acquired, sold, developed and/or used by Employer and its affiliates and (iii)
the nature and terms of Employer's and its affiliates' relationships with their
respective customers, clients, suppliers, lenders, vendors, consultants,
independent contractors and employees (all such information being hereinafter
collectively referred to as "Confidential Information"), and Employee further
acknowledges that such Confidential Information is of great value to Employer
and its affiliates and, in and by reason and as a result of Employee's
employment by Employer, Employee will be making use of, acquiring and/or adding
to such Confidential Information. Therefore, Employee understands that it is
reasonably necessary to protect Employer's and its affiliates' trade secrets,
good will and business interests that Employee agree and, accordingly, Employee
does hereby agree, that Employee will not directly or indirectly (except where
authorized by the Board of Directors of Employer for the benefit of Employer
and/or its affiliate(s) and/or as required in the course of his employment) at
any time hereafter divulge or disclose for any purpose whatsoever to any
persons, firms, corporations or other entities other than Employer or its
affiliates (hereinafter referred to collectively as "Third Parties"), or use or
cause or authorize any Third Parties to use, any such Confidential Information,
except as otherwise required by law.
B. EMPLOYER'S MATERIALS. In accordance with the foregoing, Employee
furthermore agrees that (i) Employee will at no time retain or remove from the
premises of Employer or its affiliates any research and development materials,
drawings, notebooks, notes, reports, formulae, software programs or discs or
other containers of software, manuals, data, books, records, materials or
documents of any kind or description for any purpose unconnected with the strict
performance of Employee's duties with Employer and
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(ii) upon the cessation or termination of Employee's employment with Employer
for any reason, Employee shall forthwith deliver or cause to be delivered up to
Employer any and all research and development materials, drawings, notebooks,
notes, reports, formulae, software programs or discs or other containers of
software, manuals, data, books, records, materials and other documents and
materials in Employee's possession or under Employee's control relating to any
Confidential Information or any property or information which is otherwise the
property of Employer or its affiliates.
11. COVENANT-NOT-TO-COMPETE
In view of the Confidential Information to be obtained by or disclosed
to Employee, because of the know-how acquired and to be acquired by Employee,
and as a material inducement to Employer to enter into this Agreement and
continue to employ Employee, Employee covenants and agrees that, so long as
Employee is employed by Employer and for a period of two (2) years after
Employee ceases for any reason to be employed by Employer, Employee shall not,
directly or indirectly, (i) divert business from, (ii) solicit or transact any
business competitive with Employer or its affiliates with, or (iii) sell any
products or services sold or offered by Employer or its affiliates to, any
customer or former customer of Employer or its affiliates. In addition, Employee
covenants and agrees that, so long as Employee is employed by Employer and for a
period of two (2) years after Employee ceases for any reason to be employed by
Employer, Employee hereby agrees to refrain from, anywhere in the world (the
"Geographical Area"), directly or indirectly owning, managing, operating,
controlling or financing, or participating in the ownership, management, control
or financing of, or being connected with or having an interest in, or otherwise
taking any part as a stockholder (other than deminimas amounts as a passive
investor), director, officer, employee, agent, consultant, partner or otherwise
in, any business competitive with that engaged in or being developed by Employer
or its affiliates during Employee's term of employment. Without limitation of
the foregoing, Employer's business is acknowledged to include the development,
manufacture and sale of human leukocyte interferon therapy and products and
other natural or recombinant technologies aimed at enhancing the human immune
system. Employee acknowledges that Employer's business is anticipated to be
international in scope, that a similar business could effectively compete with
Employer's and its affiliates businesses from any location in the world, and
that, therefore, the restricted Geographical Area is reasonable in scope to
protect Employer's and its affiliates' trade secrets and legitimate business
interests.
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12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 & 11
Employee covenants and agrees that if Employee shall violate or breach
any of Employee's covenants or agreements provided for in Sections 10 or 11
hereof, Employer and/or its affiliates shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remunerations or benefits
which Employee directly or indirectly has realized or realizes as a result of,
growing out of or in connection with any such violation or breach. In addition,
in the event of a breach or violation or threatened or imminent breach or
violation of any provisions of Sections 10 or 11 hereof, Employer and/or its
affiliates shall be entitled to a temporary and permanent injunction or any
other appropriate decree of specific performance or equitable relief, without
posting of bond, from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other costs
incurred in connection with any such litigation, both before and at trial and at
all tribunal levels. Resort by Employer and/or its affiliates to such injunctive
or other equitable relief shall not be deemed to waive or to limit in any
respect any other rights or remedies which Employer or its affiliates may have
with respect to such breach or violation.
13. REASONABLENESS OF RESTRICTIONS
A. REASONABLENESS. Employee acknowledges that any breach or
violation of Sections 10 or 11 hereof will cause irreparable injury and damage
and incalculable harm to Employer and its affiliates and that it would be very
difficult or impossible to measure the damages resulting from any such breach or
violation. Employee further acknowledges that Employee has carefully read and
considered the provisions of Sections 10, 11 and 12 hereof and, having done so,
agrees that the restrictions and remedies set forth in such Sections (including,
but not limited to, the time period, geographical and types of restrictions
imposed) are fair and reasonable and are reasonably required for the protection
of the business, trade secrets, interests and goodwill of Employer and its
affiliates.
B. SEVERABILITY. Employee understands and intends that each
provision and restriction agreed to by Employee in Sections 10, 11 and 12 hereof
shall be construed as separate and divisible from every other provision and
restriction and that, in the event that any one of the provisions of, or
restrictions in, Sections 10, 11 and/or 12 hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof and restrictions therein shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable provisions or restrictions had not been included therein, and any
one or more of such valid provisions and restrictions may be enforced in whole
or in part as the circumstances warrant. In the event that any such provision
relating to time period and/or geographical and/or type of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum or
permissible time period, geographical area or type of restriction such court
deems reasonable and enforceable, said time period and/or geographical and/or
type of restriction shall be deemed to become and shall thereafter be the
maximum time period and/or geographical restriction and/or type of restriction
which such court deems reasonable and enforceable.
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<PAGE> 9
C. SURVIVABILITY. The restrictions, acknowledgments, covenants and
agreements of Employee set forth in Sections 10, 11, 12 and 13 of this Agreement
shall survive any termination of this Agreement or of Employee's employment (for
any reason, including expiration of the Employment Term).
D. COMPARABLE RESTRICTIONS. Employer agrees that it will use its
best efforts to have other senior executives execute and observe agreements
containing similar provisions as are contained in Sections 10, 11 and 12 hereof.
14. EMPLOYEE'S DISCLOSURES AND REPRESENTATIONS AND WARRANTIES.
Employee hereby acknowledges, represents and warrants to, and/or
agrees with, Employer as follows:
(a) Subject to Employee's right to designate family members to
own the stock acquired through exercise of the Options, if any, that Employee is
acquiring the Options for his own account, for investment purposes only, and not
with a view to the public sale or distribution thereof, except as applicable
under the Form S-8 Registration to be filed by the Company covering the Shares
underlying the Options.
(b) That Employee has full right, power and authority to perform
all obligations under this Agreement.
(c) Employee hereby agrees to indemnify and hold harmless
Employer and its shareholders, directors, officers, employees and agents from
and against any and all loss, damage, liability, cost or expense (including
reasonable attorneys' and paralegals' fees and costs before and at trial and at
all appellate levels) due to or arising out of any material inaccuracy in, or
material breach of, any material representation, warranty or covenant of
Employee contained herein.
15. INDEPENDENT COUNSEL
Employer and Employee agree that each of them have been, or were
advised and fully understand that they are entitled to be represented by
independent legal counsel with respect to all matters contemplated herein from
the commencement of negotiations at all times through the execution hereof.
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16. LAW APPLICABLE
This Agreement shall be governed by and construed pursuant to the
laws of the State of Florida, without giving effect to conflicts of laws
principles.
17. NOTICES
Any notices required or permitted to be given pursuant to this
Agreement shall be sufficient, if in writing, and if personally delivered or
sent by certified or registered mail, return receipt requested, to his
residence, in the case of Employee, or to its then principal office, in the case
of Employer.
18. SUCCESSION
This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective legal representatives, heirs, assignees
and/or successors in interest of any kind whatsoever; provided, however, that
Employee acknowledges and agrees that he cannot assign or delegate any of his
rights, duties, responsibilities or obligations hereunder to any other person or
entity.
19. ENTIRE AGREEMENT
This Agreement constitutes the entire final agreement between the
parties with respect to, and supersedes any and all prior agreements, both oral
and written, between the parties hereto, except as related to rights of the
Employee and obligations related thereto of Employer regarding previously
granted stock options and previously purchased stock, as may have been modified
from time to time. The subject matter hereof may not be amended, modified or
terminated except by a writing signed by the parties hereto.
20. SEVERABILITY
If any provision of this Agreement shall be held to be invalid or
unenforceable, and is not reformed by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision and shall not
in any way affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if such invalid or
unenforceable provision were not contained herein.
21. NO WAIVER
A waiver of any breach or violation of any term, provision or
covenant contained herein shall not be deemed a continuing waiver or a waiver of
any future or past breach or violation. No oral waiver shall be binding.
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22. ATTORNEYS' FEES
In the event that either of the parties to this Agreement
institutes suit against the other party to this Agreement to enforce any of his
or its rights hereunder, the prevailing party in such action shall be entitled
to recover from the other party all reasonable costs thereof, including
reasonable attorneys' and paralegals' fees and costs incurred before and at
trial and at all tribunal levels.
23. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall
be an original, but both of which together shall constitute one and the same
instrument.
24. INDEMNITY OF EMPLOYEE
Employer shall indemnify and hold harmless Employee from and
against any and all claims, judgments, fines, penalties, liabilities, losses,
costs and expenses (including reasonable attorneys' fees and costs) asserted
against or incurred by Employee as a result of acts or omissions of Employee
taken or made in the course of performing his duties for Employer or by reason
of Employee acting or having acted as a director or officer of Employer, to the
maximum extent permitted by law, including Section 607.0850, Florida Statutes
(including the advancement of expense provisions thereof); provided, however,
that such indemnity shall not apply to acts or omissions of Employee which
constitute misconduct, gross negligence or which were intended by Employee to
personally benefit Employee, directly or indirectly, at the expense of Employer,
unless the matter which benefits Employee was first fully disclosed to the Board
of Directors of Employer and approved by said Board.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands
on the day and year first above written.
VIRAGEN, INC.
By: ___________________________
GERALD SMITH
President
EMPLOYEE
___________________________
DENNIS W. HEALEY
<PAGE> 1
EXHIBIT 10(lxxi)
MEMORANDUM OF AGREEMENT
BETWEEN
THE ISOSCELES FUND
AND
VIRAGEN, INC.
DATED AS OF MARCH 17, 1999
This AGREEMENT (this "Agreement") is entered into as of the 17 day of
March, 1999, by and between the Isosceles Fund (the "Subscriber"), an entity
organized and existing under the laws of the Commonwealth of the Bahamas and
Viragen, Inc., a corporation organized and existing under the laws of the State
of Delaware (the "Company").
WHEREAS, the parties have entered into a Purchase Agreement to purchase
$2,000,000 in principal amount of Redeemable Convertible Notes, dated the date
hereof (the "Purchase Agreement");
WHEREAS, the parties agree that, upon the terms and subject to the
conditions contained herein, the Company may issue and sell to the Subscriber,
from time to time as provided herein, and the Subscriber may purchase, up to
$7,000,000 additional principal amount of Redeemable Convertible Notes and
Warrants (as defined below); and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) of and Regulation D under the United States Securities Act of
1933, as amended (the "Securities Act"), and/or upon such other exemption from
the registration requirements of the Securities Act as may be available with
respect to any or all of the investments to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 "CLOSING MARKET PRICE" with respect to any date shall mean
the average of the closing bid prices of the Company's Common Stock on the
Principal Market during the five preceding consecutive trading days preceding
the applicable Purchase Date.
Section 1.2 "COMMON STOCK" shall mean the Company's common stock $.01 par
value per share.
Section 1.3 "CONDITION SATISFACTION DATE" shall have the meaning
assigned to it in Article IV.
Section 1.4 "EFFECTIVE DATE" shall mean the date on which the SEC first
declares effective a Registration Statement registering resale of the Registered
Shares.
Section 1.5 "INITIAL CLOSING" shall mean the closing of the purchase
and sale of the first tranche of Notes and Warrants on the Initial Purchase
Date.
Section 1.6 "INITIAL PURCHASE DATE" shall mean the date of the original
issuance of the Notes.
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Section 1.7 "INVESTMENT AMOUNT" shall mean the amounts to be paid by
the Subscriber to the Company pursuant to Article II hereof.
Section 1.8 "MATERIAL ADVERSE AFFECT" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (a) this Agreement and (b) the Registration Rights
Agreement.
Section 1.9 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.10 "NOTES" shall mean the amount of Redeemable Convertible
Notes issued from time to time by the Company in an amount divisable by $25,000
with an interest rate of 8% per annum, and having substantially the terms and
condition set forth in Exhibit A to the Purchase Agreement.
Section 1.11 "PRE-PAYMENT DEADLINE" shall mean the sooner of the end of
the applicable Registration Period or the Effective Date.
Section 1.12 "PRINCIPAL MARKET" shall mean the Nasdaq National Market,
the Nasdaq Small-Cap Market, the American Stock Exchange or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock.
Section 1.13 "PROXY" shall mean the proxy to be filed with the SEC
pursuant to Section 4.2(k).
Section 1.14 "PURCHASE DATE" shall mean the Initial Purchase Date or
the Second Closing Date or Third Closing Date, as applicable.
Section 1.15 "PURCHASE NOTICE" shall mean a notice substantially in the
form of Exhibit C hereto and given pursuant to Section 2.1(b).
Section 1.16 "REGISTRATION PERIOD" shall mean 90 days after the
applicable Purchase Date if there are no comments from the SEC or 105 days after
the applicable Purchase Date if there are comments from the SEC.
Section 1.17 "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the Common
Stock underlying the notes, the Warrants and the Finder's Warrants, entered into
between the Company and the Subscriber as of the Subscription Date.
Section 1.18 "REGULATION D" shall mean Regulation D under the
Securities Act.
Section 1.19 "SEC" shall mean the Securities and Exchange Commission.
Section 1.20 "SECOND CLOSING" shall mean the closing of the purchase
and sale of the second tranche of Notes on the Second Closing Date.
Section 1.21 "SECOND CLOSING DATE" shall mean the date upon which the
second tranche of Notes may be purchased pursuant to Section 2.1(c)(i).
Section 1.22 "SECTION 4(2)" shall mean Section 4(2) of the Securities
Act.
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Section 1.23 "SECURITIES ACT" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.24 "THIRD CLOSING" shall mean the closing of the purchase and
sale of the third tranche of Notes on the Third Closing Date
Section 1.25 "THIRD CLOSING DATE" shall mean the date upon which the
third tranche of Notes may be purchased pursuant to Section 2.1(c)(ii).
Section 1.26 "TRADING DAY" shall mean any day during which the NASDAQ
shall be open for business.
Section 1.27 "TRANCHE" shall mean the First Tranche, the Second Tranche
or the Third Tranche as those terms are used in Section 2.1.
Section 1.28 "WARRANTS" shall mean warrants to purchase Common Stock
substantially in the form set forth in Exhibit B to the Purchase Agreement.
Section 1.29 "WARRANT AMOUNT" shall mean Common Stock equivalent to 30%
of the Investment Amount divided by the applicable Closing Market Price, subject
to adjustment to 20% for the Second and Third Tranches if agreed between the
parties hereto.
Any other defined terms shall have the meanings ascribed to them in the
Purchase Agreement.
ARTICLE II
PURCHASE AND SALE OF REDEEMABLE CONVERTIBLE NOTES AND WARRANTS
Section 2.1 INVESTMENTS.
(a) First Tranche. On the Initial Purchase Date, the Subscriber
purchased for $2,000,000 an equivalent principal amount of Notes
and Warrants in the Warrant Amount (the "First Tranche").
(b) Subsequent Purchases.
(i) Second Tranche: Following execution of the definitive
documentation and consummation of the Initial Closing, the
Company will have the option to sell pursuant to a Purchase
Notice a second tranche of Notes in an amount equal to
$3,500,000 and Warrants in the Warrant Amount (the "Second
Tranche") and the Subscriber currently to purchase such Notes
and Warrants if the conditions set out herein are satisfied.
The Second Closing will occur within 15 business days of such
Purchase Notice and shall be subject to the satisfaction of
the following conditions: (1) at least 90 and not more than
120 days shall have elapsed since the Pre-Payment Deadline for
the First Tranche; (2) the registration statement with respect
to the First Tranche shall have been declared effective and
shall remain effective to the extent not all Common Stock
registered thereon has been sold; (3) the conditions set forth
in Section 4.2 shall be met; and (4) the average closing bid
price of the Common Stock of the Company for the 10 business
days preceding the Purchase Notice for the Second Tranche
shall be at least $0.50 per share (adjusted to reflect any
stock split or reverse stock split).
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Except as set forth in Section 2.4, for the Second Tranche,
all the terms and conditions of the Initial Closing will
remain unchanged with the exception of (a) the Exercise Price
for the Warrants (as defined therein) and the Closing Market
Price which will be calculated on the basis of the price of
the Company's common stock preceding the Second Closing Date
and (b) all time frames shall commence on the Second Closing
Date.
(ii) Third Tranche: Following execution of the definitive
documentation and consummation of the Initial Closing and the
Second Closing, the Company will have the option to sell
pursuant to a Purchase Notice a third tranche of Notes in an
amount equal to $3,500,000 and Warrants in the Warrant Amount
(the "Third Tranche") and the Subscriber currently intends to
purchase such Notes and Warrants if the conditions set out
herein are satisfied. The Third Closing will occur within 15
business days of the date of such Purchase Notice and shall be
subject to the satisfaction of the following conditions: (1)
at least 90 and not more than 120 days shall have elapsed
since the Pre-Payment Deadline for the Second Tranche; (2) the
registration statements with respect to the First and Second
Tranches shall have been declared effective and shall remain
effective to the extent not all Common Stock registered
thereon has been sold; (3) the conditions set forth in Section
4.2 shall be met; (4) the average closing bid price of the
Common Stock of the Company for 10 business days preceding the
Purchase Notice for the Third Tranche shall be at least $0.50
per share (adjusted to reflect any stock split or reverse
stock split); and (5) the Company and the Subscriber will have
completed the Second Closing.
Except as set forth in Section 2.4, for the Third Tranche, all
the terms and conditions for the Initial Closing and Second
Closing will remain unchanged with the exception of (a) the
Exercise Price for the Warrants (as defined therein) and the
Closing Market Price which will be calculated on the basis of
the price of the Company's common stock preceding the Third
Closing Date and (b) all time frames shall commence on the
Third Closing Date.
Any obligations of the Subscriber with respect to the Second
and Third Tranches are further conditioned on: (1) the
Subscriber's completion of due diligence to its satisfaction
prior to the closing of each such Tranche (the approval of
such due diligence being at the Subscriber's sole discretion);
(2) the availability of authorized Common Stock of the Company
in an amount equal to 300% of the number of shares of Common
Stock that would be issued upon conversion of all outstanding
Notes (including those to be issued in such Tranche),
calculated at the conversion rate in effect at the date of the
relevant Purchase Notice, plus 150% of the number of shares of
Common Stock to be issued upon exercise of all outstanding
Warrants, calculated on the same basis; (3) to the extent that
the Company's shareholders do not vote to issue shares in
excess of the limitations imposed by the NASD, an opinion of
Company Counsel that issuances of shares under prior Tranches
will not be integrated with the applicable Tranche in
calculating such NASD limitations; (4) the issuance of an
updated Transfer Agent Consent in the form of Exhibit D hereto
and (5) no event described in Section 6.7 of the Purchase
Agreement shall be existing.
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Section 2.2 CLOSINGS. On the Second Closing Date and the Third Closing
Date, (either or both "Subsequent Closing Dates") (i) the Company shall deliver
into escrow the Notes and the Warrants, to be purchased by the Subscriber,
registered in the name of the Subscriber, and (ii) the Subscriber shall deliver
into escrow the principal amount of the Notes. In addition, on or prior to a
Subsequent Closing Date, each of the Company and the Subscriber shall deliver
all documents, instruments and writings required to be delivered or reasonably
requested by either of them pursuant to this Agreement in order to implement and
effect the transactions contemplated herein.
Payment of funds to the Company and delivery of the certificates to the
Subscriber shall occur out of escrow in accordance with the Escrow Agreement
between the parties hereto and Chase Manhattan Bank & Trust Co. dated as of
March 17, 1999 following (x) the Company's deposit into escrow of the
certificates representing the Notes and Warrants and (y) the Subscriber's
deposit into escrow of the relevant Investment Amount; PROVIDED that to the
extent the Company has not paid the expenses, including fees, expenses and
disbursements of the Subscriber's counsel in accordance with Section 13.1 of the
Purchase Agreement, the amount of such fees, expenses and disbursements shall be
paid from the escrow account in immediately available funds, at the direction of
the Subscriber, to Subscriber's counsel with no reduction in the number of Notes
or Warrants issuable to the Subscriber on such Closing Date.
Section 2.3 TERMINATION OF INVESTMENT INTENT. The Subscriber shall not
purchase Notes and Warrants in the event that (i) the applicable Registration
Statement is not effective within 90 after the applicable Purchase Date if there
are no comments from the SEC or 105 days after the Initial Purchase Date if
there are comments from the SEC; (ii) there shall occur any stop order or
suspension of the effectiveness of the Registration Statement for an aggregate
of 30 Trading Days, for any reason other than deferrals or suspension in
accordance with Section 2.1(i) of the Registration Rights Agreement, as a result
of corporate developments subsequent to the Subscription Date that would require
such Registration Statement to be amended to reflect such event in order to
maintain its compliance with the disclosure requirements of the Securities Act;
or (iii) the Company shall at any time fail to comply with the requirements of
Article VI of the Purchase Agreement.
Section 2.4 TERMS OF SUBSEQUENT PURCHASE AGREEMENT. Any purchases of
Notes or Warrants pursuant to the Second or Third Closings shall be made
pursuant to purchase agreements having the same terms and conditions,
representations, conditions and warranties as set out in the Purchase Agreement
(subject to such changes as shall be mutually agreed by the parties hereto), and
the terms of the Notes and Warrants shall be the same as those set forth in the
Purchase Agreement, except that the provisions in the Warrants and Notes
regarding (a) the number of conversions of the Notes, (b) the percentage of the
Notes converted on each Conversion Date, (c) the number repricing provisions and
Re-Set Dates of Issued Shares, (d) the Applicable Rates with respect to
Warrants, (e) the number of Warrants exercisable unconditionally after the
Purchase Date, (f) the termination of the repricing events with respect to the
Warrants, and (g) the Re-Sets of the Warrant Exercise Price shall be as set
forth in the Termsheet between the parties hereto dated February 11, 1999.
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ARTICLE III
CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER
A PURCHASE NOTICE AND THE PURCHASE BY THE SUBSCRIBER OF
NOTES IN THE SECOND CLOSING AND THIRD CLOSING
The right of the Company to deliver a Purchase Notice and the purchase
by the Subscriber of the Notes described therein incident to a closing is
subject to the satisfaction, on (i) the date of delivery of such Purchase Notice
and (ii) the applicable closing date (each a "Condition Satisfaction Date"), of
each of the following conditions:
(a) Registration of the Registrable Securities with the SEC.
As set forth in the Registration Rights Agreement, the
Company shall have filed with the SEC one or more
Registration Statements with respect to previous Tranches
that shall have been declared effective by the SEC and the
Company shall be in compliance with the Registration Rights
Agreement.
(b) Effective Registration Statement. As set forth in the
Registration Rights Agreement, the Registration Statement(s)
shall have previously become effective and shall remain
effective on each Condition Satisfaction Date and (i) neither
the Company nor the Subscriber shall have received notice
that the SEC has issued or intends to issue a stop order with
respect to a Registration Statement or that the SEC otherwise
has suspended or withdrawn the effectiveness of a
Registration Statement, either temporarily or permanently, or
intends or has threatened to do so (unless the SEC's concerns
have been addressed and the Subscriber is reasonably
satisfied that the SEC no longer is considering or intends to
take such action), and (ii) no other suspension of the use or
withdrawal of the effectiveness of a Registration Statement
or related prospectus shall exist.
(c) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company made in the
Purchase Agreement and any subsequent purchase agreement with
respect to the Second and Third Tranches shall be true and
correct in all material respects as of each Condition
Satisfaction Date as though made at each such time (except
for representations and warranties specifically made as of a
particular date) with respect to all periods, and as to all
events and circumstances occurring or existing to and
including each Condition Satisfaction Date, except for any
conditions which have temporarily caused any representations
or warranties herein to be incorrect and which have been
corrected with no continuing impairment to the Company or the
Subscriber and the Company shall have furnished a compliance
certificate in the form of Exhibit B hereto.
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by
this Agreement and the Registration Rights Agreement to be
performed, satisfied or complied with by the Company at or
prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted,
entered, promulgated or adopted by any court or governmental
authority of competent jurisdiction that prohibits or
directly and adversely affects any of the transactions
contemplated by this Agreement, and no proceeding shall have
been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by
this Agreement.
6
<PAGE> 7
(f) Adverse Changes. Since the date of filing of the
Company's most recent SEC Document, no event that had or is
reasonably likely to have a Material Adverse Effect has
occurred.
(g) No Suspension of Trading In or Delisting of Common Stock.
The trading of the Common Stock (including without limitation
the Purchased Shares) shall not have been suspended by the
SEC, the Principal Market or the NASD and the Common Stock
(including without limitation the Purchased Shares) shall
have been approved for listing or quotation on and shall not
have been delisted from the Principal Market. The issuance of
shares of Common Stock with respect to the applicable
Closing, if any, shall not violate the shareholder approval
requirements of the Principal Market.
(h) Legal Opinions. The Company shall have caused to be
delivered to the Subscriber an opinion of the Company's
independent counsel in the form of Exhibit A hereto,
addressed to the Subscriber; provided, however, that in the
event that such an opinion cannot be delivered by the
Company's independent counsel to the Subscriber, the Company
shall not deliver a Purchase Notice. If a Purchase Notice
shall have been delivered in good faith without knowledge by
the Company that an opinion of independent counsel cannot be
delivered as required, at the option of the Subscriber,
either the applicable Closing Date shall automatically be
postponed for a period of up to five Trading Days until such
an opinion is delivered to the Subscriber, or such Closing
shall otherwise be canceled. The Company's independent
counsel shall also deliver to the Subscriber upon execution
of this Agreement an opinion in form and substance reasonably
satisfactory to the Subscriber addressing, among other
things, corporate matters and the exemption from registration
under the Securities Act of the issuance of the Registrable
Securities by the Company to the Subscriber under this
Agreement and the Registration Rights Agreement.
(i) Due Diligence. No dispute between the Company and the
Subscriber shall exist as to the adequacy of the disclosure
contained in any Registration Statement.
(j) Escrow Agreement. The parties hereto shall have entered
into a mutually acceptable escrow agreement for the purchase
prices due hereunder, providing for reasonable interest on
any funds deposited into the escrow account established under
such agreement.
(k) The Company shall prepare for shareholder approval a
proxy to be filed with the SEC authorizing the issuance of
additional shares in order to comply with NASD limitations
with respect to the number of shares issued and shall receive
approval of such Proxy; PROVIDED, HOWEVER, that the Company
shall not file such Proxy with the SEC until the Registration
Statement with respect to the First Tranche has been declared
effective.
7
<PAGE> 8
(l) The Company shall have notified the transfer agent of the
terms of the Subsequent Purchase Agreement, including each
Conversion Date, Conversion Date upon which the Warrant
Exercise Price may be re-set and the deadline for filing of
the registration statement and the Effective Date. The
Company shall instruct the transfer agent to issue following
the Effective Date, the respective common stock certificates
without restrictive legend in the name of the Subscriber or
such persons as may be designated by the Subscriber
representing the number of shares of the Issuer's common
stock issuable upon each respective Conversion Date and
Warrant Exercise Date, as applicable, and deliver such shares
to escrow within two trading days of the respective
Conversion Date and Warrant Exercise Date. The Issuer
represents that instructions to impose a "stop transfer" will
be given to the transfer agent with respect to the share
certificates until the Effective Date and that thereafter the
Issuer's common stock shall otherwise be freely transferable
on the books and records of the Issuer. Prior to the Purchase
Date the Issuer will cause the transfer agent to execute and
acknowledge in writing to the Subscriber an irrevocable
consent to the foregoing (the "Transfer Agent Consent") in
the form of Exhibit D hereto. To the extent set forth in the
terms of the Note, delivery shall be electronically and the
Company shall so instruct the transfer agent.
(m) Other. On each Condition Satisfaction Date, the
Subscriber shall have received and been reasonably satisfied
with such other certificates and documents as shall have been
reasonably requested by the Subscriber in order for the
Subscriber to confirm the Company's satisfaction of the
conditions set forth in this Article III, including, without
limitation, a certificate in substantially the form and
substance of Exhibit D hereto, executed in either case by an
executive officer of the Company and to the effect that all
the conditions to such Closing shall have been satisfied as
at the date of each such certificate.
ARTICLE IV
CHOICE OF LAW
Section 4.1 CHOICE OF LAW. This Agreement shall be construed under the
laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Memorandum of
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
THE ISOSCELES FUND
By:
_____________________________
Name:
Title:
8
<PAGE> 9
VIRAGEN, INC.
By:
_____________________________
Dennis W. Healy
Exec. VP/CFO/Treas./Secy
9
<PAGE> 10
EXHIBIT A
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
1. The Company is duly organized and validly existing under the laws of
the state of Delaware and has requisite power and authority to enter into the
Purchase Agreement, the Registration Rights Agreement, the Notes, the Warrants
and the Escrow Agreement (the "Agreements"); the execution and delivery of the
Agreements and the consummation by the Company of the transactions contemplated
thereby are duly authorized by all necessary corporate action and no further
consent or authorization of the Company or its Board of Directors or
Shareholders is required; and the Agreements have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
2. The Shares of Common Stock to be received upon exercise of the
Warrants or conversion of the Notes are validly issued and outstanding, fully
paid and non-assessable and subject to no preemptive rights.
3. The number of authorized shares of the Company will be unaffected by
a reverse stock split.
4. The sale of the Notes and the Warrants and the conversion or
exercise thereof is not required to be registered under the Securities Act of
1933.
<PAGE> 11
EXHIBIT B
COMPLIANCE CERTIFICATE
VIRAGEN, INC.
The undersigned, hereby certifies, with respect to the Notes and
Warrants of Viragen, Inc. (the "Company") issuable in connection with the
Purchase Notice, dated _____________ (the "Notice"), delivered pursuant to the
Memorandum of Agreement, dated March 17, 1999, by and between the Company and
the Isosceles Fund (the "Agreement"), as follows:
1. The undersigned is the duly elected Executive Vice President and
Chief Financial Officer of the Company.
2. The representations and warranties of the Company set forth in
Article IV of the Purchase Agreement dated March 17, 1999are true and correct in
all material respects as though made on and as of the date hereof.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.
The undersigned has executed this Certificate this ____ day of
________, 199_.
------------------------------------
Dennis W. Healey
Executive Vice President
and Chief Financial Officer
<PAGE> 12
EXHIBIT C
FORM OF PURCHASE NOTICE
The Isosceles Fund
c/o Manzur Associates, Ltd.
Witan Court, 270 Witan Gate West
Milton Keynes, MK9 1EJ
United Kingdom
[Date]
Dear Sirs,
Pursuant to the Memorandum of Agreement between us dated March 17, 1999
(the "Agreement"), and subject to the terms and conditions set forth therein we
hereby exercise our right to require you to purchase Notes (as defined in the
Agreement) in the principal amount of $3,500,000. The closing with respect to
such purchase is to take place within 15 days of the date of this Notice,
provided that the conditions set forth in the Agreement are met.
Sincerely,
VIRAGEN, INC.
By:
-----------------------------
Name:
Title:
<PAGE> 13
EXHIBIT D
FORM OF TRANSFER AGENT CONSENT
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE
JURISDICTION OF OWNED BY
INCORPORATION REGISTRANT
--------------- ----------
<S> <C> <C>
Vira-Tech, Inc.(1).......................................... Florida 100%
Viragen Technology, Inc.(2)................................. Florida 100%
Viragen Reagents, Inc.(3)................................... Florida 100%
Florida Capital Enterprise Corp.(4)......................... Florida 100%
Viragen U.S.A., Inc.(5)..................................... Delaware 94%
Viragen (Europe) Ltd.(6).................................... Delaware 87%
Viragen (Scotland) Ltd.(7).................................. Scotland (UK) 87%
Viragen (Germany) GmbH(8)................................... Germany 87%
</TABLE>
- ---------------
(1) Incorporated January 12, 1981
(2) Incorporated January 13, 1995
(3) Incorporated July 14, 1997
(4) Incorporated November 20, 1998
(5) Incorporated April 4, 1996
(6) Acquired December 8, 1995
(7) Incorporated January 17, 1995; 100% owned by Viragen (Europe) Ltd.
(8) Acquired November 14, 1997; 100% owned by Viragen (Europe) Ltd.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-50403) pertaining to the Viragen, Inc. Amended 1997 Stock
Option Plan and (Form S-8 No. 33-60131) pertaining to the Viragen, Inc. 1995
Stock Option Plan, Employment Contracts with Key Executives and Stock Option
Agreements with Directors of Viragen, Inc. and (Form S-8 No. 333-18197)
pertaining to the Consulting Agreement with Girmon Investment Co., Limited and
Common Stock Purchase Option Granted to Key Employee, of our report dated
September 18, 1998, 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.
/s/ Ernst & Young LLP
Miami, Florida
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,055,587
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,616,077
<PP&E> 9,358,122
<DEPRECIATION> 3,337,807
<TOTAL-ASSETS> 8,529,324
<CURRENT-LIABILITIES> 3,906,518
<BONDS> 0
120,920
2,650
<COMMON> 699,135
<OTHER-SE> 3,013,554
<TOTAL-LIABILITY-AND-EQUITY> 8,529,354
<SALES> 0
<TOTAL-REVENUES> 374,064
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,012,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 574,375
<INCOME-PRETAX> (10,650,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,650,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,650,832)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
