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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-75749
Selling Security Holder Offering Prospectus
Viragen, Inc.
6,220,121 shares of common stock
OTC Bulletin Board symbol: VRGN
Recent price: $1.40 at January 25, 2000.
The selling security holders will receive the proceeds from the re-sale of the
shares. They may be considered underwriters within the meaning of the
Securities Act of 1933 in connection with the sale of the shares offered.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is February 11, 2000.
<PAGE> 2
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 11
Price Range of Common Stock and Dividend Policy 12
Capitalization 13
Selected Consolidated Financial Data 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Business 22
Management 33
Certain Transactions 40
Principal Stockholders 41
Selling Security Holders 42
Plan of Distribution 46
Description of Securities 46
Shares Eligible for Future Sale 48
Legal Matters 48
Experts 49
Additional Information 49
List of Financial Statements F-1
You should rely only on the information contained in this document or
to which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information contained in this document may only be
accurate on the date of this document.
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PROSPECTUS SUMMARY
This summary highlights information included elsewhere in our
prospectus. This summary does not include all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors."
OUR COMPANY
Viragen, Inc. is in the business of researching and developing products
which help the human immune system resist viral infections. We were organized in
1980. Our primary product is a natural interferon product named Omniferon(TM),
which we produce using 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 like hepatitis,
multiple sclerosis, cancer and HIV/AIDS.
Neither the United States Food and Drug Administration nor the
European Union regulatory authorities has approved our product. When we refer to
"product" later in this prospectus, we do not intend to imply that our product
has regulatory approvals that will allow it to be marketed currently. 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. We
are concentrating our efforts in obtaining approval for our Omniferon product.
This will be initially in the European Union and eventually from the Food and
Drug Administration for the United States.
Our affiliate, Viragen (Scotland) Ltd., has entered into a license and
manufacturing agreement with the Common Services Agency of Scotland, and the
Scottish National Blood Transfusion Service. As a result of this agreement, the
Scottish National Blood Transfusion Service will help in the manufacture of our
natural interferon product for exclusive distribution in the European Union and
on a non-exclusive basis worldwide. The Scottish National Blood Transfusion
Service will receive royalties and special access to our Omniferon product. We
have also entered into agreements with the American Red Cross, America's Blood
Centers and the German Red Cross for supplies of white blood cells. These
sources of white blood cells will enable us to manufacture Omniferon in
sufficient quantities to conduct planned European Union and United States
clinical trials. Subject to regulatory approvals, these sources will also
provide sufficient quantities of white blood cells for commercial manufacturing
in the future.
Our executive offices are located at 865 S.W. 78th Avenue, Suite 100,
Plantation, FL 33324. Our telephone number is (954) 233-8746; our facsimile
number is (954) 233-1414.
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THE OFFERING
Common stock offered
by selling security holders: 6,220,121 shares
Common stock to be outstanding
after the offering: 79,023,997 shares
This number excludes 10,120,339
shares of common stock reserved for
issuance upon the conversion of
preferred stock and exercise of
outstanding options and warrants held
by officers, directors, employees and
consultants.
Use of proceeds: We will not receive any of the
proceeds from re-sale of common stock
offered by selling security holders.
OTC Bulletin Board symbol: VRGN
Risk factors: For a discussion of risks that you
should consider before buying shares
of our common stock from selling
security holders, see "Risk Factors."
Summary financial data:
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
-------------------------------------------------------- ----------------------
1999 1998 1997 1996 1995 1999 1998
---------- ---------- ----------- ------- -------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $ 374 $ 1,143 $ 1,404 $ 739 $ 722 $ 20 $ 107
Net Loss .......................... (10,651) (7,856) (4,775) (4,672) (3,952) (2,863) (2,398)
Loss attributable to common stock . (11,653) (10,354) (14,674) (5,570) (3,955) (2,865) (3,036)
Loss per average common share ..... (0.19) (0.21) (0.37) (0.15) (0.12) (0.04) (0.06)
Weighted average shares outstanding 60,109 50,503 39,135 36,198 32,138 72,876 53,299
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
--------------------------------------------------------------------- -------------------
1999 1998 1997 1996 1995 1999
------------- ------------- -------------- ------------- ------------ -------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ (2,290) $ 7,842 $ 29,331 $18,266 $ 1,614 $ (2,156)
Total assets 8,529 15,895 37,462 20,617 3,330 7,721
Long-term debt 352 7,466 239 116 857 336
Stockholders' equity 3,836 5,887 32,144 17,275 1,698 4,044
</TABLE>
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RISK FACTORS
An investment in our common stock is very risky. You should be aware
you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully read this entire prospectus and
consider the following risk factors.
WE HAVE A HISTORY OF LOSSES DUE TO LACK OF SALES AND REGULATORY APPROVAL. IF WE
DO NOT RECEIVE NECESSARY REGULATORY APPROVALS AND DEVELOP PROFITABLE OPERATIONS,
WE WILL NEED TO TERMINATE OUR OPERATIONS. AS A RESULT, INVESTORS MAY LOSE THEIR
ENTIRE INVESTMENT.
Since the organization of Viragen, we have incurred operating losses.
Losses have totaled:
o $2,862,529 for the three month period ended September 30, 1999,
o $10,650,832 for the fiscal year ended June 30, 1999,
o $7,856,136 for the fiscal year ended June 30, 1998, and
o $4,775,245 for the fiscal year ended June 30, 1997.
At September 30, 1999, we had a total deficit since organization of $53,386,436
and a working capital deficit of $2,156,091.
We presently produce a single product known as Omniferon(TM), a natural
human leukocyte derived alpha interferon. However, because the United States
Food and Drug Administration and the European Union regulatory authorities have
not yet approved our natural interferon product, we cannot sell this product. As
a result, we have no current source of income from operations.
We will not be able to reduce our losses or operate profitably, until
we obtain the necessary approvals to sell natural interferon. While we currently
have a 10% interest in a company that is developing a product for the treatment
of rheumatoid arthritis, we expect sales of natural interferon to be our primary
source of income. Investors must understand that our natural interferon product
may never receive the necessary approvals from regulatory authorities. In
addition, even if the product is approved, we may not be able to recover
sufficient profit from the sale of natural interferon. If we do not obtain the
required approvals or we do not profit from the sale of natural interferon or
other products, Viragen most likely will terminate its operations. In that case,
those who have invested in Viragen will likely lose their entire investment.
As a result of these conditions, our independent certified public
accountants included an explanatory paragraph in their report dated September
17, 1999. Their report indicated that these conditions raised substantial doubt
about our ability to continue as a going concern. As of January 25, 2000, our
financial condition has not improved.
VIRAGEN HAS BEEN DELISTED FROM NASDAQ. IF THE PENNY STOCK RULES BECOME
APPLICABLE TO OUR STOCK, IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK.
On June 28, 1999, the NASDAQ Stock Market delisted our common stock.
The hearing review panel was concerned that we would not be able to maintain a
closing bid price for our common stock of at least $1.00, as well as continue to
meet NASDAQ's minimum $4 million net worth requirement. Our common stock is now
traded on the OTC Bulletin Board, which is a more limited market than the NASDAQ
Stock Market. Stocks quoted in this market generally do not have the same
following as stocks traded on the NASDAQ Stock Market. In general, local and
national newspapers do not quote OTC Bulletin Board stocks in the stock market
tables. In addition, our common stock could become subject to the penny stock
rules under the Securities Exchange Act of 1934, if we do not maintain a minimum
tangible net worth of at least $2 million. As of September 30, 1999, our
tangible net worth totaled $4,044,026.
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The penny stock rules require broker-dealers to deliver a standardized
risk disclosure document prepared by the Securities and Exchange Commission,
prior to a transaction in a penny stock. This document provides information
about penny stocks and the risks in the penny stock market. The broker-dealers
must also provide the customer the following:
o current bid and offer quotations for the penny stock,
o the compensation of the broker-dealer and its salesperson in the
transaction, and
o monthly account statements showing the market value of each penny
stock held in the customer's account.
The broker-dealers must give the quotations and compensation
information to the customer, orally or in writing, prior to completing the
transaction. They must give this information to the customer, in writing, before
or with the customer's confirmation.
In addition, the penny stock rules require that, prior to a transaction
in a penny stock, the broker and/or dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser.
The broker and/or dealer must receive the purchaser's written agreement to the
transaction. These disclosure requirements may reduce the level of purchases in
our common stock and trading activity in the secondary market for Viragen's
common stock. If our common stock becomes subject to the penny stock rules, it
will be more difficult for you to sell the common stock. This may reduce the
value of your investment.
COMPETITIVE CONDITIONS IN THE PHARMACEUTICAL INDUSTRY MAY FORCE US TO TERMINATE
OPERATIONS.
Competition for investment capital and market share in the
immunological and pharmaceutical products industry is very strong. Our
competitors, which include major pharmaceutical companies, have more experience
in research, development and clinical testing of pharmaceutical and biomedical
products. We do not have, as yet, an immunological product that can be marketed.
Our competitors also have greater financial, marketing and human resources than
Viragen. Some of our competitors, including Hoffman-La Roche, Inc.,
Shering-Plough Corporation, Biogen, Inc., Chiron Corp., and Baxter Laboratories,
already have approvals for their synthetic interferons. They have been marketing
their products, since 1986. These companies have received wide acceptance from
the medical community and the patient population for their products. This will
make it more difficult for us to introduce our product, if and when we receive
regulatory approval. We only expect competition to increase in the future. In
addition, technological advances made by our competitors may make synthetic
products more effective, less costly and with less harmful side effects. Viragen
may not be able to keep pace with technological advances by others, either
because we do not have sufficient resources or because we cannot achieve greater
improvements in our technology. If we are unable to compete with our larger,
more experienced competitors, we may terminate operations.
Competition for funding in the pharmaceutical industry is also intense.
As explained above, we have no source of income, as yet. We may not have
sufficient sources of income or investment capital for a significant period of
time, if ever. We need additional funds to conduct clinical trials so we can
receive regulatory approvals. We must obtain additional funding from outside
sources to conduct these trials. If we are unable to locate funding or obtain
funding on reasonable terms, we will most likely terminate operations. In that
case, any investment in Viragen could be lost.
GOVERNMENT REGULATION MAY AFFECT VIRAGEN'S ABILITY TO DEVELOP AND DISTRIBUTE
NATURAL INTERFERON.
All pharmaceutical manufacturers are subject to state and federal rules
and regulations. In particular, we must comply with the United States Food and
Drug Administration guidelines governing production, testing and marketing.
European Union regulatory authorities also impose similar regulations. These
rules and regulations are constantly changing. These changes could extend the
period of clinical trials, involve costly compliance measures and may restrict
our ability to produce and distribute our natural interferon product based on
the results of testing. It is possible that we may never receive these
regulatory approvals for any specific illness or range of illnesses that we are
attempting to treat with our natural interferon product.
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IF PATIENTS HAVE PROBLEMS RECEIVING THIRD PARTY REIMBURSEMENTS OF OUR PRODUCT,
IT WILL BE MORE DIFFICULT TO MARKET OUR PRODUCT. IN ADDITION, OUR MARKETING
COSTS WOULD INCREASE.
Our ability to successfully market our products depends in part on the
receipt of reimbursements from government health administration authorities,
private health coverage insurers and other organizations. The pricing of
products similar to ours or the amount of reimbursement available to patients
may affect our ability to market our product at a profit. Third party
reimbursement limitations could restrict the patient population that will make
use of our product. If we have difficulty in getting third party payors to allow
reimbursement for our product, this could also require us to increase our
marketing efforts. This will involve greater expenses.
OUR PROPRIETARY TECHNOLOGY AND ANY FUTURE PATENTS THAT WE RECEIVE MAY NOT
PROVIDE SUFFICIENT PROTECTION TO US.
We intend to rely, in part, on technology developed by Viragen's
scientists for the efficient and safe production of natural interferon. We
believe that this technology allows us to produce our natural interferon more
efficiently and with less possible contaminants. Viragen recently filed two
patent applications relating to our Omniferon production technology. If we are
not successful in obtaining patents or demonstrating that our production process
is proprietary under trade secret law, we will have limited protection against
those who might copy our technology. In addition, we may be damaged if we are
accused of misappropriating a competitor's proprietary technology, even if these
claims are untrue. We cannot assure you that our patent applications will be
approved. Even if granted, we cannot assure you that these patents or our other
proprietary rights will provide necessary protection to us.
TECHNOLOGY TRANSFERS BY VIRAGEN TO THIRD PARTIES MAY NOT RESULT IN REVENUE TO
US.
One of our proposed marketing strategies is to license our
manufacturing technology to third parties. They, in turn, will use it to produce
natural human leukocyte alpha interferon outside the United States. We cannot
guarantee that these third parties will be able to successfully market the
product or that we will receive revenue from their efforts.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND OUR PRODUCT LIABILITY
INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL CLAIMS OR CONTINUE TO BE AVAILABLE
TO US.
Persons, who claim to be injured from use of our natural interferon,
may file claims for personal injuries or other damages against us. In order to
protect Viragen against these claims, we maintain product liability insurance in
the amount of $1,000,000 per occurrence and $2,000,000 in total. We cannot be
sure that this insurance will be adequate to cover any liabilities that may
result from the use of our natural interferon. Also, we may not be able to
afford this form of insurance in the future.
OUR RELIANCE ON FOREIGN THIRD PARTY MANUFACTURER MAY DISRUPT OPERATIONS.
Viragen (Scotland) Ltd., a wholly-owned subsidiary of Viragen (Europe)
Ltd., our majority-owned subsidiary, entered into a manufacturing agreement with
the Common Services Agency of Scotland for the production of Omniferon. Under
this agreement, Viragen (Scotland) and the Common Services Agency will jointly
manufacture Omniferon. Our decision to use an offshore manufacturer could expose
us to risks involved with fluctuations in exchange rates of foreign currencies.
In addition, relying on the Common Services Agency exposes us to all the risks
of dealing with a foreign manufacturing source. These risks include:
o local governmental regulations,
o tariffs,
o import and export restrictions,
o transportation,
o taxes, and
o foreign health and safety regulations.
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Foreign manufacturing arrangements will limit our control. For
instance, the Common Services Agency has limited our access to portions of their
facility, when introducing stimulating agents during production. This may lead
to the disruption of our operations. This could negatively affect our operations
and your investment in us.
WE ARE DEPENDENT ON KEY EXECUTIVES AND THEIR LOSS WOULD BE DAMAGING TO VIRAGEN.
Mr. Gerald Smith, our chairman of the board and president, Mr. Dennis
W. Healey, our executive vice president, treasurer and chief financial officer,
and Dr. D. Magnus Nicolson, the managing director of Viragen (Scotland) Ltd.,
manage our day-to-day operations. We have employment agreements with Messrs.
Smith, Healey and Nicolson which restrict competitive activities by them.
However, the loss of their services would have a negative effect on our ability
to conduct business. Our future success will greatly depend on our ability to
attract and retain additional skilled personnel in various phases of our
operations.
WE WILL REQUIRE ADDITIONAL FUNDING TO CONDUCT OPERATIONS. THE FUNDING MAY NOT BE
AVAILABLE AND CAUSE US TO TERMINATE OUR OPERATIONS.
Viragen will continue to require significant funding in the future to
continue its operations. We estimate that we will require funding of
approximately $30 million over the next three years. These funds would be used
to fund operations and clinical trials. We cannot assume that any additional
financing will be available. If financing is not available, we may have to sell,
suspend, or terminate our operations.
OUR TRANSACTION WITH SELLING SECURITY HOLDERS AND OTHER FINANCINGS MAY CAUSE
SUBSTANTIAL DILUTION TO OUR STOCKHOLDERS.
We expect to issue up to 6,220,121 shares of our common stock, or 8.0%
of the outstanding common stock as of January 25, 2000, to the
selling security holders in connection with the notes and warrants described in
this prospectus. Sales of our shares by the selling security holders may depress
the price of our stock in the market.
As described in the preceeding risk factor, we will need additional
funding to continue to conduct operations. We will likely raise these funds
through additional equity transactions in the near future. In order to raise the
amount of funding needed, we may have to issue millions of additional shares.
Future transactions with other investors could further depress the price of our
stock because of additional stockholder dilution.
In November 1999, we entered into an agreement to issue a total of
4,600,000 shares of our common stock and 375,000 warrants to purchase common
stock in exchange for $2.5 million.
PAYMENT OF PENALTY FEES AND REDEMPTION OF COMMON SHARES HELD BY SELLING SECURITY
HOLDERS COULD NEGATIVELY AFFECT OUR OPERATIONS.
Events of default, on our obligations to the selling security holders,
include:
o default under the promissory notes,
o failure to maintain effectiveness of our registration under
the Securities Act of 1933,
o delisting our stock from NASDAQ (which has occurred), and
o failure to have our registration statement become effective by
July 7, 1999 (which has occurred).
Penalties on default involve payments of many thousands of dollars. The
sum of the penalties depends on the period that we are in non-compliance. To
date, we have incurred approximately $320,000 in penalty fees. The penalty
amount will continue to increase $40,000 per month, until this registration
becomes effective.
The selling security holders have the right to force redemption of
their common shares, because this registration statement is not yet effective.
As described in the "Selling Security Holders" section of this prospectus, the
redemption value, if elected by the selling security holders, would exceed the
initial investment of $2 million. The redemption value is the greater of:
o $2 million and related interest plus a premium of 15%; or
o market value of the shares to be redeemed, on the date the
selling security holders elect redemption.
Payment of the penalty fees and redemption of common shares held by
selling security holders will negatively affect our ability to finance our
current and future operations.
WE MAY HAVE VIOLATED SECTION 5 OF THE SECURITIES ACT OF 1933 AND MAY HAVE A
CONTINGENT LIABILITY TO INVESTORS.
In March 1999, we issued 8% convertible promissory notes in the amount
of $2,000,000 to the selling security holders. In June 1999, we modified our
agreements with the selling security holders to lower the conversion price of
their promissory notes. We did this in order to obtain a waiver from the selling
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security holders for an interim financing. We did the interim financing in May
1999 when we received $1,375,000 from three investors through the sale of our
common stock. Since we had a pending registration statement at the time of the
June 1999 modification and the May 1999 interim financing, the Securities and
Exchange Commission has informed us that we may have violated Section 5 of the
Securities Act of 1933. If this is so, we may have a contingent liability to the
selling security holders and the three investors in the interim financing, since
they may have the right to rescind their transactions.
OUR OPERATIONS MAY SUFFER FROM COMPUTER PROBLEMS RELATING TO THE YEAR 2000.
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the year 2000. Some older
computer systems store dates with only a two-digit year with an assumed prefix
of "19." Consequently, this limits those systems to dates between 1900 and 1999.
If not corrected, many computer systems and applications could fail or create
erroneous results by or at the year 2000.
Because we rely heavily on computers to conduct our business, we are
subject to all the risks associated with the year 2000 condition. We have
assessed the scope of our risks related to problems these computer systems may
have experienced upon the arrival of the year 2000. We believe that we have
adequately addressed these risks. In addition, we questioned our vendors and
business partners about their progress in identifying and addressing problems
related to the year 2000. However, we cannot assure you that all of these third
party systems or our computer systems are year 2000 compliant.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never paid cash dividends on our common stock. We do not expect
to pay cash dividends on our common stock any time in the near future. The
future payment of dividends directly depends upon our future earnings, capital
requirements, financial requirements and other factors that our board of
directors will consider. For the foreseeable future, we will use any earnings
from operations, if any, to finance our growth, and we will not pay dividends to
our common stockholders. Since we do not anticipate paying cash dividends on our
common stock, return on your investment, if any, will depend solely on an
increase in the market value of Viragen's common stock.
POSSIBLE SALES OF SECURITIES BY CURRENT STOCKHOLDERS AND DEPRESSIVE EFFECT ON
MARKET VALUE OF OUR STOCK.
As of January 25, 2000, we had 14,621,707 shares of common stock
outstanding, which were "restricted securities," as defined by Rule 144 under
the Securities Act of 1933. Also, as of that date, we had convertible preferred
stock, options and warrants outstanding, which if exercised, would result in
10,120,339 additional shares of our common stock outstanding. Under Rule 144, a
person who holds restricted securities for a period of one year may sell a
limited number of shares to the public in ordinary brokerage transactions. Sales
under Rule 144 and sales of common stock covered by registration statements
filed by us, including shares covered by this prospectus, may reduce the market
price of our common stock and will increase the number of our publicly-held
securities.
WE COULD USE PREFERRED STOCK TO RESIST TAKEOVERS AND MAY ALSO CAUSE POTENTIAL
ADDITIONAL DILUTION.
Our Certificate of Incorporation authorizes 1,000,000 shares of
preferred stock, of which at January 25, 2000, 2,650 shares of series A
preferred stock were issued and outstanding. Our Certificate of Incorporation
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gives our board of directors the authority to issue preferred stock without
approval of our stockholders. We may issue additional shares of preferred stock
to raise money to finance our operations. We may authorize the issuance of the
preferred stock in one or more series. In addition, we may set the following
terms:
o dividend and liquidation preferences,
o voting rights,
o conversion privileges,
o redemption terms, and
o other privileges and rights of the shares of each authorized
series.
The issuance of large blocks of preferred stock could possibly have a dilutive
effect to our existing stockholders. It can also negatively impact our existing
stockholders' liquidation preferences. In addition, while we include preferred
stock in our capitalization to improve our financial flexibility, we could
possibly issue our preferred stock to friendly third parties to preserve control
by present management. This could occur if we become subject to a hostile
takeover that could ultimately benefit Viragen and Viragen's stockholders.
USE OF PROCEEDS
Viragen received $1,861,820, net of finders' fees, from the sale of the
convertible notes with detachable warrants. We may receive additional proceeds
upon the exercise of the warrants. We will not, however, receive any proceeds
from the re-sale of shares of common stock acquired by the selling security
holders.
Viragen used these proceeds to fund operations.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Viragen's common stock traded on the NASDAQ National Market between
December 29, 1996 and June 28, 1999, under the symbol "VRGN". Our common stock
began trading on the over-the-counter bulletin board on June 29, 1999. The stock
symbol continues to be "VRGN". The following table lists the high and low bid
quotations for our common stock since July 1, 1997.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1999 - 2000
First quarter ended 9/30/99 $ 1.05 $ 0.48
Second quarter ended 12/31/99 1.59 .55
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. These quotations may not necessarily
represent actual transactions.
As of January 25, 2000, we had approximately 2,700 stockholders of record.
As of January 25, 2000, the closing price of the common stock was $1.40 per
share.
We have never paid any dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future because:
o we have experienced losses since inception,
o we have significant capital requirements in the future, and
o we presently intend to retain future earnings, if any, to
finance the expansion of our business.
Future dividend policy will depend on:
o our earnings, if any,
o capital requirements,
o expansion plans,
o financial condition, and
o other relevant factors.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30,
1999:
o on an actual basis; and
o reflects the issuance of 4,112,219 shares of common stock issued
upon conversion of the 8% convertible promissory notes, including
related interest, at the rate of $0.50 per common share. The
re-set shares totaling 1,098,193 shares are also included
<TABLE>
<CAPTION>
September 30, 1999
------------------------
Actual
------------------------
<S> <C>
Long-term debt, less current portion $ 213,018
Convertible series I cumulative preferred stock, $1.00 par value. Authorized 200
shares; issued and outstanding 11 shares 123,137
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
Common stock, $0.01 par value. Authorized 125,000,000 shares;
issued 75,400,430 shares, of which 845,277 shares are held as treasury stock 754,002
Capital in excess of par value 58,229,493
Treasury stock, at cost (1,277,613)
Retained deficit (53,386,436)
Accumulated other comprehensive income 192,381
Notes due from directors (470,451)
Total stockholders' equity 4,044,026
----------
Total capitalization $4,380,181
==========
</TABLE>
The table does not reflect the possible issuance of 1,009,709 common shares,
which are issuable upon exercise of the selling security holders' warrants. Also
the table does not reflect 2,600,000 common shares issued through December 1999
and an additional 2,000,000 common shares that we expect to issue to investors
in our November 1999 Regulation S offering upon effectiveness of that
registration statement.
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SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with selected historical
consolidated financial data of Viragen, Inc. We have prepared this information
using Viragen Inc.'s audited consolidated financial statements for the five
years ended June 30, 1999 and the unaudited consolidated condensed financial
statements for the three months ended September 30, 1999 and 1998.
When you read this selected historical consolidated financial data, it
is important that you read along with it the historical consolidated financial
statements and related notes included in our annual reports, as well as the
section of our annual reports titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our annual reports are filed
with the Securities and Exchange Commission.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
--------------------------------------------------------------- --------------------------
1999 1998 1997 1996 1995 1999 1998
------------ ------------ ------------ ----------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 374 $ 1,143 $ 1,404 $ 739 $ 722 $ 20 $ 107
Net Loss (10,651) (7,856) (4,775) (4,672) (3,952) (2,863) (2,398)
Loss attributable to common stock (11,653) (10,354) (14,674) (5,570) (3,955) (2,865) (3,036)
Loss per average common share (0.19) (0.21) (0.37) (0.15) (0.12) (0.04) (0.06)
Weighted average shares outstanding 60,109 50,503 39,135 36,198 32,138 72,876 53,299
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
---------------------------------------------------------------------------- ------------------
1999 1998 1997 1996 1995 1999
--------------- -------------- --------------- -------------- -------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ (2,290) $ 7,842 $ 29,331 $ 18,266 $ 1,614 $ (2,156)
Total assets 8,529 15,895 37,462 20,617 3,330 7,721
Long-term debt 352 7,466 239 116 857 336
Stockholders' equity 3,836 5,887 32,144 17,275 1,698 4,044
</TABLE>
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report on Form S-1 that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. These include statements regarding Viragen's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include our statements regarding liquidity, anticipated cash needs
and availability, and anticipated expense levels in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" including expected
product clinical trial commencement dates, product introductions, expected
research and development expenditures and related anticipated costs. All
forward-looking statements included in this document are based on information
available on this date, and we assume no obligation to update any of our
forward-looking statements. You should note that actual results could differ
materially from those contained in forward-looking statements. Among the factors
that may cause our actual results to differ materially are the risks discussed
in the "Risk Factors" section included in this prospectus.
Viragen has incurred operational losses and operated with negative cash
flows since its inception in December 1980. Losses have totaled $2,862,529,
$10,650,832, $7,856,136, and $4,775,245 for the three month period ended
September 30, 1999, and fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of January 25, 2000, Viragen has limited capital to sustain its
operations. The fiscal 1999 report of independent certified public accountants,
included in our annual report on Form 10-K/A, noted our financial condition
raises substantial doubt as to our ability to continue as a going concern. Our
financial condition has not improved since this report was issued. 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, we will need to significantly reduce or
completely suspend all operations.
Our working capital deficit totaled approximately $2,156,000 on September
30, 1999, an increase in working capital of $134,000 from the previous year end
balance. This increase was attributed to the conversion of $2,000,000 in
convertible notes plus related interest into 5,210,412 shares of common stock.
This increase was reduced by operational losses of approximately $2,863,000 and
additions to property, plant and equipment of $219,000.
While subject to significant limitation, Viragen, at September 30, 1999,
has available approximately $33 million in net tax operating loss carry-forwards
expiring between 2000 and 2019. We can use these carry-forwards to offset
taxable income, if any, during those periods. Our ability to generate revenues
during future periods is dependent upon obtaining regulatory approvals of our
Omniferon and/or LeukoVAX products. As we cannot determine that we will be
successful in obtaining 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. As a result, we have recognized a
valuation allowance to offset 100% of the deferred tax assets related to these
carry-forwards.
We believe that our Omniferon product, which is currently under
development, can be manufactured in sufficient quantity and be priced at a level
to offer patients an attractive alternative treatment to the synthetic
interferons currently being marketed. We began our clinical trials in the
European Union during the forth calendar quarter of 1999 and intend to
eventually submit an Investigational New Drug Application to the U.S. Food and
Drug Administration. Approvals of these projects cannot be assured and require
the successful completion of lengthy and costly clinical trials. The completion
of the projects also depends on our ability to raise significant additional
investment capital.
We need additional funding to conduct the clinical trial process relating
to Omniferon both in the European Union and domestically, prior to receiving
regulatory approval to market Omniferon. Management estimates our funding
requirements related to approval of Omniferon for hepatitis C, the first
approval we are seeking in the European Union, are as follows:
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<PAGE> 16
o Phase I and Phase II trials -- $3.2 million, and
o Phase III studies -- $9.1 million.
We estimate that we will require funding of approximately $30 million, over the
next three years. These funds would be used to fund operations and clinical
trials.
In addition, anticipated funding requirements for U.S. operations include:
o the establishment of domestic manufacturing capacity -- $6 million,
o joint research and development projects -- $4 million, and
o commencement of domestic preclinical Phase I and Phase II studies
-- $1.5 - $2.0 million.
We will also use future fundings, if any, for continued product development,
general working capital purposes, including administrative support functions,
and possible equity investments in businesses complementary to our operations.
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 has
focussed on the development of LeukoVAX, an immunomodulating white blood cell
(leukocyte) preparation. LeukoVAX is currently in U.S. Food and Drug
Administration Phase I/II clinical trials for rheumatoid arthritis. Under the
terms of this agreement, we have options to acquire an additional 70% equity
position in Inflammatics through two additional fundings.
We will make the additional funding, if any, at our sole option, based upon
our evaluation of LeukoVAX clinical trial data. This funding will be used to
underwrite a Phase III clinical trial. The agreement also provides for us to
issue up to 3 million shares of our common stock and warrants to acquire 300,000
shares of common stock, in exchange for additional series A convertible shares
of Inflammatics, if all funding phases are completed. Preliminary estimates for
the funding of Phase III clinical trials of LEUKOVAX range between $6.0 million
and $10.0 million.
On August 10, 1999, Viragen mortgaged its Florida-based research facility
for $600,000. We must pay interest on the promissory note in eleven monthly
installments, which began on September 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.
On November 3, 1999, Viragen secured a $400,000 short-term loan by pledging
its domestic scientific equipment and a second mortgage on our Florida-based
research facility as collateral. We must pay interest on the promissory note in
6 monthly installments, which began on December 3, 1999. Interest is calculated
at the rate of 12% per annum. The principal balance of $400,000 plus any unpaid
interest is due on May 3, 2000.
On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:
o AMRO International, S.A.,
o Markham Holdings, Limited, and
o Tashdale Ltd.
The agreement was for gross proceeds of $2.5 million. Viragen contracted to
issue, in three tranches, 4,600,000 shares of common stock and warrants to
purchase 375,000 shares of common stock. We entered into this financing under
Regulation S of the Securities Act of 1933. Gross proceeds from the first
tranche totaled $650,000, in exchange for:
o the sale of 1,000,000 shares and warrants to purchase 50,000 shares
to AMRO International, and
o the sale of 300,000 shares and warrants to purchase 15,000
shares to Markham Holdings Limited.
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<PAGE> 17
The warrants are exercisable at $1.15 per share and expire at November 30, 2002.
When Viragen filed the related registration statement on Form S-1 (File No.
333-93425) for this financing, Viragen received an additional $650,000. In this
tranche:
o AMRO International acquired an additional 1,000,000 shares of
common stock and warrants to purchase 50,000 shares, and
o Markham Holdings acquired, at the same time, 300,000 additional
shares and warrants to purchase 15,000 shares.
The warrants are also exercisable at $1.15 per share and expire on November 30,
2002.
Viragen will issue 2,000,000 shares and warrants to purchase 120,000 shares
to Tashdale, in the third tranche, for consideration of $1,200,000. The warrants
are exercisable at $1.15 per share and will expire at November 30, 2002. This
tranche will occur when the Securities and Exchange Commission declares the
related registration statement effective.
In connection with this transaction, Viragen will pay a fee of 7% of the
amount invested to AMRO International in consideration of locating the other two
investors. They have received warrants to purchase 65,000 shares of common stock
and will receive warrants to purchase an additional 60,000 shares of common
stock when the related registration statement becomes effective. The warrants
are exercisable at $1.15 per share through November 30, 2002.
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was amended on June 16, 1999.
Under the purchase agreement, we issued Isosceles and Cefeo 8% convertible
promissory notes in the aggregate principal amount of $2,000,000 and warrants to
purchase our common stock.
To date, Viragen has incurred approximately $320,000 in penalties payable
to the selling security holders. We continue to incur $40,000 in penalties per
month, until this registration statement becomes effective, at which time the
accrued penalty will be paid. Also, the selling security holders have the right
to force redemption of their common shares, because this registration statement
is not yet effective. As described in the "Selling Security Holders" section of
this prospectus, the redemption value, if elected by the selling security
holders, would exceed the initial investment of $2 million. The redemption value
is the greater of:
o $2 million and related interest plus a premium of 15%; or
o market value of the shares to be redeemed, on the date the selling
security holders elect redemption.
The selling security holders have not requested a cash redemption.
In 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.
As we indicated, in June 1999, we modified our agreements with the selling
security holders to lower the conversion price of the promissory notes. We did
this in order to obtain a waiver from the selling security holders to permit the
interim financing in May 1999. Since we had a pending registration statement at
the time of the May 1999 interim financing and June 1999 modification, the
Securities and Exchange Commission has informed us that we may have violated
Section 5 of the Securities Act of 1933. Accordingly, we may have a contingent
liability to the selling security holders and the three investors in the interim
financing since they may have a right to rescind their transactions. We have,
however, obtained waivers from both the selling security holders and May 1999
investors of their rescission rights under Section 5 of the Securities Act of
1933. In the case of the selling security holders, they still have the right to
rescind their investments by the terms of their agreement with us, because we
are no longer NASDAQ-listed and were not able to process our registration
statement on a timely basis.
In December 1999, we retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us in identifying and developing financing
sources. We cannot assure you that any financing will result from this
relationship.
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.
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<PAGE> 18
Viragen recognized no sales revenue or related costs for the three months
ended September 30, 1999 or 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 begin generating sales revenue through export sales of
Omniferon prior to the end of fiscal 2000 under an agreement with the AGC group
of companies. 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 required regulatory approvals.
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 began
clinical trials in the European Union during the fourth calendar quarter of
1999. Eventually, we will submit an Investigational New Drug Application to the
Food and Drug Administration. We cannot assure you that we will receive these
approvals. These approvals require the successful completion of clinical trials
and our ability to raise significant additional investment capital to fund the
completion of these trials.
Fiscal 1999 Compared to Fiscal 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 resulted 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 fiscal
1999 compared to $4,222,000 for 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. We did not incur this expense in
the prior year. We are now performing the bulk of our development work in our
Scottish facility.
General and administrative expenses totaled approximately $5,528,000 for
fiscal 1999, 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. We 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 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. Also, legal fees decreased by
$222,600 between periods due to the settlement of litigation during the prior
year, as well as the completion of contract negotiations.
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. The
loss also includes the amortization of the capitalized finders fee and warrant
costs. These costs are being amortized in proportion to the losses incurred by
Inflammatics as compared to our initial cash capital contribution to
Inflammatics.
Fiscal 1998 Compared to Fiscal 1997
Interest and other income of $1,143,112 represented earnings on invested
cash balances during fiscal 1998. This was a 19% decline from the previous
fiscal year. This significant decline reflected the decline in cash balance from
the previous year. This decline was due primarily to cash redemptions on
convertible preferred stock issuances and operational losses.
Research and development costs totaled $4,222,332, for fiscal 1998 compared
to $2,360,416 for the previous year. This increase reflected the overall
increase in research activities being conducted between the periods both in the
U.S. and Scotland. These activities 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 Common Services
Agency of Scotland 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.
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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, as well as 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. Legal fees associated with research of
technology patents increased by $111,300. We also expanded our efforts in
collaborative agreements and general contractual transactions, both domestically
and in Europe, for an increase of $211,200. Finally, costs associated with
litigation increased by $222,900. During the year, 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 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. The shareholder claimed 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 also experienced increased travel costs attributable to administrative
support functions related to the establishment of our Scottish facility.
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.
This note was issued in exchange for the series B convertible stock then
outstanding. This note was paid-in-full in April 1998.
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Research and development costs totaled approximately $1,062,000 for the
first quarter of fiscal 2000 compared to $940,000 for the same period of the
previous year. The increase of $122,000 included an increase in laboratory
supplies expense of $26,200, and an increase in research related salaries and
support fees of $130,100.
The increase in research and development costs is net of the decreased
development activity, related to OMNIFERON, being performed domestically, as the
technology transfer to our Scottish facility was deemed completed. During the
quarter, domestic lab supplies and research related support fees decreased by
$77,100 and $84,900 respectively, when compared to the same period of the
previous year. In November 1999, we ceased all research projects being conducted
in our Florida laboratory facility. All research related projects, including
research related to production scale-up, are now being conducted in our
Edinburgh, Scotland facility. We believe that this consolidation step will
improve and streamline our scientific development efforts as well as reduce
operating costs by consolidating operations in one facility. Research and
development costs, however, will continue to increase in the following periods
as we commence our clinical trials of OMNIFERON.
General and administrative expenses totaled approximately $1,013,000 for
the quarter ended September 30, 1999, a decrease of approximately $590,000 from
the same period of the preceding year. This decrease reflects a decrease in
domestic administrative salaries and support fees of $182,200 due to the
implementation of our cost reduction program. Also, Viragen waived a 90-day
expiration provision on stock options held by three directors who were not
re-elected to the Board of Directors during the first quarter of the previous
year. Accordingly, last year we recognized $324,500 in compensation expense, in
accordance with the provisions of FAS 123, during the first quarter of fiscal
1999. This expense was not incurred during the current fiscal year.
We recognized approximately $146,000 in losses during the quarter related
to our investment in Inflammatics, Inc. up from $116,000 in the prior year. This
loss reflects 100% of the losses incurred by Inflammatics associated with the
clinical testing of LEUKOVAX and the expensing of our excess investment costs.
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The significant increase in interest expense is related to debt instruments
which were outstanding during the first quarter of fiscal 2000, but not
outstanding during the same period of fiscal 1999. Specifically, Viragen had
outstanding 8% convertible promissory notes with a principal balance of
$2,000,000 and a short-term promissory note totaling $600,000. Also, Viragen
incurred approximately $700,000 of interest expense on reset shares issued to
investors upon the conversion of the promissory notes.
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 reductions implemented in
calendar 1999 are 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 closed
our Florida-based research facility, consolidating these operations in our
Scottish facility and saving approximately an additional $800,000 annually. We
intend to sell our Florida facility during the second fiscal quarter. These
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 U.S., particularly in general and administrative expenses, these savings
will be more than offset by increasing expenses in our Scottish facilities
related to scale-up process and the start of clinical trials scheduled to
commence in the fourth calendar quarter of 1999.
YEAR 2000
Viragen recognizes the potential problem posed to its 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 its ongoing research and
production scale-up projects as well as computer controlled commercial scale
manufacturing equipment. 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 utilizing both internal and external resources to isolate and
as necessary, reprogram, update or replace hardware or software found to be
non-Year 2000 compliant. Due to the limited size of our administrative staff,
most of this work has been performed by outside contractors retained
specifically for this project. We believe that all of our significant computer
dependent systems, both administrative and scientific, are now Year 2000
compliant. The total estimated costs to us to complete our internal Year 2000
project was approximately $50,000, including hardware replacements where
indicated. Funding for the evaluation and corrective phases was provided from
general working capital.
We previously contacted 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. We will continue to evaluate in the future additional third
party responses and intend to mitigate third party Year 2000 issues, as
necessary. For example, while we believe our current suppliers of white blood
cells, a critical component to our manufacturing process, are year 2000
compliant, we have identified and confirmed alternate sources of this material,
if needed.
The ultimate success of our Year 2000 compliance program 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,
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. This could negatively
affect our financial condition, results of operations and cash flows.
To date, we have not experienced any Year 2000 computer problems. Also, we
are not aware of any Year 2000 computer problems experienced by our vendors. We
will, however, continue to monitor the situation, in the event any problems
occur during the year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
Securities Act Release No. 7386. This release requires that we disclose our
policies used to account for derivatives and 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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We have not traded or otherwise transacted in derivatives nor do we expect
to do so in the future. We have established policies and internal processes
related to the management of market risks which we use in the normal course of
our business operations.
Interest Rate Risk
The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 1999, a change in
interest rates would not have a material impact on our future operating results
or cash flows.
Foreign Currency Exchange Risk
We believe our foreign currency risk is not material. At the present time,
we do not have sales revenues or related receivables. Also, we do not purchase
foreign currencies on a regular basis. Transfers of funds to our foreign
subsidiary in Scotland are infrequent and are transferred at the then current
exchange rate.
We were not impacted by the European Union's adoption of the "Euro"
currency. Our foreign operations are located in Scotland, and the United Kingdom
did not participate in the adoption of the Euro. The United Kingdom does not
have a scheduled date for the eventual adoption of the Euro.
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BUSINESS
INTRODUCTION
Viragen, Inc., a Delaware corporation, was organized in 1980. We operate
through:
o Viragen, Inc. - parent company
o Viragen U.S.A. - 94% owned by Viragen, Inc.
o Viragen (Europe) Ltd - 87% owned by Viragen, Inc.
o Viragen (Scotland) Ltd - 100% owned by Viragen (Europe)
o Viragen (Germany) GmbH - 100% owned by Viragen (Europe)
We are in the business of researching and developing products which help the
human immune system resist viral infections. Our primary product will be a
natural interferon product named Omniferon(TM). We produce Omniferon 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 like hepatitis, multiple sclerosis, cancer and
HIV/AIDS.
Neither the United States Food and Drug Administration nor the European
Union regulatory authorities have approved Omniferon. Viragen is currently
seeking European Union regulatory authority approval for its Omniferon product.
We will seek U.S. Food and Drug Administration approval in the future. These
approvals require several years of clinical trials and substantial additional
funds.
In August 1998, we acquired a 10% equity interest, with an option to
acquire up to an 80% interest, in Inflammatics, Inc. Inflammatics has licensed
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 are concentrating our efforts on the clinical trials necessary to obtain
approvals for Omniferon, currently within the European Union, and later in the
United States. We began our preclinical studies with Omniferon in March 1998 and
obtained approval of our Clinical Trial Exemption Application in July 1999.
Next, we began our clinical trials of Omniferon, in Europe, during the fourth
calendar quarter of 1999.
RECENT DEVELOPMENTS
We have entered into a series of strategic alliance and supply agreements
with major worldwide suppliers of blood products. These agreements secure
reliable and safe sources of human white blood cells, also known as leukocytes,
which are critical to the production of both Omniferon and LeukoVAX. During
1998, we entered into agreements with the American Red Cross and America's Blood
Centers. Between them, they collect annually 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 over 45% of the U.S. blood supply through member blood donation
centers and mobile collection facilities. Under the America's Blood Centers
agreement, we have first and preferential access to all leukocytes produced by
America's Blood Centers members who have elected to participate in the program.
We 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 increased
costs incurred by participating America's Blood Centers members.
The America's Blood Centers agreement also provides for a royalty payment
to be paid for each leukocyte provided under this agreement. The royalty is
based on the higher of:
o a percentage of net revenues realized by Viragen,
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o the estimated net revenues that could have been realized, based on the
sale of Omniferon, using the America's Blood Centers leukocytes
provided, or
o 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. The valuation
of shares will be based on 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 may change
based on 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. These
agreements relate to shares underlying the warrant and shares received in lieu
of cash for leukocyte purchases.
In August 1998, we entered into a strategic alliance with Inflammatics,
Inc., a private drug development company, headquartered in Philadelphia, PA. At
the same, time we purchased a 10% equity interest in Inflammatics, which is
focused on the development of 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 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. The warrants are
exercisable at prices ranging between $1.00 and $1.78 per share. We also
received two options to acquire up to an additional 70% equity position in
Inflammatics through two additional fundings. These fundings would be made
solely at our option.
The first additional funding is subject to our evaluation of the Phase I/II
clinical trial results. It would include:
o the issuance of 1,000,000 shares of common stock,
o the issuance of 300,000 common stock purchase warrants exercisable
at $1.00 through August 14, 2003, and
o the underwriting of Phase III clinical trials.
In exchange, we can acquire an additional 36.3% equity interest in Inflammatics.
Preliminary estimates of the cost for Phase III clinical trials of LeukoVAX
range between $6.0 million and $10.0 million.
The second additional funding is subject to our further evaluation of the
Phase III clinical trial results. It provides for the issuance of an additional
2,000,000 shares of common stock in exchange for an additional 33.3% equity
interest in Inflammatics.
In November 1998, Viragen signed an exclusive supply and distribution
agreement with AGC, a Pakistan-based, multinational conglomerate. This agreement
provides for the purchase and distribution of Omniferon. Under this agreement,
AGC's designated territories include:
o India,
o Pakistan,
o Saudi Arabia,
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o Kuwait,
o Yemen,
o Oman,
o UAE,
o Brunei, and
o other Middle Eastern countries.
AGC must purchase a minimum of $20 million of Omniferon over five years. The
purchase minimums become binding on AGC if and when:
o AGC receives the required regulatory approvals for product
commercialization in all of the above territories, and
o we receive the regulatory approvals to export Omniferon from our
commercial manufacturing facility in Edinburgh, Scotland.
AGC has agreed to provide Viragen with its projected annual requirements to be
updated quarterly. Projected requirements in excess of agreed purchase minimums
are binding on AGC. The purchase minimums, if contractually triggered, will be
secured by a $1 million irrevocable revolving letter of credit. AGC and Viragen
have agreed that if and when we obtain regulatory approval for commercialization
of Omniferon in the United States and/or Europe, both parties will negotiate in
good faith an amendment to the agreement which could modify the purchase
minimums and selling price.
The AGC agreement has been approved by the boards of directors of AGC and
Viragen.
Under the AGC agreement, AGC is responsible for clinical and regulatory
costs to obtain approvals for commercialization of Omniferon in their designated
territories. AGC is also responsible for all subsequent sales, marketing and
distribution activities. AGC is required to build, own and operate, at their
expense, a pharmaceutical distribution facility in a mutually agreeable location
within the territories. AGC has informed us that they initially intend to focus
on distribution for hepatitis B and C. These diseases are at epidemic
proportions in the designated territories.
In July 1999, Viragen entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and distribution agreement between Viragen and Drogsan for
natural interferon. These terms are similar to the AGC agreement. The final
terms of this agreement are still being negotiated.
OPERATIONS
In July 1999, Viragen (Scotland) Ltd. received regulatory approval of its
Clinical Trial Exemption Application, to begin Phase I/II human clinical trials
of its Omniferon product, initially for the treatment of hepatitis C. We began
our clinical trials in the fourth calendar quarter of 1999.
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. This is expected to take several years to accomplish with no
assurance that regulatory 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 like viruses. It 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 indicate that interferons may inhibit malignant cell and tumor growth
without affecting normal cell activity.
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There are two basic types of interferon. They are 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. This is 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). This
is a genetically engineered interferon. Generally, it is produced from a single
human gene in bacterial cells by recombinant DNA techniques.
Clinical studies indicate that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon may cause an immunological
response through the production by the human immune system of neutralizing
and/or binding antibodies. These antibodies reduce the effectiveness of the
treatment or may cause adverse side effects. We believe that the production of
neutralizing and/or binding antibodies is fairly non-existent in patients
treated with natural interferon. Furthermore, primarily due to biological
differences, the side effects of treatment with natural interferon may be
milder 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. They
subsequently received Food and Drug Administration approval to produce and
market their recombinant alpha interferon products for the treatment of
hairy-cell leukemia, hepatitis and Kaposi's Sarcoma, an AIDS-related skin
cancer.
After the emergence of recombinant or synthetic alpha interferon, the
medical community's interest in natural interferon diminished. This was 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 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, Interferon Sciences, Inc. received Food
and Drug Administration approval in 1989 to sell, in injectable form,
Alferon(TM), a 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 viral infections. Viragen believes
interferons can arrest the progress of 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. Approximately 30,000 new cases are 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. Currently, the Food and Drug Administration has
approved interferons for the treatment of Hepatitis C including:
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o Hoffman-LaRoche's Roferon(TM),
o Schering-Plough's Intron A(TM), and
o Amgen's Infergen(TM).
Hepatitis B
Approximately 45% of the world population live in areas with a high
prevalence of hepatitis B infection. In these areas, 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. The United States is not in a high prevalence area. Here approximately
300,000 cases of acute hepatitis B are diagnosed annually. Between 2% and 10% of
these patients develop 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 U.S. Food and Drug Administration
approved drug for hepatitis B. It has proven to be effective in the treatment of
some cases. Viragen believes that Omniferon may also prove effective in the
treatment of hepatitis B.
Multiple Sclerosis
In 1988, we conducted a patient funded, multi-phase clinical trial for the
treatment of multiple sclerosis with Alpha Leukoferon, our first-generation
natural interferon product. We conducted this study on a double-blind basis.
Certain patients received different dosage levels of that product and other
patients received a placebo. The study terminated in mid-1992. Published
information on these trials indicates that, in many cases, our Alpha Leukoferon
product provides favorable results in the treatment of patients afflicted with
relapsing/remitting, relapsing progressive and chronic progressive multiple
sclerosis.
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. In 1994, 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. This is
the official journal of the American Neurological Association. The investigators
and Viragen published an additional article, titled "Natural Alpha Interferon in
Multiple Sclerosis: Results of Three Preliminary Series." It 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. It 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. This kind of therapy affects both the
presence of leukemia cells as well as the number of bone marrow cells having the
Philadelphia chromosome.
HIV/AIDS
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. This approval was 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 began in March 1996. A total of 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.
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MANUFACTURE OF INTERFERON
Human white blood cells, also known as leukocytes, and a stimulating agent
are needed to produce human interferon. These raw materials are readily
available to us. A Food and Drug Administration approved stimulating agent,
which is harmless to humans, will be 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 our Scottish facility for use in the human clinical
trials, which began in the fourth quarter of calendar 1999.
Production methods that we have developed, as well as enhanced methods
currently under development, we believe will reduce our costs of production and,
ultimately, the market price of Omniferon to patients. However, we cannot assure
you that this new manufacturing technology will 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 of a new bio-pharmaceutical drug takes several
years. It also requires substantial funding. In July 1999, Viragen received
approval of its European Clinical Trial Exemption Application to begin clinical
trials of Omniferon. Through our equity investment in Inflammatics, we are
currently involved n Food and Drug Administration Phase I/II clinical trials of
LeukoVAX. 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 improving these processes will improve the purity
of the product while increasing production yields. We believe that focusing
research efforts on increased production yields, if successful, will
significantly lower costs of production. This will result in a lower more
competitive sales price of Omniferon.
Research and development costs totaled $1,062,034, $5,152,748, $4,222,332
and $2,360,416, for the three months ended September 30, 1999, and the fiscal
years ended June 30, 1999, 1998 and 1997, respectively .
ROYALTY AGREEMENT
Viragen and Medicore, Inc., a former affiliate, have a royalty agreement.
It provides for a maximum cap on royalties to be paid to Medicore of $2,400,000.
It includes a schedule of royalty payments of:
o 5% of the first $7,000,000 of sales of interferon and related
products,
o 4% of the next $10,000,000, and
o 3% of the next $55,000,000
until the total of $2,400,000 royalty is paid. The agreement also states that
royalties of approximately $108,000 previously accrued as payable to Medicore
will be the final payment. As we have had no interferon sales, no royalty
expense has been recognized for the three months ended September 30, 1999 or 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.
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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 these patents have been
granted. During fiscal 1999, our patent issued in Japan for the topical use of
interferon was challenged by a Japanese company. We successfully defended our
patent position.
Under a license agreement between Viragen and Viragen (Europe) Ltd. dated
July 12, 1995, Viragen (Europe) has exclusive rights to Viragen's technologies.
These include technologies covered by patent, for all countries in the European
Union. In addition, we granted Viragen (Europe) the non-exclusive rights to
Viragen's technology throughout the world, excluding the United States and its
territories. 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. Viragen deferred the minimum royalty payment until Viragen
(Europe) has the necessary cash flow to meet this payment. The initial term of
this agreement is 15 years and automatically renews for two successive 15-year
periods.
United States patents have been issued to others for genetically engineered
and human-derived interferon. In the event of valid claims, Viragen may have to
negotiate license agreements with patent holders to use some processes and
products. We believe that we do not infringe upon any current patent. Also, no
one has alleged patent infringement by Viragen.
Someone can challenge the validity and enforceability of a patent by
litigation after its issuance. If the outcome is against the owner of the
patent, other parties may be free to use the subject matter of the patent.
Protection provided by foreign patents may be different than in the United
States. We cannot assure you that any future patents will offer substantial
protection or commercial benefit to us.
REGULATION
United States and European Union
Viragen's activities and its products and processes are subject to
substantial government regulation in the United States and within the European
Union. The European Union, Food and Drug Administration, state and local
agencies regulate the manufacturing, advertising and sale of biologic substances
and pharmaceutical products. The Food and Drug Administration has mandatory
procedures and standards, which apply to the clinical testing, marketing and
manufacture of any biologic product, including ours. European Union and/or Food
and Drug Administration approvals 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 under specific protocols. The process of
obtaining European Union and/or Food and Drug Administration approvals requires
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. 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. In July 1999, we received
approval of our Clinical Trial Exemption application to begin clinical trials on
humans. We began the clinical trials in the European Union during the fourth
calendar quarter of 1999. Eventually, we expect to 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 assembled a clinical advisory
committee. It consists of scientists, medical researchers and clinicians. They
are acting in an advisory capacity to assist us in developing the medical,
scientific and clinical aspects in support of our clinical trials. This is
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 any early side effects 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 effectiveness and safety required by regulatory agencies. If Phase II
evaluations indicate potential effectiveness with an acceptable safety profile,
Phase III trials are performed. Phase III is performed to conclusively
demonstrate clinical effectiveness 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.
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Regulatory approvals depend on a number of factors, including. These
include 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 controlled circumstances, for further processing,
packaging, labeling and distribution to third parties in approved foreign
countries. This controlled distribution is 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.
License and Manufacturing Agreement
European Union regulations require less stringent preclinical studies for
naturally occurring substances like our Omniferon product, than for genetically
engineered products. While we provide you with no assurances, 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. We also wanted their 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.
It 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 for us to conduct European Union clinical
trials as well as providing a sufficient source of raw materials for future
subsequent commercial manufacturing.
During fiscal 1998, we were notified that, due to concerns over the
possible presence of Mad Cow disease in the UK blood supply, human leukocytes
collected in Scotland would not be approved for use in our clinical trials or
potential commercial production. This would remain 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.
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. Viragen (Germany) has a right to
receive 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.
We engaged professionally recognized consultants familiar with the European
Union regulatory process to assist in the manufacturing and product approval
submissions. 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 later
product approvals at the conclusion of the European Union clinical studies.
After obtaining a manufacturing license 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 distribution in the United States.
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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 rights 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. They also agreed to
conduct studies relevant to our product and cooperate with us in complying with
the laws and regulations of the European Union.
We are providing the Transfusion Service with full access to our
proprietary technology and specialized equipment under the license and
manufacturing agreement. We are also absorbing all costs of securing permits and
regulatory approvals, and expanding the Transfusion Service facilities, if
necessary, to participate in the manufacture of Omniferon. In addition, we are
bearing the costs of obtaining documentation showing compliance with European
Union regulatory requirements.
We have agreed to pay the Transfusion Service for product manufactured:
o for use in clinical trials in the European Union,
o for sales prior to obtaining new drug application approval, and
o for sales following regulatory approval.
Under this arrangement, payments will be made at varying percentages in
relation to costs, as follows:
o for products manufactured for clinical trials, they are entitled to
cost plus 25%,
o for sales prior to obtaining new drug application approval, cost plus
40%, and
o 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. There are also two additional five-year extension terms at our option.
The agreement also contains provisions protecting our proprietary rights and
limits various competitive activities by the Transfusion Service.
COMPETITION
Competition in the research, development and production of interferon, and
other immunological products is intense. It involves major, well-established and
well-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 synthetic DNA technology.
A number of large companies, including Hoffman-LaRoche, Inc., Schering-Plough
Corporation, Biogen, Inc., Chiron Corp., Berlex Laboratories and Ares-Serono are
producing, selling and conducting clinical trials with these recombinant
interferons (alpha and beta) and other immunological products. These relate to
the treatment of cancer 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.
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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 competitive in the biopharmaceutical industry, because it does
not have a product, which can be distributed, at this time.
EMPLOYEES
As of January 25, 2000, we have 40 employees. Of these, 31 are research
and development and quality assurance/quality control personnel. The remaining 9
employees are management, regulatory and/or administrative personnel.
PROPERTIES
In November 1996, Viragen entered into a ten year lease for 14,800 square
feet in Plantation, Florida. This location contains our domestic administrative
and executive offices. The lease contains an option for up to two additional
five-year terms. Base lease payments on the facility total $15,700 per month.
Our administrative offices are located at 865 SW. 78th Avenue, Suite 100,
Plantation, Florida 33324; phone (954) 233-8746.
Viragen owns a 14,000 square foot building in Hialeah, Florida. This
facility includes a laboratory for biomedical research and development
activities. In August 1999, we obtained a $600,000 mortgage on our Florida
laboratory facility. The facility is also pledged against a $400,000 promissory
note obtained in November 1999. We intend to sell our Florida laboratory
facility during fiscal 2000, and consolidated our research and production assets
in our Edinburgh, Scotland facility.
In November 1996, through Viragen (Scotland), we entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, consisting of approximately 12,000 sq. ft., contains our European
laboratory and production facilities. This location augments other productive
assets available to us within the Transfusion Service facility under the
Scottish agreement. The annual base lease rate for the facility is 71,700 UK
pounds or approximately US$119,700 plus adjustment for common area maintenance
charges. Viragen (Scotland) has the right to renew the lease for four additional
five-year terms.
We believe our properties are in good condition, well-maintained and
generally suitable and adequate to carry on our business. We also believe that
we maintain sufficient insurance coverage on all of our real and personal
property.
LEGAL PROCEEDINGS
In October 1997, Viragen, the company's president and Cytoferon Corp., a
former affiliate of the president, were named as defendants in a civil action
brought in the United States District Court for the Southern District of Florida
(Walter L Smith v Cytoferon Corp. et al; Case No: 97-3187-CIV-MARCUS). The
plaintiff is a former 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 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. We have submitted to
the Court a request for reimbursement of litigation related costs of
approximately $75,000, but we are uncertain what we can recover.
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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. It 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. He also says that Viragen's president
breached his fiduciary duty to Cytoferon Corp. by not achieving sufficient
financing for Viragen which would have entitled Cytoferon Corp. to additional
shares. He is also claiming 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.. We cannot determine at this point, the
ultimate liability, if any, resulting from this litigation. No accrual for loss
has been recorded.
32
<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS OFFICER AND/OR
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE CLASS
---- --- ------------------------- ------------------------- -----
<S> <C> <C> <C>
Gerald Smith 69 Chairman of the Board 1994
Chief Executive Officer 1998 C
President 1993
Robert Zeiger 55 Vice Chairman of the Board 1998 B
Dennis W. Healey 51 Chief Financial Officer 1980
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 set up a
classified board of directors with the 1997 annual meeting. Following that
meeting, we divided directors into three subclasses consisting of class A, class
B and class C.. 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; and the term of the class C directors
initially expires after the 2000 annual meeting. At each annual meeting,
stockholders will elect directors of the class whose term expired. Directors
will be elected to hold office for a term to expire at the third ensuing annual
meeting.
Gerald Smith became president of Viragen in May 1993. Since 1982, Mr. Smith
was a principal stockholder, president, chief executive officer and a director
of Business Development Corp. Business Development 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 was also the president, chief
executive officer and a director of Cinescopic Corporation and International
Database Service, Inc. These are 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.
Robert H. Zeiger was appointed chief executive officer and chief operating
officer of Viragen, during May 1995. At that time, he was also elected as a
director. 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. He served as vice president and general manager of their
Dermatological Division from 1985 to 1988. He then served as vice president and
general manager of Glaxo Pharmaceuticals from 1991 to 1994. Previously, Mr.
Zeiger served as vice president marketing and sales with Stiefel Laboratories,
Inc., Coral Gables, Florida, from 1979 to 1985. He was national sales manager to
Knoll Pharmaceutical Company, Whipping, New Jersey from 1971 to 1979. Mr. Zeiger
has also served as 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 Viragen (Europe) 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
Viragen board. He is a member of the executive committee of the board of
directors.
33
<PAGE> 34
Dennis W. Healey is a certified public accountant. He was appointed
chairman of the board and chief executive officer on April 13, 1993. In June
1994, Mr. Healey relinquished his position as chairman of the board to Mr.
Smith. In July 1994, he relinquished the position of chief executive officer.
Upon Gerald Smith becoming president in May 1993, Mr. Healey became executive
vice president. He 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. This is a public company engaged primarily in
electronics assembly and ownership of dialysis centers. He was also executive
vice president of its Techdyne affiliate. He served as treasurer of most of
Medicore's subsidiaries. He was also 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. He 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:
o technology manager for Locate in Scotland (1995),
o senior executive (1993 to 1995), and
o 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. He earned a 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.
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. He was an engineer with Cordis Dow Corporation from 1974 to
1983.
Carl N. Singer was elected a director in August 1997. He currently 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 also 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 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. He 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
are publicly-traded companies.
34
<PAGE> 35
Charles J. Simons was elected to the board of directors in July 1998. He
currently 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. Also, he 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. These positions included manager of cash
management, internal control and corporate finance from 1975 to 1981. He was
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 includes Messrs.
Simons (chairperson), Dworkin, Salisbury and Healey.
The executive committee acts for the full board during intervals between
board meetings, except on matters which by law may not be delegated. The
executive committee will meet as necessary. 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 communicates with Viragen's independent certified
public accountants, on behalf of the board of directors. This committee receives
written reports, supplemented by oral reports, 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. The
committee is responsible for supervising the 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 members 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.
35
<PAGE> 36
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table includes 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>
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS (#) PAYOUTS COMPENSATION
- ------------------ ---- ------ ----- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith 1999 $282,000
Chairman of Board 1998 263,000
and President 1997 175,885 1,050,000
Robert H. Zeiger 1999 22,582
CEO, Director 1998 111,347
1997 65,250 12,500 5,000 50,000
Dennis W. Healey 1999 252,000
Exec. V.P., 1998 240,000
Treasurer, CFO 1997 163,345 350,000
and Director
Charles F. Fistel 1999 151,846
Exec. V.P., 1998 150,000
Director 1997 138,886 300,000
Jay Sawardeker 1999 174,039
Exec. V.P., and 1998 148,470
Director 1997 113,462 200,000
</TABLE>
Employment Agreements
On March 1, 1997 Mr. Smith entered into a two-year employment agreement.
This agreement provided for:
o a salary of $190,000 and $200,000 for the first and second years,
respectively,
o options to purchase 1,000,000 shares of common stock at $3.22 per
share exercisable over five years,
o health and life insurance,
o similar employee benefits generally available to other employees,
o use of an automobile and related maintenance, and
o reimbursement of business related expenses.
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. We amended the agreement on July 3,
1997, to provide for an annual salary of $72,000 for the year July 1, 1997
through June 30, 1998, and $82,000 per annum for the period from July 1, 1998
through February 28, 1999. Mr. Smith's employment agreements with both Viragen
and Viragen (Europe) expired on March 1, 1999. On that date, he entered into a
single employment agreement with Viragen under terms similar to his previous
agreement. This agreement provides for a total annual salary of $282,000. Mr.
Smith continues to serve as the president and chairman of Viragen (Europe).
On May 9, 1995, Viragen entered into a two-year employment agreement
with Robert H. Zeiger. Under the agreement, he was to serve as chief executive
officer and chief operating officer through May 1, 1997. The agreement provided
for:
36
<PAGE> 37
o an annual salary of $120,000,
o the issuance of options to purchase 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,
o health and life insurance,
o similar employee benefits generally made available to other employees,
o use of an automobile and related maintenance expenses, and
o reimbursement of business related expenses.
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, during the first six months of the contract term.
In July 1998, Mr. Zeiger resigned for health reasons his positions as chief
executive officer of Viragen and Viragen (Europe) and director of Viragen
(Europe), effective September 30, 1998. Mr. Zeiger continues to serve as vice
chairman and as senior pharmaceutical advisor to the Viragen board. He is a
member of the executive committee of the board of directors.
On March 1, 1997 Mr. Healey entered into a two-year employment agreement.
The agreement, which was amended on July 1, 1997, provided for:
o a salary $190,000 and $195,000 for the first and second years,
o options to purchase 300,000 shares of common stock at $3.22 per share,
exercisable over five years,
o health and life insurance,
o similar employee benefits generally available to other employees, and
o reimbursement of automobile and business related expenses.
On July 30, 1996, Viragen (Europe) entered into a two-year employment
agreement with Mr. Healey under terms similar to his employment agreement with
Viragen. It provided 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 new two-year employment agreement,
subsequently amended on July 3, 1997. This agreement was to run concurrent with
Mr. Smith's Viragen (Europe) agreement and superceded 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 a single employment agreement with Viragen under terms similar to
his previous agreements. The agreement provides for a total annual salary of
$252,000. Mr. Healey continues to serve as executive vice president, chief
financial officer, secretary and director of Viragen (Europe).
On July 1, 1996, Viragen entered into a two-year employment agreement with
Charles Fistel to serve as executive vice president. This agreement provided
for:
o an annual salary of $140,000 and $150,000 for the first and second
years,
o health and life insurance,
o similar employee benefits generally made available to other employees,
and
o 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. The terms of this agreement are similar to
his previous agreement, modified to increase his annual salary to $172,500
during the two year term. Mr. Fistel resigned on May 14, 1999.
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<PAGE> 38
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. This agreement provided for:
o a salary of $100,000 per year,
o a five year option to acquire 250,000 shares of common stock,
exercisable at $1.80 per share, vesting one third on the effective
date of the employment agreement and an additional one third vesting
on the first and second anniversary dates,
o similar employee benefits generally available to executive employees,
o $400 per month auto allowance, and
o reimbursement of business related expenses.
Dr. Sawardeker's employment agreement was subsequently amended and extended
through June 30, 1999. It provided 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, Dr. Nicolson entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:
o an annual salary of $170,000,
o the grant of an option to acquire 200,000 shares of common stock at
$.625, vesting one-half on the first anniversary of the grant date and
one-half on the second anniversary,
o similar employee benefits generally available to executive officers,
o use of an automobile, and
o reimbursement of business related expenses.
On July 1, 1999, Mr. Rothberg entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:
o an annual salary of $160,000 and $172,500 for the first and second
years,
o the grant of an option to acquire 250,000 shares of common stock at
$.625 per share, vesting one-half on the date of grant and one-half on
the first year anniversary,
o health insurance,
o similar employee benefits generally available to executive employees,
o $400 per month auto allowance, and
o reimbursement of business related expenses.
OPTION GRANTS IN LAST FISCAL YEAR
The following table includes information as to the grant of options to
purchase shares of common stock during the fiscal year ended June 30, 1999 to
each person named in the summary compensation table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES # OF TOTAL OPTIONS/SARS
UNDERLYING OPTIONS/SARS GRANTED TO EMPLOYEES IN FISCAL EXERCISE OR BASE PRICE
NAME GRANTED (#) YEAR ($/SHARES) EXPIRATION DATE
- ---------------------- ----------------------- ------------------------------ --------------------- ---------------
<S> <C> <C> <C> <C>
Gerald Smith -- -- -- --
Robert H. Zeiger -- -- -- --
Dennis W. Healey -- -- -- --
Charles F. Fistel -- -- -- --
Jay Sawardeker -- -- -- --
</TABLE>
38
<PAGE> 39
OPTION EXERCISES AND HOLDINGS
The following table includes information as 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.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1999 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN THE MONEY
OPTIONS AT FY-END
SHARES VALUE REALIZED NUMBER OF UNEXERCISED OPTIONS (BASED ON FY-END/SHARE)
SHARES MARKET PRICE AT AT FY END PRICE OF $0.75
ACQUIRED ON EXERCISE LESS ----------------------------- ---------------------------------
NAME EXERCISE PRICE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- ----------------- ------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Gerald Smith 250,000 139,000 2,450,000 -- $ 350,000 $ --
Robert H. Zeiger -- -- 1,050,000 -- -- --
Dennis W. Healey 250,000 139,000 650,000 -- 75,000 --
Charles F. Fistel 410,000 41,250 300,000 -- -- --
Jay Sawardeker -- -- 450,000 -- -- --
</TABLE>
1997 AMENDED STOCK OPTION PLAN AND 1995 AMENDED STOCK OPTION PLAN
On May 15, 1995 the board of directors adopted, subject to approval by the
stockholders, a stock option plan, called the 1995 stock option plan. On
September 22, 1995, the board of directors amended the 1995 stock option plan to
define certain terms and clarify the minimum exercise price of the non-qualified
options. The minimum exercise price of non-qualified options cannot be less than
55% of the fair market value. Viragen stockholders ratified the 1995 stock
option plan at the annual meeting held on December 15, 1995.
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. The
1997 stock option plan contains terms and provisions similar to the 1995 stock
option plan. Viragen stockholders ratified the 1997 stock option plan at the
annual meeting held on February 28, 1997. On April 24, 1998 the board of
directors adopted, subject to ratification by the stockholders, an amendment to
the 1997 stock option plan. This amendment reserved an additional 1,000,000
shares of common stock for issuance under that plan. This amendment brought the
total shares reserved under the 1997 stock option plan to 4,000,000 shares. On
July 31, 1998, the stockholders ratified this amendment to the 1997 stock option
plan.
The audit, finance and compensation committee of the board of directors and
the board of directors currently administer the plans. Administration of the
plan includes determining:
o the persons who will be granted plan options,
o the type of plan options to be granted,
o the number of shares subject to each plan options, and
o the plan options price.
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<PAGE> 40
Options granted under either the 1995 or the 1997 stock option plans may qualify
as incentive stock options, under Section 422 of the Internal Revenue Code of
1986, as amended. In addition, the plans also include a reload option provision.
This provision permits an eligible person to pay the exercise price of the plan
option with shares of common stock owned by the eligible person. The person then
receives a new plan option to purchase shares of common stock equal in number to
the tendered shares. Any incentive option, which is granted under a 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 the fair market value, as determined on
the date of the grant. The board of directors or the audit, finance and
compensation committee determine the term of each plan option and the manner in
which it may be exercised. No plan option may be exercisable more than 10 years
after the date of its grant. In the case of an incentive option granted to an
eligible employee owning more than 10% of Viragen's common stock, no plan option
may be exercisable more than five years after the date of the grant.
Officers, directors, key employees and consultants of Viragen and its
subsidiaries are eligible to receive non-qualified options under the stock
option plans. Only officers, directors and employees who are employed by Viragen
or by any of its subsidiaries are eligible to receive incentive options.
Incentive options are non-assignable and nontransferable, except by will or
by the laws of descent and distribution during the lifetime of the optionee.
Only the optionee may exercise incentive options. 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 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. If the optionee
dies during the term of his employment, the plan option granted to him will
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, 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 the disability.
The board of directors or the audit, finance and compensation committee may
amend, suspend or terminate the stock option plans at any time. However, no
amendment can be made which changes the minimum purchase price, except in the
event of adjustments due to changes in Viragen's capitalization. Unless the
plans have been suspended or terminated by the board of directors, the 1995
stock option plan will terminate on May 15, 2005, and the 1997 stock option plan
will terminate on January 27, 2007. The termination of either plan will not
affect the validity of any plan options previously granted.
As of January 25, 2000, we have issued 3,965,000 options under the 1995
stock option plan and 3,729,500 options under the 1997 stock option plan.
OTHER OPTION GRANTS
During fiscal 1999, Viragen issued options to purchase 25,000 shares of
common stock to each of the two directors who joined the board of directors
during the year. In addition, we issued 35,000 options to Dr. Ray Ziai our vice
president of research and development in connection with an amendment and
extension of his employment agreement. All options were issued with a five year
term, exercisable at the market price on the date of grant.
CERTAIN TRANSACTIONS
Gerald Smith and Dennis W. Healey, who are principal officers of Viragen,
also serve as the principal officers of Viragen (Europe). Messrs. Smith and
Healey also serve as principal officers of our majority-owned subsidiary,
Viragen U.S.A., Inc.
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<PAGE> 41
On April 25, 1997, Viragen loaned William Saeger, a former director,
$100,000. In exchange, Viragen received 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 determine the amounts which could ultimately be realized on the
promissory note. Accordingly, we wrote-off the entire amount due under the note
with related accrued interest of approximately $10,000 as uncollectible 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. Both exercised their options through
the issuance of promissory notes payable to Viragen totaling $300,000. Smith and
Healey also entered into related pledge and escrow agreements. The promissory
notes bear interest at 5.47%, payable semi-annually, and are secured by the
underlying common stock purchased. The purchased shares are being held in
escrow, pending payment of the related notes pursuant to the provisions of the
pledge and escrow agreements.
Mr. Carl Singer, a director, also exercised options for 50,000 shares on
October 1, 1998. Mr. Peter Fischbein, a director, exercised options for 200,000
shares on October 8, 1998. Mr. Charles F. Fistel, a former officer, exercised
options totaling 410,000 shares on May 3, 1999 and May 11, 1999 These options
were all exercised through the issuance of promissory notes payable Viragen
totaling $302,000, and related pledge and escrow agreements. The promissory
notes bear interest at rates ranging between 5.06% and 5.15%, payable semi-
annually, and are secured by the underlying common stock purchased. The
purchased shares are being held in escrow, pending payment of the related notes
pursuant to the provisions of the pledge and escrow agreements.
PRINCIPAL STOCKHOLDERS
The following table shows certain information regarding Viragen's common stock
beneficially owned at January 25, 2000, by:
o 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,
o each of Viragen's directors, and
o all officers and directors as a group.
A person is considered a beneficial owner of any securities that the person has
the right to acquire beneficial ownership of within 60 days. At January 25,
2000, there were 78,043,414 shares of common stock outstanding. Other than
indicated in the notes, we have been informed that these persons have sole
voting and dispositive power with respect to their shares.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED
---------------------------
AQUIREABLE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS CURRENTLY WITHIN 60 DAYS
- ------------------------------------ -------------------- ---------------- --------- --------------
<S> <C> <C> <C>
Gerald Smith 2,700,000 3.4 % 250,000 2,450,000
Robert H. Zeiger 965,000 1.2 -- 965,000
Carl N. Singer 1,915,541 2.5 1,915,541 --
Dennis W. Healey 1,005,000 1.3 555,000 450,000
Peter D. Fischbein 400,000 0.5 325,000 75,000
Sidney Dworkin, Ph.D. 325,244 0.4 175,244 150,000
Charles J. Simons 35,000 0.0 10,000 25,000
Robert C. Salisbury 30,000 0.0 30,000 --
Officers & Directors (as a Group of 12 persons) 8,228,435 9.9 3,278,935 4,449,500
The Isosceles Fund 4,606,838 5.9 3,907,809 699,029
</TABLE>
41
<PAGE> 42
SELLING SECURITY HOLDERS
TRANSACTION OVERVIEW
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited. We signed an amended agreement to
the purchase agreement on June 16, 1999. This amendment reduced the conversion
price, waived first refusal rights for an interim financing and extended the
date for Viragen to complete the processing of its registration statement. The
purchase agreement:
o describes the terms pursuant to which we issued Isosceles and Cefeo 8%
redeemable promissory notes in the aggregate principal amount of
$2,000,000 and warrants to purchase shares of our common stock;
42
<PAGE> 43
o requires us to indemnify Isosceles, Cefeo and their respective
officers, directors and affiliates from any damages they incur if we
breach the purchase agreement; and
o gives Isosceles a right of first refusal to participate in private
equity financings we undertake prior to March 17, 2000.
At the same time we executed the purchase agreement, we entered into a
memorandum of agreement with Isosceles which gave us the option to sell
Isosceles an aggregate of up to $7,000,000 of additional notes and warrants in
two tranches. Neither Viragen nor the selling security holders have an
obligation to complete the subsequent tranches.
NOTES. We issued Isosceles and Cefeo promissory notes in the principal
amount of $2,000,000 under the purchase agreement. The principal amount of the
notes accrued interest at a rate of 8% annually.
CONVERSION. One-half of the principal balance and accrued interest on the
related principal converted automatically into 2,049,534 shares of our common
stock on July 7, 1999. In addition, the remaining one-half of the principal
balance and accrued interest on the notes converted automatically into 2,062,685
shares of our common stock on August 6, 1999. The conversion price was $0.50 per
common share.
In addition to the shares issued on conversion of the notes, the note
holders were entitled to receive additional shares of our common stock 30 days
after each one-half of the notes converted into shares of our common stock, as
required by a re-set provision. The purpose of this arrangement was to make sure
that the selling security holders had a return of at least 20% on the shares
received on the conversion of the first half of the notes and at least 22%
return on the conversion on the remaining half of the notes.
The number of additional shares to which the note holders were entitled was
calculated by dividing $0.644 by the lowest closing bid price of our common
stock during the ten consecutive trading days preceding each re-set date. The
quotient obtained was multiplied by 1.2 on the first re-set date and 1.22 on the
second re-set date. The resulting product was reduced by 1. The resulting number
was then multiplied by the shares issued on the first or second conversion
dates, as appropriate. The formula is as follows:
(applicable rate X $0.644/future price) -1) x (shares issued)
On August 6, 1999, Isosceles and Cefeo received a total of 546,990
additional common shares, based on the first re-set calculation. These shares
were issued using a future price of $0.61 per share. On September 5, 1999,
Isosceles and Cefeo received a total of 551,203 additional common shares, based
on the second re-set calculation. These shares were issued using a future price
of $0.62 per share.
DEFAULT. The purchase agreement, notes and registration rights agreement
defined several events of default including:
o failure to continue trading on the NASDAQ stock market;
o failure to have this registration statement effective by July 7, 1999,
the initial deadline;
o failure to have this registration statement effective by September 13,
1999, the final deadline;
o failure to maintain this registration as effective for 30 consecutive
days.
As Viragen was delisted from the NASDAQ Stock Market on June 28, 1999, and
has failed to meet the two registration deadline requirements, we are in default
of these terms if declared by the selling shareholders. To date, we have
incurred approximately $320,000 in penalties. Accordingly, we continue to accrue
a penalty of $40,000 per month, until the date this registration statement is
declared effective, at which time the accrued penalty will be paid. Also,
Isosceles and Cefeo holders have the right to request a cash redemption of the
common shares issued upon conversion of the notes. The redemption value, if
requested, would be the greater of:
43
<PAGE> 44
o $2 million and related interest plus a premium of 15% , or
o market value of the shares to be redeemed, on the date the selling
security holders elect redemption.
To date, the selling security holders have not requested a cash redemption.
THE WARRANTS
The warrants entitle Isosceles and Cefeo to purchase a total of 932,039
shares of our common stock. The warrants are exercisable until March 17, 2004
with the exercise price of $0.50 per share. The warrants also contain a cashless
exercise provision which allows the selling security holders to use the
difference between the closing price of the common stock, at the time of
exercise, minus the exercise price as a currency to acquire the shares without
paying cash. By way of example, if 1,000 shares are being exercised when the
closing price is $1.00 and the exercise price is $0.50, the selling shareholders
could use 500 shares with a market value of $500 to pay for the exercise of the
warrants. The holder would receive 500 shares net, as a result of the cashless
exercise.
We must, however, reduce the exercise price of the warrants if we sell
shares of our common stock, grant options or adjust the exercise prices of
options or issue other securities convertible into our common stock at prices
less than $.50. Any adjustment to the exercise price of the warrants would be to
match the price of a new offering, if it occurs below $0.50 per share. We must
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.
ADDITIONAL WARRANTS
We also issued warrants to purchase an aggregate of up to 155,339 shares of
our common stock at $.774 per share to Ballsbridge Finance Limited, Elliot Layne
& Associates, Inc. and Ven-Gua Capital Markets, Ltd. in consideration for
introducing Viragen to Isosceles and Cefeo. The warrants we issued to
Ballsbridge, Elliot Layne and Ven-Gua are exercisable currently until March 17,
2004. As we did not pre-pay the notes issued to Isosceles and Cefeo, before July
7, 1999, one-half of the warrants issued to Ballsbridge, Elliot Layne and
Ven-Gua were returned to Viragen. We entered into a registration rights
agreement with Ballsbridge, Elliot Layne & Associates and Ven-Gua similar to the
one we entered into with Isosceles and Cefeo.
44
<PAGE> 45
The following table sets forth as of January 25, 2000:
o the name of the selling security holders,
o the amount of common stock held directly or indirectly or underlying
the notes and the warrants to be offered by the selling security
holders, and
o the amount to be owned by the selling security holders following the
sale of these shares.
As of January 25, 2000, there were outstanding 78,043,414 shares of Viragen's
common stock.
The total of 6,220,121 potential shares allocated to the selling
security holders was derived as follows:
o 4,112,219 shares issued upon conversion of the promissory notes and
related interest at $0.50 per share;
o 1,098,193 shares issued under the re-set provision of the notes; and
o 1,009,709 shares issuable upon exercise of related warrants.
<TABLE>
<CAPTION>
NAME OF SELLING NUMBER OF SHARES PERCENTAGE OF SHARES OWNED SHARES TO BE OWNED AFTER
SECURITY HOLDERS OWNED PRIOR TO OFFERING OFFERING
--------------- ---------------- -------------------------- ------------------------
<S> <C> <C> <C>
The Isosceles Fund Limited 4,606,838 5.9 % 0
Cefeo Investments Limited 1,535,619 2.0 % 0
Ballsbridge Finance, Limited 19,418 * 0
Elliott Layne & Associated, Inc. 29,126 * 0
Ven-Gua Capital Markets Ltd. 29,126 * 0
</TABLE>
* Is less than 1%
Isosceles Fund's ownership includes 3,907,809 shares acquired upon
conversion of notes and related re-set shares, and 699,029 shares which may be
acquired upon the exercise of warrants. The Isosceles Fund is controlled by
Linford Asset Management Ltd.
Cefeo Investments' ownership includes 1,302,603 shares acquired upon
conversion of notes and related re-set shares, and 233,010 shares which may be
acquired upon the exercise of warrants. Cefeo Investments Limited is
beneficially owned by Banca, Privata, Solari and Blum, S.A.
Placement agent ownership represents shares issuable upon exercise of
warrants exercisable at $.773 until March 17, 2004.
Viragen agreed to pay for all costs and expenses in the issuance, offer,
sale and delivery of the shares of our common stock. These include, all expenses
and fees of preparing, filing and printing the registration statement and
mailing of these items. Viragen will not pay selling commissions and expenses
for any sales by the selling security holders. Viragen will indemnify the
selling security holders against civil liabilities including liabilities under
the Securities Act of 1933.
POTENTIAL CONTINGENT LIABILITY
As discussed above, in June 1999, we amended the purchase agreement with
the selling security holders. This was done to provide a waiver of the selling
security holders' first refusal rights for an interim financing in which Viragen
received $1,375,000 from three investors through sale of our common stock. Since
we had a pending registration statement on behalf of the selling security
45
<PAGE> 46
holders at the time of the May 1999 interim financing and June 1999
modification, the Securities and Exchange Commission has informed us that we may
have violated Section 5 of the Securities Act of 1933. If this is so, we may
have a contingent liability to the selling security holders and the three
investors in the interim financing since they may have a right to rescind their
transactions.
PLAN OF DISTRIBUTION
These shares of our common stock may be sold by the selling security
holders or by other successors in interest. The sales may be made on one or more
exchanges or in the over-the-counter market, at prices related to the then
current market price, or in negotiated transactions. The shares of our common
stock may be sold by one or more of the following methods, including:
o a block trade in which the broker-dealer will attempt to sell the
shares of our common stock as agent, but may position and resell a
portion of the block as principal;
o purchases by a broker or dealer as principal and resale by the broker
or dealer;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face or other direct transactions between the selling security
holders and purchasers without a broker-dealer or other intermediary.
In addition, the selling security holders may, subject to the restrictions
described below and previously under "Selling Security Holders", sell short the
common stock of Viragen. In these instances, this prospectus may be delivered in
the connection with the short sale, and the shares offered may be used to cover
the short sale. The selling security holders may be considered underwriters,
within the meaning of the Securities Act of 1933, in connection with the sale of
the shares offered. In making sales, broker-dealers or agents engaged by the
selling security holders may arrange for other broker-dealers or agents to
participate. Broker-dealers may receive commissions or discounts from the
selling security holders in amounts to be negotiated immediately prior to the
sale. These broker-dealers, agents and any other participating broker-dealers or
agents, as well as the selling security holders and the placement agent may be
considered "underwriters" within the meaning of the Securities Act of 1933. In
addition, any securities covered by this prospectus that qualify for sale under
Rule 144 may be sold under Rule 144 rather than by this prospectus.
We informed the selling security holders that the anti-manipulative rules
under the Securities Exchange Act of 1934, including Regulation M, will apply to
their sales in the market. We have furnished the selling security holders with a
copy of these rules. We have also informed the selling security holders that
they must deliver a copy of this prospectus with any sale of their shares.
DESCRIPTION OF SECURITIES
Viragen is currently authorized to issue up to 125,000,000 shares of common
stock, par value $.01 per share. There were 78,043,414 shares outstanding as of
January 25, 2000. Viragen is also authorized to issue up to 1,000,000 shares of
preferred stock, par value $1.00 per share. There were 2,650 shares of series A
preferred stock were outstanding as of January 25, 2000.
COMMON STOCK
Subject to the dividend rights of preferred stockholders, common
stockholders share dividends on a proportionate basis, as may be declared by the
board of directors. Upon liquidation, dissolution or winding up of Viragen,
after payment to creditors and holders of our outstanding preferred stock,
Viragen's assets will be divided proportionately on a per share basis among the
holders of our common stock.
46
<PAGE> 47
Each share of our common stock has one vote. Holders of our common stock do
not have cumulative voting rights. This means that the holders of a plurality of
the shares voting for the election of directors can elect all of the directors.
In that event, the holders of the remaining shares will not be able to elect any
directors. Viragen's By-Laws provide that a majority of the outstanding shares
of our common stock are a quorum to transact business at a stockholders'
meeting. Our common stock has no preemptive, subscription or conversion rights.
Also, our common stock is not redeemable.
PREFERRED STOCK
Viragen is authorized to issue a total of 1,000,000 shares of preferred
stock, par value $1.00 per share. Viragen's board of directors may issue
preferred stock by resolutions, without any action of the stockholders. These
resolutions may authorize issuance of preferred stock in one or more series. In
addition, the board of directors may fix and determine all privileges and rights
of the authorized preferred stock series including:
o dividend and liquidation preferences,
o voting rights,
o conversion privileges, and
o redemption terms.
Viragen includes preferred stock in its capitalization to improve its
financial flexibility. However, Viragen could use preferred stock to preserve
control by present management, in the event of a potential hostile takeover of
Viragen. In addition, the issuance of large blocks of preferred stock could have
a dilutive effect to existing holders of Viragen's common stock.
SERIES A PREFERRED STOCK
Viragen established the series A preferred stock in November 1986. Each
share of series A preferred stock is immediately convertible into 4.26 shares of
our common stock. Dividends on the series A preferred stock are cumulative and
have priority to our common stock. These dividends are payable in either cash or
common stock, at Viragen's option.
The series A preferred stock has voting rights only if dividends are in
arrears for five annual dividends. Upon this occurrence, the voting is limited
to the election of two directors. Voting rights terminate upon payment of the
cumulative dividends. Viragen may redeem the series A preferred stock at any
time after expiration of ten consecutive business days during which the bid or
last sale price for our common stock is $6.00 per share or higher. There is no
mandatory redemption or sinking fund obligation for the series A preferred
stock.
Owners of the series A preferred stock are entitled to receive $10.00 per
share, plus accrued and unpaid dividends, upon liquidation, dissolution or
winding up of Viragen. This must be satisfied before any distribution or payment
is made to holders of the common stock or other stock of Viragen junior to the
series A preferred stock.
SERIES I PREFERRED STOCK
The remaining 11 shares of the series I preferred stock were converted into
common stock on October 20, 1999. There are no outstanding shares of the series
I preferred stock.
The series I preferred stock had no dividends, although an 8% accretion
factor was included for purposes of determining the liquidation and conversion
amounts. The series I preferred stock carried no voting rights and had a stated
value of $10,000 per share.
The series I preferred stock and the 8% accretion factor were convertible
into shares of our common stock at the lower of:
47
<PAGE> 48
(1) $1.59; or
(2) the variable conversion price which was equal to 82% of the market
price on the date of conversion.
The amount of the shares of our common stock a holder of the series I preferred
stock could have converted into a limited to a maximum of 15% of the aggregate
principal amount of the series I preferred stock issued to a holder for each
monthly period. This was subject to a maximum of 25% per monthly period if the
holder had not elected to convert the permitted 15% amount for the series during
any previous monthly conversion period. This conversion quota became void when
Viragen completed private offerings of its debt and equity securities.
TRANSFER AGENT
The transfer agent for the shares of our common stock is Chase Mellon
Shareholders Services, Overpeck Centre, 85 Challenger Road, Ridgefield Park, New
Jersey 07660-2108.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
this offering could negatively affect the market price of our common stock. They
could also impair our future ability to raise capital through the sale of our
equity securities.
Upon the completion of the re-sale of common stock by the selling security
holders, we will have outstanding 79,023,997 shares of common stock. Of these
shares, approximately:
o 69,626,877 shares will be freely tradable by persons, other than
"affiliates," without restriction under the Securities Act of 1933;
and
o 9,397,120 shares will be "restricted" securities, within the meaning
of Rule 144 under the Securities Act of 1933, and may not be sold in
the absence of registration under the Securities Act of 1933 unless an
exemption from registration is available, including the exemption
provided by Rule 144.
In general, under Rule 144, a person or persons whose shares are
aggregated, including any affiliate of Viragen who has beneficially owned
restricted securities for at least one year, would be entitled to sell within
any three-month period, a number of shares that does not exceed 1% of the number
of common stock then outstanding. This would be approximately 790,240 shares
immediately after the completion of this offering.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
Viragen. Under Rule 144(k), a person who is not considered to have been an
affiliate of Viragen at any time during the 90 days preceding a sale, and who
has beneficially owned restricted securities for at least two years, including
the holding period of any prior owner except an affiliate of Viragen, may sell
these shares without following the terms of Rule 144.
LEGAL MATTERS
Atlas, Pearlman, Trop & Borkson, P.A. will review the validity of the
issuance of the shares of our common stock being offered. They are located at
200 East Las Olas Boulevard, Suite 1900, Fort Lauderdale, Florida 33301. Members
of that firm or members of their family own a total of 37,000 shares of our
common stock.
48
<PAGE> 49
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements at June 30, 1999 and 1998, and for each of
the three years ended June 30, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus is a part of the registration statement.
It does not contain all of the information set forth in the registration
statement. For further information about Viragen, Inc. and its common stock, you
should refer to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to in
this prospectus are not necessarily complete. Where a contract or other document
is an exhibit to the registration statement each of you should review the
provisions of the exhibit, to which reference is made. You may obtain these
exhibits from the Securities and Exchange Commission, as discussed below.
We are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may review the registration statement, as well as reports and other
information we have filed, without charge at the Securities and Exchange
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies may also be obtained from:
o the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates, or
o the Commission's web site at HTTP://WWW.SEC.GOV.
These materials may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. For further information on
the operation of the public reference rooms, please call 1-800-SEC-0330. You may
also review these statements at the regional offices of the Securities and
Exchange Commission at:
o 7 World Trade Center, Suite 1300, New York, New York 10048, and
o Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511.
49
<PAGE> 50
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen, Inc. and
subsidiaries are included:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated balance sheets -- June 30, 1999 and 1998 (audited) and September 30, 1999 (unaudited) F-3
Consolidated statements of operations -- Years ended June 30, 1999, 1998 and 1997
(audited) and three months ended September 30, 1999 and 1998 (unaudited) F-4
Consolidated statements of stockholders' equity - Years ended June 30, 1999, 1998 and 1997
(audited) and three months ended September 30, 1999 (unaudited) F-5
Consolidated statements of cash flows -- Years ended June 30, 1999, 1998 and 1997 (audited) and
three months ended September 30, 1999 and 1998 (unaudited) F-9
Notes to consolidated financial statements F-11
</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> 51
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> 52
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------- September 30,
1999 1998 1999
------------ ------------ ------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,055,587 $ 2,708,317 $ 430,867
Restricted cash -- -- 45,600
Marketable securities, available-for-sale -- 6,105,076 --
Prepaid expenses 254,057 206,995 254,405
Other current assets 306,433 530,950 203,443
------------ ------------ ------------
Total Current Assets 1,616,077 9,551,338 934,315
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,492,585 3,538,926 3,580,796
Equipment and furniture 5,556,106 5,311,327 6,023,464
Construction in progress 309,431 48,655 --
------------ ------------ ------------
9,358,122 8,898,908 9,604,260
Less accumulated depreciation (3,337,807) (2,744,827) (3,529,070)
------------ ------------ ------------
6,020,315 6,154,081 6,075,190
INVESTMENT IN UNCONSOLIDATED COMPANY 671,744 -- 525,617
DEPOSITS AND OTHER ASSETS 221,218 189,806 185,475
------------ ------------ ------------
$ 8,529,354 $ 15,895,225 $ 7,720,597
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,132,323 $ 829,661 $ 1,814,170
Short-term promissory note -- -- 600,000
8% Convertible promissory notes 1,929,877 -- --
Accrued expenses and other liabilities 702,209 708,005 543,481
Current portion of long-term debt 142,109 171,277 132,755
------------ ------------ ------------
Total Current Liabilities 3,906,518 1,708,943 3,090,406
ROYALTIES PAYABLE 107,866 107,866 107,866
DEFERRED INCOME -- 200,000 --
LONG-TERM DEBT, less current portion 231,107 280,094 213,018
MINORITY INTEREST 326,684 525,936 142,144
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 shares at
September 30, 1999 and June 30, 1999, and 200 shares at June 30, 1998 120,920 2,039,014 123,137
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 2,650
Common stock, $.01 par value. Authorized 125,000,000 shares at
September 30, 1999, and 75,000,000 shares at June 30, 1999 and 1998; issued
75,400,430, 69,913,762 and 53,416,912 shares at September 30, 1999,
June 30, 1999, and June 30, 1998, respectively, of which 845,277
shares are held as treasury stock at September 30, 1999, and June
30, 1999 and 606,277 shares are held as treasury stock at June 30, 1998 699,135 534,168 754,002
Capital in excess of par value 55,353,205 45,686,143 58,229,493
Treasury stock, at cost (1,277,613) (996,541) (1,277,613)
Retained deficit (50,521,028) (39,624,889) (53,386,436)
Accumulated other comprehensive income 46,752 284,990 192,381
Notes due from directors (466,842) -- (470,451)
------------ ------------ ------------
Total Stockholders' Equity 3,836,259 5,886,521 4,044,026
------------ ------------ ------------
$ 8,529,354 $ 15,895,225 $ 7,720,597
============ ============ ============
</TABLE>
See notes to consolidated financial statements
which are an integral part of these statements.
F-3
<PAGE> 53
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- --------------------------------
1999 1998 1997 1999 1998
------------ ------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income
Interest and other income $ 374,064 $ 1,143,112 $ 1,403,610 $ 19,948 $ 107,093
------------ ------------ ------------ ------------ ------------
374,064 1,143,112 1,403,610 19,948 107,093
Cost and Expenses
Research and development costs 5,152,748 4,222,332 2,360,416 1,062,034 940,414
Selling, general and administrative
expenses 5,528,410 5,580,213 4,049,086 1,012,734 1,602,980
Equity in losses of unconsolidated
company 757,256 -- -- 146,127 115,665
Interest expense 574,375 590,867 30,713 846,122 11,757
------------ ------------ ------------ ------------ ------------
12,012,789 10,393,412 6,440,215 3,067,017 2,670,816
------------ ------------ ------------ ------------ ------------
Loss before minority interest (11,638,725) (9,250,300) (5,036,605) (3,047,069) (2,563,723)
Minority interest in loss of consolidated
subsidiaries 987,893 1,394,164 261,360 184,540 165,683
------------ ------------ ------------ ------------ ------------
NET LOSS (10,650,832) (7,856,136) (4,775,245) (2,862,529) (2,398,040)
Deduct required dividends on convertible
preferred stock, Series A 2,650 2,823 20,760 663 663
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 -- -- 432,224
Deduct required dividends on convertible
preferred stock, Series I 322,774 232,154 -- 2,217 205,091
------------ ------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON
STOCK $(11,652,754) $(10,354,488) $(14,673,984) $ (2,865,409) $ (3,036,018)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE,
after deduction for required dividends
on convertible preferred stock $ (0.19) $ (0.21) $ (0.37) $ (0.04) $ (0.06)
============ ============ ============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES 60,109,133 50,502,503 39,134,631 72,875,763 53,299,268
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements which are an
integral part of these statements.
F-4
<PAGE> 54
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Preferred Preferred Preferred Preferred Preferred
Stock, Stock, Stock, Stock, Stock, Stock, Common
Series A Series B Series C Series D Series E Series F Stock
---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $ 2,650 $ 15,000 $ $ $ $ $ 378,959
Exercise of common stock
options & warrants 5,183
Exercise of Viragen
(Europe) Ltd.. warrants
Exercise of Viragen USA
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 5,000
Sale of series D preferred
stock, net of issuance costs 15,000
Sale of series E preferred
stock, net of issuance costs 5,000
Dividends on preferred
stock, paid in common stock 235
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
Conversion of series C
preferred stock (4,026) 11,636
Conversion of series D
preferred stock (3,800) 24,425
Exercise of cash-out option
on conversion of series D
preferred stock (1,000)
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
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Capital In Other Notes Due
Excess of Treasury Retained Comprehensive from
Par Value Stock Deficit Income Directors
------------- ------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $38,618,391 $ $(21,782,872) $ 43,057 $ --
Exercise of common stock
options & warrants 378,654 (12,500)
Exercise of Viragen
(Europe) Ltd.. warrants 697,464
Exercise of Viragen USA
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 4,735,923
Sale of series D preferred
stock, net of issuance costs 14,035,349
Sale of series E preferred
stock, net of issuance costs 4,676,744
Dividends on preferred
stock, paid in common stock 35,039 (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 (34,608)
Conversion of series C
preferred stock (2,548,739)
Conversion of series D
preferred stock (20,625)
Exercise of cash-out option
on conversion of series D
preferred stock (999,000) (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, (10,612)
available for sale
Net Loss (4,775,245)
------------- ------------ -------------- ---------------- ------------
Balance at June 30, 1997 $59,995,768 $(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> 55
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
Preferred Preferred Preferred Preferred Preferred Preferred
Stock, Stock, Stock, Stock, Stock, Stock, Common
Series A Series B Series C Series D Series E Series F Stock
---------- ----------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 2,650 $ 7,445 $ 974 $ 10,200 $ 5,000 $ $ 462,601
Exercise of common stock
options and warrants 2,305
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 (7,445)
promissory note
Purchase of treasury stock
Conversion of series C
preferred stock (974) 2,814
Conversion of series D
preferred stock (2,250) 13,903
Conversion of series E
preferred stock (1,000) 5,060
Exchange of series D
preferred stock for series F (7,950) 7,950
preferred stock
Exchange of series E
preferred stock for series G (4,000)
preferred stock
Conversion of series F
preferred stock (5,500) 43,377
Exercise of cash-out option
on conversion of series F
preferred stock (2,450)
Conversion of series G
preferred stock 3,511
Cash dividends on preferred
stock
Dividends on preferred stock,
paid in common stock 597
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
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Capital In Other Notes Due
Excess of Treasury Retained Comprehensive from
Par Value Stock Deficit Income Directors
------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $59,995,768 $(699,150) $(27,802,624) $ 262,857 $ (101,417)
Exercise of common stock
options and warrants 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 (7,437,555) (2,247,748)
promissory note
Purchase of treasury stock (297,391)
Conversion of series C
preferred stock (554,881)
Conversion of series D
preferred stock (11,653)
Conversion of series E
preferred stock (4,060)
Exchange of series D
preferred stock for series F
preferred stock
Exchange of series E
preferred stock for series G (3,996,000)
preferred stock
Conversion of series F
preferred stock (37,877)
Exercise of cash-out option
on conversion of series F
preferred stock (2,447,550) (294,000)
Conversion of series G
preferred stock 454,489
Cash dividends on preferred (521,725)
stock
Dividends on preferred stock,
paid in common stock 86,558 (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 (8,500)
loan
Bad debt expense on director 109,917
loan
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 $45,686,143 $(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> 56
.
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
Preferred Preferred Preferred Preferred Preferred Preferred
Stock, Stock, Stock, Stock, Stock, Stock, Common
Series A Series B Series C Series D Series E Series F Stock
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 2,650 $ -- $ -- $ -- $ -- $ -- $ 534,168
Consulting fees paid with
common stock 250
Compensation expense on
stock options and warrants
Exercise of common stock
options and warrants 3,285
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 27,500
Purchase of treasury stock
Exercise of common stock
options 11,600
Accrued interest income
on directors' notes
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 82,556
Common stock issued on
conversion of preferred
stock, series I 32,718
Dividend on preferred
stock, series A
Accretion of series H and
series I preferred stock
Accretion paid in common
stock 7,058
Foreign currency
translation adjustment
Unrealized gain on
marketable securities,
available for sale
Net Loss
----------- ----------- ------------ ----------- ----------- ----------- -----------
Balance at June 30, 1999 $ 2,650 $ -- $ -- $ -- $ -- $ -- $ 699,135
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Capital In Other Notes Due
Excess of Treasury Retained Comprehensive from
Par Value Stock Deficit Income Directors
------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $45,686,143 $(996,541) $(39,624,889) $ 284,990 $ --
Consulting fees paid with
common stock 12,250
Compensation expense on
stock options and warrants 369,647
Exercise of common stock
options and warrants 250,204
Sale of detachable
warrants on 8%
convertible promissory 344,854
notes
Cost of warrants issued
to finders on 8%
convertible promissory 24,078
notes
Private placement of
common stock 1,347,500
Purchase of treasury stock (281,072)
Exercise of common stock
options 592,900 (459,500)
Accrued interest income
on directors' notes (7,342)
Capitalized cost of
warrants issued for
investment in 329,000
unconsolidated company
Capital contribution to
Viragen (Europe) Ltd. (788,641)
Common stock issued on
conversion of preferred
stock, series H 4,917,444
Common stock issued on
conversion of preferred
stock, series I 1,857,282
Dividend on preferred
stock, series A (2,650)
Accretion of series H and
series I preferred stock (242,657)
Accretion paid in common
stock 410,544
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 $55,353,205 (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> 57
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
Preferred Preferred Preferred Preferred Preferred Preferred
Stock, Stock, Stock, Stock, Stock, Stock,
Series A Series B Series C Series D Series E Series F
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 2,650 $ -- $ -- $ -- $ -- $ --
Transactions occurring
during the three months
ended September 30, 1999
(unaudited):
Conversion of 8%
convertible promissory
notes into common stock
Reset shares issued on 8%
convertible promissory
notes
Exercise of common stock
options and warrants
Compensation expense on
stock options and warrants
Dividend on preferred
stock, Series A
Accretion of Series I
preferred stock
Accrued interest income
on directors' notes
Foreign currency
translation adjustment
Net loss
----------- ----------- ------------ ----------- ----------- -----------
Balance at
September 30, 1999
(Unaudited) $ 2,650 $ -- $ -- $ -- $ -- $ --
=========== =========== ============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Capital In Other Notes Due
Common Excess of Treasury Retained Comprehensive from
Stock Par Value Stock Deficit Income Directors
----------- ------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 699,135 $55,353,205 $(1,277,613) $(50,521,028) $ 46,752 $ (466,842)
Transactions occurring
during the three months
ended September 30, 1999
(unaudited):
Conversion of 8%
convertible promissory
notes into common stock 41,123 2,014,987
Reset shares issued on 8%
convertible promissory 10,981 686,265
notes
Exercise of common stock
options and warrants 2,763 140,892
Compensation expense on
stock options and warrants 34,144
Dividend on preferred
stock, Series A (662)
Accretion of Series I
preferred stock (2,217)
Accrued interest income
on directors' notes (3,609)
Foreign currency
translation adjustment 145,629
Net loss (2,862,529)
----------- ------------- ------------ -------------- --------------- ------------
Balance at
September 30, 1999
(Unaudited) $ 754,002 $ 58,229,493 $(1,277,613) $(53,386,436) $ 192,381 $ (470,451)
=========== ============= ============ ============== =============== ============
</TABLE>
See notes to consolidated financial statements which are
an integral part of these statements
F-8
<PAGE> 58
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 -- --
Interest expense on reset shares -- -- --
-------- ---------- --------
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 short-term borrowings, net -- -- --
-------- ---------- --------
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
============== ============= ===============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net Loss $(2,862,529) $(2,398,040)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 164,008 154,967
Amortization of discount on 8% convertible
promissory notes 70,123 --
Interest expense on reset shares 697,246 --
-------- --------
Issuance of treasury stock for expenses -- --
Consulting fees paid with common stock -- --
Compensation expense on stock options 34,144 355,312
Officers and directors notes forgiven on
stock purchases -- --
Minority interest in loss of subsidiary (184,540) (165,683)
Accrued interest income on notes due from directors (3,609) (4,371)
Bad debt expense -- --
Increase (decrease) relating to operating activities from:
Prepaid expenses 20,238 (5,036)
Other current assets 102,990 198,242
Investment in unconsolidated company 146,127 115,665
Deposits and other assets 55,792 (15,188)
Accounts payable 681,847 (144,974)
Accrued expenses and other liabilities (103,279) (362,537)
Deferred income -- --
--------------- ---------------
Net cash used in operating activities (1,181,442) (2,271,643)
INVESTING ACTIVITIES
Sale of marketable securities, available-for-sale -- 5,100,357
Purchase of marketable securities, available-for-sale -- --
Investment in unconsolidated company -- (1,100,000)
Additions to property, plant and equipment, net (218,883) (257,220)
--------------- ---------------
Net cash provided by (used in) investing activities (218,883) 3,743,137
FINANCING ACTIVITIES
Proceeds from short-term borrowings, net 534,351 --
-------- --------
Proceeds from sale of 8% convertible promissory
notes, net -- --
Proceeds from sale of detachable warrants with 8%
convertible promissory notes -- --
Proceeds from private placement -- --
Payments on long-term debt (48,997) (40,843)
Proceeds from long-term debt -- --
Proceeds from sale of preferred stock series B, C, D and
E, net -- --
Proceeds from sale of preferred stock series H and I, net -- --
Proceeds from exercise of options and warrants 143,654 50,000
Preferred dividends paid to preferred stock
series A, B, D, E, F and G -- (835)
Payments on promissory note -- --
Refund of capital investment to preferred stock
series C investors -- --
Exercise of cash-out option on conversion of
preferred stock series D -- --
Exercise of cash-out option on conversion of
preferred stock series F -- --
Redemption of redeemable preferred stock series G -- --
Purchase of treasury stock -- (174,906)
Loan to director -- --
Proceeds from exercise of subsidiaries' options
and warrants -- --
--------------- ---------------
Net cash provided by (used in) financing
activities 629,008 (166,584)
Effect of exchange rate fluctuations on
cash 146,597 74,031
--------------- ---------------
Decrease in cash (624,720) 1,378,941
Cash and cash equivalents at beginning of period 1,055,587 2,708,317
--------------- ---------------
Cash and cash equivalents at end of period $ 430,867 $ 4,087,258
=============== ===============
</TABLE>
See notes to consolidated financial statements which are an
integral part of these statements.
F-9
<PAGE> 59
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR RNDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- -------------------------------
1999 1998 1997 1999 1998
-------------- -------------- --------------- ---------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 299,644 $ 580,271 $ 31,172 $ 78,753 $ 11,757
Income taxes paid -- -- 13,840 -- --
</TABLE>
During the years ended June 30, 1999, 1998 and 1997 and the three months
ended September 30, 1999 and 1998, Viragen, Inc. had the following non-cash
investing and financing activities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------- ------------------------------
1999 1998 1997 1999 1998
------------ ------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Preferred dividends paid in common stock $ -- $ 91,732 $ 35,274 $ -- $ --
Accretion paid in common stock 417,602 -- -- -- 55,659
Conversion of 8% convertible notes and
accrued interest into common stock -- -- -- 2,056,110 --
Conversion of preferred stock into common
shares 6,890,000 467,724 78,224 -- 1,370,000
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 -- 20,586 --
Issuance of treasury stock for expenses -- -- 288,245 -- --
Sale of common stock with promissory notes 604,500 -- -- -- 300,000
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 -- -- -- 270,000
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-10
<PAGE> 60
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation: Viragen, Inc. and its subsidiaries
are engaged in the research, development and manufacture of immunological
products for commercial application. The consolidated financial statements
include the parent company and all subsidiaries, including those operating
outside the U.S. All significant transactions among our businesses have been
eliminated. We made certain reclassifications to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Costs related to this transaction include finders fees
and warrants issued. These costs are being amortized in proportion to the losses
incurred by Inflammatics as compared to our initial cash contribution to
Inflammatics.
In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, and asset valuation
allowances. We are also subject to risks and uncertainties that may cause actual
results to differ from estimated results including changes in the health care
environment, competition, foreign exchange and legislation.
During fiscal 1999 Viragen incurred a loss of $10,650,832 and had negative
operating cash flow of $8,955,434. As a result, our accumulated deficit
increased to $50,521,028. These operating results were caused by a lack of
regulatory approval for the sale of our products. Management has plans to
increase working capital by its efforts related to obtaining additional capital
funding. Viragen's ability to continue as a going concern is dependent on the
availability of additional capital funding, regulatory approval of our
pharmaceutical products, and adequate downsizing to operate at a reduced level
of expense. Management plans to continue to pursue available funding and adjust
operating expenses accordingly. The Company's financial statements have been
prepared assuming it will continue as a going concern and do not reflect any
costs or charges that could result from this uncertainty.
Unaudited Interim Financial Data: The unaudited interim financial
statements for the three months ended September 30, 1999 and 1998 include, in
the opinion of our management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the financial
condition on September 30, 1999, the results of operations and cash flows for
the three months ended September 30, 1999 and 1998, and the changes in
stockholders' equity for the three months ended September 30, 1999.
Operating results for the three months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending June 30, 2000.
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.
F-11
<PAGE> 61
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Other Current Assets: Other current assets consisted of the following at
June 30, 1999 and 1998:
JUNE 30,
---------------------------------------
1999 1998
---------------- ----------------
Notes receivable $ 171,123 $ 55,222
VAT tax refund receivable 119,352 256,504
Other current assets 15,958 219,224
---------------- ----------------
$306,433 $530,950
================ ================
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:
Building and improvements 15-39 years
Equipment and furniture 5-10 years
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:
JUNE 30,
---------------------------------------
1999 1998
---------------- ----------------
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
================ ================
Deferred Income: Viragen had deferred the recognition of income from an
option fee until the period in which it is was earned.
F-12
<PAGE> 62
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
PREFERRED STOCK 1999 1998 1997
- --------------- ---- ---- ----
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 --
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
F-13
<PAGE> 63
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
667 preferred shares, or $667,000 in principal, per month over a 6 month period.
The provisions further provided that we were required to redeem $667,000 per
month less the number of series G preferred shares converted during the
preceding calendar month. In addition, the holder was restricted from converting
into common stock if the market price of our common stock was less than $2.50,
subject to adjustment, at the date of the conversion notice. In consideration
for the restrictions on conversion, management agreed to increase the dividend
rate from 5% for the series E preferred stock to 10% for the series G preferred
stock.
The monthly redemption amount of the series G preferred stock was
calculated by dividing the number of shares to be redeemed by the preferential
conversion rate of 85%. As a result, the maximum aggregate redemption could have
totaled $4,705,882, if all 4,000 shares of series G preferred stock were
redeemed by the holder. This cash redemption amount would have been reduced to
account for conversions of the preferred shares during the redemption period.
All shares of series G preferred stock were redeemed for cash or converted into
common stock by February 28, 1998.
Series H and Series I
During the third and fourth fiscal quarters of 1998, Viragen closed $7
million of financing replacing a portion of the funds used to redeem previous
preferred stock issuances. In February 1998, we received net proceeds of
approximately $4,625,000 from the sale of 500 shares of series H convertible
preferred stock with an aggregate stated value of $5 million. In April 1998,
Viragen received net proceeds of approximately $1,840,000 from the sale of 200
shares of series I convertible preferred stock. We incorporated certain
restrictions as part of the series H and series I preferred stock designations
which, in the opinion of management, would facilitate a more orderly market
relative to the underlying shares of our common stock. The series H and series I
preferred stock bear no dividends although, upon liquidation or conversion, an
8% accretion factor is included in the calculation for purposes of determining
the liquidation and conversion amount.
Neither the series H preferred stock nor the series I preferred stock
issuances were convertible until August 19, 1998, the six month anniversary of
the Series H closing. The conversion price is the lower of (1) $1.59 per share,
and (2) the variable conversion price which is equal to 82% of the market price
at the date of conversion. Management retained the right to redeem both
issuances of preferred stock at various prices upon receipt of a notice of
conversion.
In addition, the right of conversion was further limited to a maximum of
15% of the aggregate principal amount of the series H and series I preferred
stock issued to each holder for each one month period cumulatively to a maximum
of not in excess of 25% for any month in the event the holder has converted less
than 15% in any of the preceding months.
F-14
<PAGE> 64
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 stock 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 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.
F-15
<PAGE> 65
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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:
Principal balance $7,445,000
Beneficial conversion feature ($7.445
million/76.81% minus $7.445 million) $2,247,748
Preferred dividends earned (6/8/97 -- 7/1/97) $27,493
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.
F-16
<PAGE> 66
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-17
<PAGE> 67
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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.
F-18
<PAGE> 68
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-19
<PAGE> 69
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen's stock option activity, and related information for
the years ended June 30, follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF WEIGHTED AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ------------------- ----------------- -----------------
<S> <C> <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
Cancelled -- --
------------- -------------------
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
Cancelled -- --
------------- -------------------
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
Cancelled (33,500) 2.21
------------- -------------------
Outstanding at June 30, 1999 7,063,500 $ 1.79 6,896,500 $ 1.79
============= ===================
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- ------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS
- ---------------------------------- ------------- ---------------------- -------------------- ---------------- -------------------
<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>
F-20
<PAGE> 70
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 AVERAGE WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE OPTIONS 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
Cancelled (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
Cancelled (12,500) 0.80
-------------------- ----------------------
Outstanding at June 30, 1998 635,256 1.06 635,256 1.06
Granted 1,500,000 3.67
Exercised -- --
Cancelled (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 OUTSTANDING STOCK OPTIONS EXERCISABLE
- ----------------------------------- ------------- ---------------------- ---------------- -------------------
WEIGHTED AVERAGE
REMAINING
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE 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.
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.
F-21
<PAGE> 71
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen (Europe)'s stock option activity, and related
information for the years ended June 30, follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE OPTIONS EXERCISABLE EXERCISE PRICE
------------------ ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1996 50,000 $ 7.00 -- $ --
Granted -- --
Exercised -- --
Cancelled -- --
------------------
Outstanding at June 30, 1997 50,000 7.00 50,000 7.00
Granted 75,000 5.72
Exercised -- --
Cancelled -- --
------------------
Outstanding at June 30, 1998 125,000 6.23 50,000 7.00
Granted -- --
Exercised -- --
Cancelled -- --
------------------
Outstanding at June 30, 1999 125,000 $ 6.23 7,500 $ 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.
A summary of Viragen U.S.A.'s stock option activity, and related
information for the years ended June 30 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE OPTIONS 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
Cancelled -- --
--------------------
Outstanding at June 30, 1997 -- -- -- --
Granted 125,000 0.22
Exercised -- --
Cancelled -- --
--------------------
Outstanding at June 30, 1998 125,000 0.22 -- --
Granted -- --
Exercised -- --
Cancelled -- --
--------------------
Outstanding at June 30, 1999 125,000 $ 0.22 50,000 $ 0.22
====================
</TABLE>
F-22
<PAGE> 72
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<CAPTION>
<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, subject to management's further evaluation of
clinical trial results, provides for the issuance of an additional 2,000,000
shares of commons stock in exchange for an additional 33.3% equity interest.
The investment in Inflammatics was capitalized at $1,429,000, which
consisted of the $1,000,000 paid to Inflammatics, a $100,000 finders fee paid to
Sumitomo Bank, and $329,000 in costs associated with the warrants issued, which
were valued using a Black-Scholes valuation model.
Viragen recognized approximately $757,000 in losses related to its
investment in Inflammatics, Inc. during the fiscal year ended June 30, 1999.
This loss reflects 100% of the losses incurred by Inflammatics associated with
the clinical testing of LeukoVAX. The loss also includes the amortization of the
capitalized finders fee and warrant costs. These costs are being amortized in
proportion to the losses incurred by Inflammatics as compared to our initial
cash capital contribution to Inflammatics.
NOTE E -- CONVERTIBLE NOTES WITH DETACHABLE WARRANTS
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was subsequently amended on
June 16, 1999. Under the purchase agreement, we issued Isosceles and Cefeo 8%
convertible promissory notes in the aggregate principal amount of $2,000,000
with detachable warrants to purchase 932,039 shares of our commons stock.
Viragen received $1,861,820 from the issuance of the convertible notes and
detachable warrants. The proceeds were net of $138,180 paid as finders' fees. As
required by APB Opinion No. 14 -- "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants", we valued the detachable warrants
F-23
<PAGE> 73
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
exercise prices of options or issue other securities convertible into our common
stock at prices less than $.50 per common share.
We also issued warrants to purchase an aggregate of up to 155,339 shares of
our common stock at $.773 per share to certain parties in consideration for
introducing Viragen to Isosceles and Cefeo. The warrants issued are exercisable
currently until March 17, 2004. As we did not pre-pay the notes issued to
Isosceles and Cefeo before July 7, 1999, one-half of these warrants were
returned to Viragen.
Events of default, on our obligations to the investors, include: default
under the promissory notes, failure to maintain effectiveness of our
registration under the Securities Act of 1933, delisting our stock from NASDAQ
(which has occurred), and failure to have our registration statement become
effective by July 7, 1999 (which has occurred).
The sum of the penalties depends on the period that we are in
non-compliance. As of September 17, 1999, we have incurred approximately
$140,000 in penalty fees. The penalty amount will continue to increase $40,000
per month, until the related registration statement becomes effective.
The investors have the right to force redemption of their common shares,
because the related registration statement is not yet effective and the stock
has been delisted from NASDAQ. The redemption value, if elected by the
investors, would exceed the initial investment of $2 million. The redemption
value is the greater of: $2 million and related interest plus a premium of 15%;
or market value of the shares to be redeemed, on the date the investors elect
redemption.
As discussed above, in June 1999, we amended the purchase agreement with
Isosceles and Cefeo. This was done to provide a waiver of Isosceles' and Cefeo's
first refusal rights for the interim financing during May 1999 in which Viragen
received $1,375,000 from three investors through sale of our common stock. Since
we had a pending registration statement on behalf of Isosceles and Cefeo at the
time of the May 1999 interim financing and June 1999 modification, the
Securities and Exchange Commission has informed us that we may have violated
Section 5 of the Securities Act of 1933. If this is so, we may have a contingent
liability to Isosceles, Cefeo and the three investors in the interim financing
since they may have a right to rescind their transactions. We have not
classified any amount outside of permanent equity because management has
concluded that the successful assertion of a claim for recission is remote.
F-24
<PAGE> 74
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-25
<PAGE> 75
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 carry-forwards, with expiration dates, as
follows:
AMOUNT EXPIRATION
----------------- -------------
$ 270,000 2000
2,870,000 2001 -- 2003
3,120,000 2004 -- 2006
25,051,000 2007 -- 2019
-----------------
$31,311,000
=================
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
carry-forwards.
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>
F-26
<PAGE> 76
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 carry-forward at
June 30, 1999.
For financial reporting purposes, net loss before income taxes includes the
following components:
YEAR ENDED JUNE 30,
----------------------------------------
1999 1998
------------------ -----------------
U.S. $ (6,048,656) $ (3,615,140)
Foreign (4,602,176) (4,240,996)
------------------ -----------------
$ (10,650,832) $ (7,856,136)
================== =================
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, 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
F-27
<PAGE> 77
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-28
<PAGE> 78
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manufacturing and distribution license covering Malaysia, Indonesia, the
Philippines, Thailand, Taiwan, Korea, Singapore, Australia and New Zealand, for
our proprietary natural interferon production process in exchange for an initial
cash licensing fee of $20 million and a continuing royalty of 12% of Southern
Health's related revenues. Southern Health paid a $200,000 option fee.
On March 31, 1999, the option agreement expired, without being exercised.
We recognized one-half of the fee, or $100,000, as revenue, and the balance was
refunded to Southern Health during April 1999.
NOTE K -- RESEARCH AND DEVELOPMENT AGREEMENTS
Viragen has a contract with Viragen Research Associated Limited
Partnership, for Viragen to perform the research and development with respect to
two therapeutic products for the topical treatment of herpes virus infections.
Pursuant to the contract, we assigned all of our patent rights to the processes
and topical products to Viragen Research Associated in exchange for an exclusive
worldwide licensing agreement. Viragen Research Associated is to receive 5% of
the gross revenues of topical products until it has received approximately
$900,000 and, thereafter, it is to receive 2% of the gross revenues of topical
products. Viragen is not presently pursuing the development or commercialization
of a topically applied product.
NOTE L -- ROYALTY AGREEMENT
Viragen has a royalty agreement with Medicore, Inc. that will pay Medicore
a maximum of $2,400,000 in royalties. Royalties are to be paid as follows: 5% on
the first $7 million of sales of interferon and related 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,
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VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
UNAUDITED SUBSEQUENT EVENT INFORMATION
On November 3, 1999, Viragen secured a $400,000 short-term loan by pledging
its domestic scientific equipment and a second mortgage on our Florida based
research facility as collateral. Interest on the promissory note is payable in 6
monthly installments, commencing on December 3, 1999. Interest is calculated at
the rate of 12% per annum. The principal balance of $400,000 plus any unpaid
interest is due on May 3, 2000.
On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with three institutional investors. The agreement was for
gross proceeds of $2,500,000 in exchange for 4,600,000 shares of common stock
and warrants to purchase 357,000 shares of common stock. The proceeds are
payable in three tranches: $650,000 upon the execution of the agreement;
$650,000 upon the filing of the related registration statement; and $1,200,000
upon the registration statement becoming effective. The warrants are exercisable
at $1.15 per share through November 30, 2002.
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PROSPECTUS
February 11, 2000
