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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-17827
VIRAGEN (EUROPE) LTD.
(Exact name of registrant as specified in its charter)
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DELAWARE 11-2788282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2343 WEST 76TH STREET, HIALEAH, FLORIDA 33016
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (305) 823-0269
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the common stock on September 20,
1996 was approximately $31,855,000.
As of September 20, 1996, the Company had outstanding 6,954,830 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
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VIRAGEN (EUROPE) LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 6
Item 3. Legal Proceedings............................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 8
Item 6. Selected Financial Data...................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................ 9
Item 8. Financial Statements and Supplementary Data.................................. 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................. 10
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 11
Item 11. Executive Compensation....................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 14
Item 13. Certain Relationships and Related Transactions............................... 14
PART IV
Item 14. Exhibits and Reports on Form 8-K............................................. 16
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PART I
ITEM 1. BUSINESS
GENERAL
Viragen (Europe) Ltd., a Delaware corporation, (the "Company") was
organized in November 1985 (formerly "Action Associates, Inc.," and thereafter,
"SRSI Capital Group, Inc.", and "Sector Associates, Ltd.," respectively) to
initially seek business opportunities offering a potential for profit including
the acquisition of existing businesses or the acquisition of assets sufficient
to establish an active business for the Company.
In September, 1995, the Company (whose corporate name was then "Sector
Associates, Ltd.") entered into an Agreement and Plan of Reorganization to
acquire 100% of the outstanding stock of Viragen (Scotland) Ltd. ("VSL") a
Scottish private company organized in 1995, in exchange for the distribution to
Viragen, Inc., owner of 100% of the shares of VSL of newly issued shares of
Convertible Preferred Stock of the Company. The shares issued represented
approximately 94% of the then issued and outstanding capital stock interest of
the Company. As the previous owners of VSL, received voting control of the
Company in this transaction, the stock exchange represented a reverse
acquisition. (see "Recent Developments and Change in Control", below).
Effective May 2, 1996 the Company's name changed from Sector Associates,
Ltd. to Viragen (Europe) Ltd., the par value of the Common Stock was reduced
from $.10 per share to $.01 per share and the Common Stock was reverse split one
for fourteen (1:14).
Through a license granted in July 1995 to the Company's wholly-owned
subsidiary, VSL by Viragen Technology, Inc. ("VTI"), a wholly-owned subsidiary
of Viragen, Inc., VSL secured certain exclusive rights applicable to the
European Union ("EU") and certain non-exclusive rights throughout the world (but
specifically excluding the United States and its territories). Pursuant to such
license, VSL is authorized to engage in the research, development, manufacture
and sale of certain immunological products for commercial applications,
particularly human leukocyte-derived interferon including Omniferon(TM),
Viragen's natural human leukocyte-derived interferon product (the "Product"),
for antiviral and therapeutic applications. Natural Interferon is a protein
substance that inhibits malignant cell growth without materially interfering
with normal cells. Natural Interferon stimulates and modulates the human immune
system and, in addition, impedes the growth and propagation of various viruses.
Omniferon(TM) is the trade name for the Product in injectable form. The Product
has not been approved by any EU governmental or regulatory agencies nor by the
United States Food and Drug Administration ("FDA"), and there can be no
assurances that such approvals will be obtained at any time in the future.
The Company intends to seek to obtain EU approvals for various uses of the
Omniferon(TM) in the future. Such approvals are expected to require several
years of clinical trials and substantial additional funding. The Company expects
to concentrate its efforts in preparing, filing and processing its applications
and obtaining necessary approvals for its Product from the EU regulatory
authorities. Viragen has assembled an advisory committee consisting of
scientists, medical researchers and clinicians to assist Viragen and the Company
in regulatory compliance matters and its applications to the EU regulatory
authorities.
BACKGROUND
Organized on November 4, 1985, the Company's purpose was to seek business
opportunities. Following a brief ownership of South Richmond Securities, Inc. in
1986, the Company commenced active business operations in 1987 upon the
acquisition of ToSi, Inc. ("ToSi"). From 1987 until January 1993, through its
ToSi subsidiary, the Company operated a number of retail furniture stores in the
South Florida region that featured Thomasville(TM) (residential) furniture. The
operations of ToSi, however, were characterized by recurring losses and by
January 1993, the Company was compelled to abandon the business, discontinue its
operations and close all of its remaining retail operations. In November 1993,
an affiliate of the Company's then principal stockholder acquired 100% of ToSi
in consideration for agreeing to indemnify the Company
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against certain outstanding liabilities of ToSi. This was completed in
conjunction with a broad-based reorganization of the Company's outstanding
finances and recapitalization that occurred during November 1993. From March
1993 until June 1993, the Company also briefly engaged in the printing and
graphic arts business following the acquisition of Drew Communications Group,
Inc.
Between 1993 and 1995 the Company went through a series of corporate
reorganizations and related equity transactions in an effort to establish a
viable operating component on which to base future expansion. In December 1995,
a 94% equity interest in the Company was acquired by Viragen through a reverse
acquisition with Viragen's then wholly-owned subsidiary, VSL.
RECENT DEVELOPMENTS AND CHANGE OF CONTROL
On September 20, 1995, the Company (whose corporate name was then "Sector
Associates, Ltd.") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") to acquire 100% of the outstanding stock of VSL, a
Scottish private company organized in 1995, in exchange for the distribution to
Viragen, of newly issued shares of Convertible Preferred Stock of the Company,
(representing approximately 94% of the then issued and outstanding capital stock
interest of the Company), in a reverse acquisition transaction.
On November 7, 1995, the Reorganization Agreement was amended to (i) extend
the closing date, (ii) provide for an interim loan of $500,000 to VSL (which was
deemed satisfied at closing), and (iii) provide for an additional cash capital
contribution into Sector prior to closing. On December 8, 1995, the consummation
of the transactions contemplated by the Reorganization Agreement, as amended,
occurred. Upon closing, Mr. Andrew Panzo resigned as the President and a
Director of the Company, and Mr. Gerald Smith was elected as the President and a
Director of the Company. Ms. Cecile Coady resigned as Treasurer and Secretary of
the Company, but continued as a Director of the Company until January 8, 1996.
On January 8, 1996, Messrs. Robert H. Zeiger and Dennis W. Healey were appointed
to the Board of Directors.
On May 2, 1996, (i) the Company's name was changed from Sector Associates,
Ltd., to Viragen (Europe) Ltd., (ii) the par value of the Common Stock was
reduced from $.10 per share to $.01 per share and (iii) the Company effectuated
a one-for-fourteen (1:14) reverse stock split.
OPERATIONS
VSL has been organized by Viragen to undertake clinical trials in the EU
and for the sale of Viragen's Omniferon(TM) and related products in the EU and
other countries outside the United States. Viragen has transferred patent and
related proprietary rights associated with the production of its natural human
leukocyte-derived interferon and related technology to VSL for this purpose. The
Scottish National Blood Transfusion Service ("SNBTS") has committed to
manufacture the Product in sufficient scale to accommodate the EU clinical
trials and may simultaneously engage in commercial sales in amounts to be agreed
upon by the parties and the European regulatory authorities. SNBTS will also
cooperate with the Company in studies relevant to the Product and with eventual
production, clinical trials and distribution.
The recent capital investments through a series of private placements
provided the Company with the capital necessary (i) for the construction of a
building and related facilities in Scotland, (ii) the purchase of laboratory
equipment at the Company's Scottish facilities, and (iii) to provide working
capital. However, the Company will require additional financing to engage in and
complete clinical trials necessary in obtaining EU approval for distribution of
the Product. Clinical testing toward EU approval is an expensive process which
is expected to take several years to accomplish with no assurance that such
approval would eventually be obtained.
LICENSE AGREEMENT
Through a license granted on July 12, 1995 by VTI, VSL secured certain
exclusive rights applicable to the EU countries and non-exclusive rights
throughout the world (excluding the United States and its territories) to engage
in the research, development and manufacture of certain proprietary products and
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technologies relating to the therapeutic application of human leukocyte-derived
interferon. The term of the license is for 15 years, which is automatically
renewed for successive 15 year periods.
On July 20, 1995, VSL entered into a License and Manufacturing Agreement
(the "Scottish Agreement") with the Common Services Agency of Scotland, an
agency acting on behalf of the Scottish National Blood Transfusion Service
pursuant to which SNBTS, on behalf of VSL, will manufacture VSL's natural human
interferon product for exclusive distribution within the EU and non-exclusively
worldwide (excluding the United States and its territories) in return for
certain royalties and preferential access to the drug for Scottish patients at a
preferential price.
The term of the Scottish Agreement is for a five-year period with two
additional five-year extension terms at the option of VSL. The Scottish
Agreement also contains provisions protecting proprietary rights of VSL and
Viragen and the preclusion of certain competitive activities by SNBTS.
Pursuant to the Scottish Agreement, VSL and VTI will provide SNBTS with
full access to the proprietary technology and related specialized equipment,
provide suitable training to SNBTS' personnel and defray costs associated with
securing permits and regulatory approvals, and augmenting SNBTS facilities, as
necessary, to manufacture the Product within EU regulatory guidelines. SNBTS
will receive compensation for Product manufactured for use in clinical trials in
the EU, for Product manufactured for sales prior to obtaining new drug
application approval, and for sales following such approval, at varying
percentages in relation to manufacturing costs. Product manufactured and
utilized for humanitarian purposes or for medical use by Scottish patients will
be preferentially priced under a specific allocation to be agreed upon. See also
"Intellectual Property."
CLINICAL TRIALS
In order to commence clinical trials, the Scottish manufacturing facility,
method and techniques of manufacture, as delineated in Standard Operating
Procedures ("SOPS"), and parameters of the trials themselves, must be approved
by EU regulatory authorities. Viragen, on behalf of the Company and VSL, has
engaged recognized consultants familiar with the EU approval process. SNBTS will
provide its best efforts, working in conjunction with the Company, to obtain a
United Kingdom current Good Manufacturing Practices ("cGMPs") manufacturing
license and subsequent Product approval. At such time as the SNBTS obtains a
manufacturing license for the Product, Viragen may then seek U.S. FDA
manufacturing approval of the Scottish manufacturing facility. There can be no
assurance that the EU regulators will approve the manufacturing facility or
permit clinical testing and distribution of the Product within the EU, or that
the FDA will license or approve the Scottish manufacturing facility or the
Product for clinical trials and subsequent distribution in the United States.
THE PRODUCT
Since its incorporation, Viragen has focused its efforts on the research
and potential commercial applications of human leukocyte-derived
interferon-alpha. Natural interferon is one of the body's natural defensive
responses to foreign substances such as viruses, and is so named because it
"interferes" with viral growth. Interferon consists of protein molecules that
induce antiviral, antitumor and immunomodulatory responses within the body.
Medical studies have indicated that interferons may inhibit malignant cell and
tumor growth without affecting normal cell activity.
There are two basic types of interferon-alpha, differentiated primarily by
their method of manufacture and resultant composition. The first, as produced by
Viragen and the Company, is natural, human leukocyte-derived alpha interferon
("Natural Interferon") produced by stimulated human white blood cells. The human
white blood cells are cultivated and stimulated by the introduction of a virus
that induces the cells to produce Natural Interferon which contains multiple
subtypes. The Natural Interferon is then extracted and purified to produce a
highly concentrated product for clinical use. The second, recombination alpha
interferon, is a genetically engineered synthetic interferon produced by
recombinant DNA techniques ("Synthetic Interferon") which contains a single
subtype.
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Studies have indicated that there may be significant clinical differences
between the use of Natural Interferon and Synthetic Interferon. Viragen is
advised that studies have found that treatment with Synthetic Interferon in
certain cases may cause an immunological response ("neutralizing and/or binding
antibodies") that may reduce the effectiveness of the treatment. The Company
believes that the production of neutralizing and/or binding antibodies is
virtually non-existent in patients treated with Natural Interferon. Furthermore,
primarily due to other differences including dosage requirements (less of the
natural product is apparently required to treat the subject diseases), the side
effects of treatment with Natural Interferon, in most instances, may be less
severe.
THE INDUSTRY
Prior to 1985, Natural Interferon was the only type of interferon
available. Research institutions and other biomedical companies similar to the
Company were working to solve the manufacturing problems associated with
commercial scale production of Natural Interferon. In 1985, Hoffman-LaRoche,
Inc. and Schering-Plough Corporation, two major pharmaceutical companies,
successfully developed synthetic interferon using DNA technology and
subsequently received FDA approval to produce and market their 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 alpha
interferon, the medical community's interest in Natural Interferon diminished,
and most clinical studies thereafter were based on the synthetic product, due to
its availability and substantially lower unit cost compared to Natural
Interferon.
Hoffman-LaRoche, Inc., and Schering Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their respective
Synthetic Interferon products in medical journals and through direct physician
contact. In 1993 Chiron Corp. received FDA approval of its recombinant beta
interferon for the treatment of relapsing/remitting MS. In 1996, Biogen, Inc.
received FDA approval for its recombinant beta interferon for the treatment of
Multiple Sclerosis.
In addition to the manufacturers of Synthetic Interferon, a domestic
manufacturer of natural interferon-alpha, Interferon Sciences, Inc., received
FDA approval in 1989 to sell, in injectable form, their natural interferon
product for genital warts. This manufacturer also has indications currently in
the FDA approval process and they continue to market their product for their
approved indication.
MANUFACTURE OF INTERFERON
Human source leukocytes ("white blood cells") and a stimulating virus, raw
materials which are readily available to the Company, are needed to produce
human leukocyte interferon by conventional (non-recombinant) means. A
stimulating virus, harmless to humans, is introduced into the white blood cell
which induces the cell to produce interferon. The interferon is then extracted
and purified. Alpha Leukoferon(TM), which is also a natural human
leukocyte-derived interferon-alpha in injectable form, is distributed in limited
quantities in Florida. The Company's variant of the product Omniferon(TM), is
currently in development for eventual commencement of clinical trials in the EU.
Production methods developed by Viragen, as well as enhanced methods
currently under development, have reduced both Viragen's and the Company's costs
of production of Natural Interferon, and accordingly, the differences in market
price between the natural and synthetic interferons. While production of the
natural product is still believed to be somewhat more costly on a per unit
basis, the Company believes that lower dosage requirements for the Natural
Interferon make it presently a cost effective alternative method of treatment.
The Company anticipates that it will initially be required to make capital
expenditures of between $2,000,000 and $2,500,000 in order to refine, acquire
and install new manufacturing equipment associated with its proprietary
manufacturing process at its new Scottish facility. The Company believes that
the new proprietary manufacturing technology licensed by VTI should
significantly reduce the cost of production which, in turn, will further reduce
the price of the Product, thereby enabling it to be more competitive with
Synthetic Interferons. There can be no assurances that such new manufacturing
technology will enable the Company to achieve the level of manufacturing
proficiency and Product improvement anticipated by management.
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RESEARCH AND DEVELOPMENT
The entire process of research, development and EU regulatory approvals (if
obtained), of a new pharmaceutical product will take several years and require
substantial funding. Pursuant to its Licensing Agreement with SNBTS, the Company
and SNBTS intend to commence EU pre-clinical trials in 1997. The Company's
present focus is the continued research and development of Omniferon(TM) and
commencement of clinical trials in the EU.
Following the receipt of additional funding from the Company's Private
Placements completed in March 1996, research efforts and related costs increased
further and can be expected to continue to increase as the Company continues its
development efforts for its proprietary production technology for its Product.
INTELLECTUAL PROPERTY
Viragen has been awarded one patent for an enhanced purification process.
However, Viragen has recently made substantial advances in its technology but
has not, as yet, applied for patent protection for its new technology and is
currently relying on protection through trade secret laws and confidentiality
agreements until such time it does file for patent protection. In July 1995, all
of the patents and proprietary technology owned by Viragen was subsequently
transferred to its wholly-owned subsidiary, VTI and ultimately to the Company
through a License Agreement.
United States patents have been issued to others with respect to
genetically engineered organisms and genes and human leukocyte interferon
purified to a certain degree. Subject to the extent of such existing patent
claims, Viragen may have to negotiate license agreements with such patent
holders to use such processes and products in Viragen's human leukocyte-derived
interferon program. As a result, the Company may be required to become a party
in these license agreements which could have an adverse effect on the Company's
profitability since it is likely that the Company would be required to pay cash
compensation or royalties.
The validity and enforceability of a patent can be challenged by litigation
after its issuance and if the outcome of such litigation is adverse to the owner
of the patent, other parties may be free to use the subject matter covered by
the patent. The degree of protection afforded by foreign patents may be
different than in the United States. There can be no assurance that patents now
held or obtained in the future will be of substantial protection or commercial
benefit to the Company. Moreover, because of the progress in related technology,
many of the patents now owned by VTI are obsolete.
While Viragen has made efforts to protect its proprietary technology, to
the extent that such protections are inadequate, Viragen could lose the benefit
of a part or all of these rights, which, in turn, could have a material adverse
effect on the Company. Furthermore, to the extent that any of Viragen's patents
or other proprietary technology is challenged or infringed, such challenges or
infringement will likely have an adverse effect on the Company's License
Agreement with VTI and the Company's Scottish Agreement with the Agency and
SNBTS, as well as on the Company's operations. See "Licensing Agreements."
REGULATION
In accordance with EU regulations, the Product is classified as a "protein
identical to naturally occurring human polypeptides and proteins". The EU
regulations specifically provide for more abbreviated preclinical studies for
naturally occurring substances such as the Product than for genetically
engineered products. Accordingly, while there can be no assurance, the Company
hopes to receive a more expeditious review of the various EU processes and
clinical trials prerequisite to market approval.
As described above, for purposes of securing approvals and completing the
necessary clinical trials relative to the EU approval process, as well as to
secure a sufficient blood source for the manufacture of the Product following
completion of EU clinical trials, on July 20, 1995, VSL entered into the
Scottish Agreement with the Common Services Agency of Scotland, an adjunct of
the Scottish Government which acts on behalf of the National Health Service in
Scotland and the Scottish Natural Blood Transfusion Service. The Agency owns and
operates a blood fractionation facility in Edinburgh, Scotland, located near the
Company's facility
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currently under construction, and has the physical and, with the Company's
proprietary technology, the technical capacity to manufacture Omniferon(TM) from
human leukocytes. Securing a facility in the EU which has available a sufficient
qualified blood source was considered critical for the Company to successfully
conduct EU clinical trials as well as to provide for subsequent commercial
manufacturing.
In order to conduct clinical trials, the Company's Scottish manufacturing
plant and manufacturing SOPs must be approved by the Scottish regulatory
authorities. The Company has engaged a recognized consulting firm familiar with
the EU regulatory process to assist in the manufacturing and Product submissions
prerequisite to the EU regulatory approval process. In addition, the SNBTS has a
full time regulatory department, comprising the three persons, that have
obtained approval of numerous EU approved blood-derived products. The Scottish
National Blood Service will provide its best efforts, working in conjunction
with the Company, to obtain a manufacturing license and subsequent product
approval at the conclusion of the EU clinical studies. At such time as SNBTS
obtains a manufacturing license for the Product, Viragen also intends to seek
U.S. FDA approval of the Product for clinical trials in the United States.
Pursuant to the Scottish Agreement, the Agency has committed to manufacture
and supply the Product within the EU on an exclusive basis and throughout the
world (excluding the United States and its territories) on a non-exclusive
basis. The Agency has committed to manufacture the Product in sufficient scale
to accommodate the EU clinical trials, and thereafter, for subsequent commercial
sales in amounts to be agreed upon by the parties.
The Company is providing the Agency with full access to proprietary
technology and specialized equipment and will train Agency personnel. In
addition, the Company has agreed to defray all costs associated with securing
permits and regulatory approvals, augmenting the Agency's facilities, if
necessary, to manufacture the Product and securing documentation substantiating
compliance of the Product with EU regulatory requirements. The Agency will
receive compensation for Products manufactured for use in clinical trials in the
EU and for Products manufactured for sales prior to obtaining new drug
application approval. In addition, for sales for humanitarian purposes or for
medical use by patients of the Scottish National Health Services or the United
Kingdom National Health Services, Product distribution will involve either no
payments to the Agency or payments at substantially discounted prices.
COMPETITION
Competition in the immunological and pharmaceutical products industry is
intense. Competitors include major pharmaceutical, chemical, energy and food
companies, some of which have already marketed genetically engineered alpha and
beta interferon products for Multiple Sclerosis, cancer and viral treatments,
and many of which are expanding into modern biotechnology. Competition is
expected to increase in the future, based upon the perceived potential
commercial applications for such products. Many of the Company's competitors
have existing programs, more experience in research, development and clinical
testing of pharmaceutical products, and substantially greater financial,
marketing and human resources than the Company.
EMPLOYEES
As of September 20, 1996, the Company had two full-time employees, Dr.
Magnus Nicolson, the Managing Director of VSL and Mr. Dennis W. Healey, the
Company's Executive Vice President, Chief Financial Officer, Treasurer and
Secretary. Through the provisions of the Scottish Agreement, the Company
utilizes additional personnel and departments within SNBTS, including Dr. Blair
Anderson, the Company's Production Manager and external consultants as needed.
ITEM 2. PROPERTIES
Viragen, Inc., the majority stockholder of the Company, currently owns a
14,000 square foot building at 2343 West 76th Street, Hialeah, Florida 33016.
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In June 1996, the Company executed a five-year lease agreement in a
biotechnology park in the Edinburgh area of Scotland. This facility, comprised
of approximately 8,100 sq. ft., will contain the Company's laboratory and
production facilities. This location will augment other productive assets
located with the SNBTS facility which are available to the Company under the
Scottish Agreement. The monthly rental for the facility is British Pound 6,140
or approximately US$9,800, subject to adjustment for common area maintenance
charges. The Company has the right to renew the lease for four additional five
year terms. The Company considers that its property, including its new facility
under construction, as suitable and adequate to carry on the Company's business.
The Company further believes that it maintains sufficient insurance coverage on
the Company's real and personal property.
ITEM 3. LEGAL PROCEEDINGS
An action is pending in the Circuit Court for Broward County, Florida
against the Company (then named Sector Associates, Ltd.) alleging that Sector
Associates, Ltd., mishandled payment of amounts due to a Roy Woods, a secured
creditor (ROY WOODS AS TRUSTEE V. SECTOR ASSOCIATES LTD.). The Company has
denied the claim and has filed a counterclaim. In addition, a stockholder of
Sector Associates, Ltd., is obligated and has agreed to indemnify the Company in
this matter and has assumed responsibility for defense of this lawsuit. Based on
the nature of the damages alleged as well as the indemnification received from
the stockholder defending the lawsuit, management does not believe that the
litigation will result in any material liability to the Company.
The Company knows of no other material litigation or claims pending,
threatened or contemplated to which the Company is or may become a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's fiscal
year to a vote of security holders through the solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the OTC Bulletin Board
under the symbol "VERP." The following table sets forth the high and low bid
quotations for the Common Stock for the periods indicated.
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PERIOD HIGH LOW
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First Quarter ended 09/30/93................................................. 1/2 1/8
Second Quarter ended 12/31/93................................................ 1 5/8 1 3/8
Third Quarter ended 03/31/94................................................. 1 5/8 1/2
Fourth Quarter ended 06/30/94................................................ 1 5/8 1/2
First Quarter ended 09/30/94................................................. 1 3/4 1/4
Second Quarter ended 12/31/94*............................................... 1 1/2 3/8
Period 04/06/96 -- 05/01/96.................................................. 2 3/4
Period 05/02/96** -- 06/30/96................................................ 27 25
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* No public trading was undertaken with respect to the Company's Common Stock
between January 1, 1995 and April 5, 1996.
** Effective May 2, 1996, the Company effectuated a 1:14 reverse stock split
simultaneously with the change of the name of the Company from Sector
Associates, Ltd. to Viragen (Europe) Ltd.
(a) The above quotations reflect prices between dealers, do not include retail
mark-ups, mark-downs or commission and may not necessarily represent actual
transactions.
(b) On September 20, 1996, the closing bid price for the Common Stock was
$19.25.
(c) As of September 20, 1996, the approximate number of record holders of the
Company's Common Stock was 104 with an estimated total number of
shareholders of 1,200.
The Company has not paid any cash dividends on its Common Stock since
incorporation. As the Company is in the development stage, has an accumulated
deficit, and has significant capital requirements in the future and presently
intends to retain future earnings, if any, to finance the expansion of its
business, it is not anticipated that any cash dividends will be paid in the
foreseeable future. Future dividend policy will depend on the Company's
earnings, if any, capital requirements, expansion plans, financial condition and
other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
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YEAR ENDED ELEVEN WEEKS ENDED
JUNE 30, 1996 JUNE 30, 1995
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Interest and other income..................................... $ 73,945 $626
Net (loss) Income............................................. (475,351) 626
Net (loss) income per average common share outstanding........ $ (.13) 6.26
Weighted average shares outstanding and equivalents(1)........ 3,685,705 100
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CONSOLIDATED BALANCE SHEET DATA
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YEAR ENDED ELEVEN WEEKS ENDED
JUNE 30, 1996 JUNE 30, 1995
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Working capital (deficit)..................................... $ 5,795,786 $ (5,467)
Total Assets.................................................. 5,953,949 57,933
Long-term debt................................................ -- --
Stockholder's equity.......................................... 5,829,565 2,240
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The information in this table has been retroactively restated to reflect a
one-for-fourteen (1:14) reverse stock split in the Company's shares of Common
Stock on May 2, 1996. The weighted average number of shares outstanding includes
the assumed conversion of the convertible preferred shares as of the issuance
date, as they were issued with the intention of granting Viragen control of the
Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
On December 8, 1995, the Company (then named Sector Associates, Ltd.)
acquired 100% of the stock of Viragen (Scotland) Ltd. ("VSL") for 2,000,000
shares of Series B Convertible Preferred Stock of the Company which, upon
conversion, represented 5,600,000 shares of Common Stock or approximately 94% of
the then issued and outstanding capital stock interest of the Company. As the
stockholders of VSL gained voting control of the Company in this transaction,
they became the acquiring entity and accounting survivor. Accordingly, the
acquisition was accounted for as a reverse acquisition whereby the historical
financial statements reflect those of the accounting acquirer, VSL, not the
financial statements of the legal acquirer, the Company. The historical
financial statements for all periods presented up to December 8, 1995 included
herein are therefore those of the predecessor, or VSL, the accounting survivor
of the reverse acquisition. Moreover, since at the time of the acquisition the
legal acquirer, the Company, was a shell corporation with no operations,
stockholders' equity of the combined entity was recapitalized to reflect the
capital structure of the surviving legal entity and the accumulated deficit of
VSL.
VSL was organized during April 1995 by Viragen, Inc. as a Scottish private
company to undertake clinical trials in the EU and for sales of Viragen's
Product, in the EU and other countries outside the United States. Accordingly,
no financial data is available for Viragen (Europe) Ltd. and its subsidiary,
VSL, prior to April 1995.
Through a license granted by Viragen, VSL's ultimate parent, VSL secured
certain rights to engage in the research, development and manufacture of certain
proprietary products and technologies that relate to the therapeutic application
of human leukocyte interferon for various diseases that affect the human immune
system. Pursuant to these rights, on July 20, 1995, VSL entered into a License
and Manufacturing Agreement with the Common Services Agency, an agency acting on
behalf of the Scottish National Blood Transfusion Services, ("SNBTS") pursuant
to which SNBTS, on behalf of VSL, will manufacture and supply VSL's Product to
VSL for distribution in the EU in return for certain fees and additional rights.
SNBTS' services will be subject to all governmental regulations and procedures
pertaining to the manufacture and distribution of the Product. SNBTS has
committed to manufacture the Product in sufficient scale to accommodate the EU
clinical trials and may simultaneously engage in commercial sales in amounts to
be agreed upon by the parties and the European regulatory authorities. SNBTS
will also cooperate with the Company in studies relevant to the Product and with
eventual production, clinical trials and distribution. Management considers it
critical to the Company's operation and to planned clinical trials to secure a
sufficient qualified source of human leukocytes, a critical component in the
manufacture of the Product. VSL was a newly formed company which commenced
operations concurrent with the execution of its agreements with SNBTS.
The Company initiated a series of Private Placements to accredited
investors to raise capital necessary to complete the planned reverse
acquisition, raise the funding necessary to complete construction of its
Scottish facility and for initial Product testing phases by VSL in Scotland. In
December 1995, the Company completed a Private Placement, raising approximately
$750,000 through the sale of 336,000 units for a purchase price of $2.23 per
Unit. Each Unit consists of 0.71 shares of Common Stock and 2.5 Common Stock
Purchase Warrants having an exercise price of $6.00 per share, representing a
total of 240,000 Shares and 840,000 Warrants. In March 1996, the Company
completed two additional Private Placements, issuing a total of 768,000 shares
of Common Stock and 216,500 Warrants having an exercise price of $12.00 per
share. These offerings yielded net cash proceeds of $5,102,000. The completion
of the Private Placements provided the Company with initial capital necessary
(i) for the construction of a building and related facilities in Scotland, (ii)
for the purchase of equipment at the Company's Scottish facilities, (iii) to
provide a minimum royalty to the Company's affiliate, VTI to commence in
calendar year 1997 (iv) to expand the number of employees of VEL and (v) for
general working capital. However, the Company will require additional financing
to engage
9
<PAGE> 12
in clinical trials for the purpose of obtaining EU approval for the Product. The
entire process of research, development and EU regulatory approvals (if
obtained), of a new pharmaceutical product takes several years and requires
substantial funding. Pursuant to its Licensing Agreement with SNBTS, the Company
and SNBTS intend to commence EU preclinical trials in calendar 1997. The
Company's present focus is the continued research and development of the
Company's Product for the treatment of Multiple Sclerosis, Hepatitis B and C,
and HIV/AIDS.
Following the receipt of additional funding from the Company's Private
Placement completed in March 1996, research efforts commenced and related costs
were incurred which can be expected to increase as the Company continues its
development efforts for its proprietary production technology for its product.
In June 1996, the Company executed a five year lease agreement in a
biotechnology park in the Edinburgh area of Scotland. This facility, comprised
of approximately 8,100 sq. ft., will contain the Company's laboratory and
production facilities. The monthly rental for the facility is 5,590 British
Pounds or approximately US$8,830 subject to adjustment for common area
maintenance charges. This location will augment other productive assets located
within the SNBTS facility which are available to the Company under the Scottish
Agreement.
During fiscal 1996, the Company incurred general and administrative
expenses associated primarily with the recommencement of operations including
fees associated with the Company's License and Manufacturing Agreement with the
SNBTS and domestic professional fees associated with public filings. Such fees
included legal and accounting fees of $107,200, administrative consulting fees
in Scotland of $56,300 and travel related costs between the U.S. and Scotland of
$43,500. Also included is compensation expense of $243,000 representing shares
issued to three officers and directors in September 1995.
Management believes that the working capital currently on-hand is adequate
to complete the planned construction phase of its Edinburgh production facility
and maintain its research and product development operations for the foreseeable
future. Additional funding will be required to undertake and complete EU
regulatory approvals.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
10
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS
OFFICER AND/OR
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
- --------------------------------------- --- --------------------------------------- --------------
<S> <C> <C> <C>
Gerald Smith........................... 65 Chairman of the Board 1995
President 1995
Director 1995
Director of Viragen (Scotland) Limited 1995
Robert H. Zeiger....................... 52 Chief Executive Officer 1996
Chief Operating Officer 1996
Director 1996
Director of Viragen (Scotland) Limited 1995
Dennis W. Healey....................... 48 Executive Vice President 1996
Chief Financial Officer 1996
Treasury, Secretary and Director 1996
Director of Viragen (Scotland) Limited 1995
Dr. Magnus Nicolson.................... 34 Managing Director of Viragen (Scotland)
Ltd. 1996
</TABLE>
The Company's directors are collectively elected at the annual meeting of
stockholders and hold office for one year and until their successors are elected
and qualified. The Company's officers are appointed by the Board of Directors
and serve at the pleasure of the Board.
Set forth below is a biographical description of each director and
executive officer of the Company.
GERALD SMITH, in accordance with reorganization by and among the Company,
Viragen, Inc., and Viragen (Scotland) Limited, became the President and Chairman
of the Board of Directors of the Company on December 8, 1995. Mr. Smith has also
served as a Director of Viragen (Scotland) Limited since its inception in April
1995. Since February 5, 1993, Mr. Smith has served as a Director of Viragen,
Inc., the majority stockholder of the Company, and on May 12, 1993, Mr. Smith
became President of Viragen. In June, 1994 Mr. Healey relinquished his position
as Chairman of the Board of Directors of Viragen in favor of Mr. Smith. Since
1982, he was a Principal Stockholder, President, Chief Executive Officer and
Director of Business Development Corp. ("BDC") of Miami, Florida, which has
served as a managing entity and consultant to several high technology ventures
including Compupix Technology Joint Venture of Boca Raton, Florida. In 1988, Mr.
Smith was the Founder, President and a Director of Club-Theatre Network, Inc. of
Boca Raton, Florida, an audience interactive private video theater. Mr. Smith
sold his interest in that company in March 1989. From August 1991 to December
1991, Mr. Smith was the chief executive officer of Electronic Imagery, Inc.
located in Pompano, Florida, a company engaged in the development of imaging
software. Mr. Smith is also the President, Chief Executive Officer and a
Director of Cinescopic Corporation and International Database Service, Inc.
located in Palm Beach Gardens, Florida, computer-oriented companies which
developed database technology using the personal computer for audio, video,
animation and real time communication. Mr. Smith has wound down BDC's operations
in order to devote substantially all of his time to the Company and Viragen. Mr.
Smith has advised that his services to these companies will not materially
affect his ability to render services to the Company.
ROBERT H. ZEIGER was appointed a Director, Chief Executive Officer and
Chief Operating Officer of the Company in January, 1996. Mr. Zeiger has also
served as a Director of Viragen (Scotland) Limited, a wholly-owned subsidiary of
the Company since April, 1995 and a Director of Viragen, Inc., the majority
stockholder of the Company, since June, 1995. From 1985 to 1994, Mr. Zeiger was
employed by Glaxo, Inc., a pharmaceutical manufacturer during which time he
served as Vice President and General Manager, Glaxo Pharmaceuticals Division
(1991 to 1994), Vice President and General Manager of the Allen & Hansbury
Division, and Vice President and General Manager of the Dermatology Division
(1985 to 1988).
11
<PAGE> 14
DENNIS W. HEALEY is a Certified Public Accountant and was appointed the
Company's Executive Vice President, Chief Financial Officer, Treasurer,
Secretary and a Director of the Company in January, 1996. Mr. Healey has also
served as a Director of Viragen (Scotland) Limited since April, 1995. In April
1993, he was appointed Chairman of the Board and Chief Executive Officer of
Viragen, Inc., the majority stockholder of the Company, and in June 1994, Mr.
Healey relinquished that position to Mr. Smith and in July 1994 relinquished the
position of Chief Executive Officer. Upon Gerald Smith becoming President of
Viragen on May 12, 1993, Mr. Healey became Executive Vice President and has
served as Chief Financial Officer and Treasurer of Viragen since 1980 and its
Secretary since 1994. In July 1996, Mr. Healey, resigned his position as Chief
Financial Officer and Treasurer of Medicore, Inc., a publicly traded company on
the NASDAQ, and as Executive Vice President of its Techdyne affiliate. Mr.
Healey joined Medicore in 1976 as its Controller. He also resigned his position
as Treasurer of most of Medicore's subsidiaries and as Vice President of
Dialysis Corporation of America ("DCA"), a subsidiary of Medicore.
MAGNUS NICOLSON, PH.D. has served as the Managing Director of Viragen
(Scotland) Limited, a wholly-owned subsidiary of the Company, since April 1996.
From 1992 to 1995, Dr. Nicolson was employed by Scottish Enterprise, an agency
of the Scottish government responsible for generating economic development in
Scotland. During his time at Scottish Enterprise, he served as Technology
Manager for "Locate in Scotland" (1995), Senior Executive (1993 to 1995), and
Contractor, Healthcare Liaison Office of Dunbartonshire Enterprise (1992 to
1993). From 1990 to 1992, Dr. Nicolson conducted various market research
projects for a variety of public and private enterprises, as an independent
marketing consultant. In 1988, Dr. Nicolson was awarded a Doctorate in
Immunology from the University of Strathclyde, in addition to acquiring Masters
Degrees in both Immunology and Business in 1985 and 1992, respectively. Dr.
Nicolson is a Fellow of the Royal Societies of Medicine and Chemistry, as well
as a Member of the Chartered Institute of Marketing.
There is no family relationship between any of the officers and directors.
ITEM 11. EXECUTIVE COMPENSATION
During the past three fiscal years (1995, 1994, and 1993), none of the
Company's executive officers have received any cash compensation. Commencing in
July 1996, Mr. Dennis W. Healey, the Company's Executive Vice President, Chief
Financial Officer, Treasurer, and Secretary, and a Director began receiving an
annual salary of $85,000 pursuant to a two-year Employment Agreement with the
Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL RESTRICTED ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD SARS(#) PAYOUTS SATION
- ------------------- ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith....... 1995 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Chairman of Board 1994 -- -- -- -- -- -- --
and President(1) 1993 -- -- -- -- -- -- --
Robert H. Zeiger... 1995 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Chief Executive 1994 -- -- -- -- -- -- --
Officer(2) 1993 -- -- -- -- -- -- --
Andrew Panzo....... 1995 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Chairman of Board 1994 -- -- -- -- -- -- --
and President(3) 1993 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Smith became the Chairman of the Board, Chief Executive Officer,
President and a Director of the Company on December 8, 1995, pursuant to
the Company's Agreement and Plan of Reorganization ("Reorganization
Agreement") by and among the Company, Viragen, Inc., and Viragen (Scotland)
Limited, which position he relinquished to Mr. Robert H. Zeiger on January
8, 1996.
12
<PAGE> 15
(2) Mr. Zeiger was appointed Chief Executive Officer on January 8, 1996 which
position was relinquished by Mr. Smith, Chairman of the Board of Directors.
(3) Mr. Panzo resigned as the Company's Chairman of the Board, Chief Executive
Officer, President and a Director of the Company on December 8, 1995,
concurrent with the Company's reverse acquisition transaction and pursuant
to the provisions of the Company's Reorganization Agreement.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1996 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE
- ------------------------------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Gerald Smith.................................... -- -- --
Robert H. Zeiger................................ -- -- --
Andrew Panzo.................................... -- -- --
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1996 to each person named in the Summary Compensation Table and the unexercised
options held as of the end of the 1996 fiscal year:
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1996 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
LESS EXERCISE VALUE OF UNEXERCISED IN THE
VALUE REALIZED MONEY OPTIONS AT FY-END
MARKET PRICE NUMBER OF UNEXERCISED (BASED ON FY-END PRICE OF
SHARES AT EXERCISE OPTIONS AT FY-END $ /SHARE)
ACQUIRED LESS PRICE --------------------------- ---------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith.............. -- -- -- -- -- --
Robert H. Zeiger.......... -- -- -- -- -- --
Andrew Panzo.............. -- -- -- -- -- --
</TABLE>
ADDITIONAL STOCK OPTIONS
In November 1995, VSL, a wholly-owned subsidiary of the Company, issued an
aggregate of 7,144 shares of VSL common stock at $56.00 per share to individuals
now serving as officers and directors of the Company and to an employee of
Viragen, all of whom were expected to contribute to the operations of VSL. In
connection with the Agreement and Plan of Reorganization, these shares were
exchangeable into an aggregate of 400,000 shares of the Company. Of these
options, 100,000 were granted each to (i) Mr. Gerald Smith, the current
President and Chairman of the Company, (ii) Mr. Robert H. Zeiger, the Chief
Executive Officer, Chief Operating Officer, and a director of the Company, (iii)
Mr. Dennis W. Healey, the Company's Treasurer, Chief Financial Officer,
Secretary and a director of the Company, and (iv) to Mr. Steven Sanders, an
employee of Viragen, who provided various services to the Company. All options
in VSL were exercised on December 5, 1995 at $.001 per share. The Company
recognized $243,000 in compensation expense as a result of the issuance of these
shares. See "Principal Stockholders" and "Certain Relationship and Related
Transactions."
13
<PAGE> 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned at September 20, 1996 (i) by each person who is
known by the Company to own beneficially or exercise voting or dispositive
control over 5% or more of the Company's Common Stock, (ii) by each of the
Company's directors, and (iii) by all officers and directors as a group. A
person is deemed to be a beneficial owner of any securities of which the person
has the right to acquire beneficial ownership within sixty days. At September
20, 1996, there were 6,954,830 shares of Common Stock of the Company
outstanding.
<TABLE>
<CAPTION>
AMOUNT
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- --------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Viragen, Inc.(3)..................................................... 5,000,000 72%
Gerald Smith(4)...................................................... 100,000 1.4%
Robert H. Zeiger(5).................................................. 100,000 1.4%
Dennis W. Healey(6).................................................. 100,000 1.4%
Officers and Directors as a Group (3 persons)........................ 300,000 4.3%
</TABLE>
- ---------------
(1) Based upon information furnished to the Company by the principal security
holders or obtained from the stock transfer books of the Company. Other
than indicated in the notes, the Company has been informed that such
persons have sole voting and dispositive power with respect to their
shares. All of the individuals listed are officers and/or directors of the
Company whose address is 2343 West 76th Street, Hialeah, Florida 33016,
which is also the address of Viragen, Inc.
(2) Based on 6,954,830 shares of Common Stock outstanding at September 20, 1996.
(3) Viragen, Inc. is the majority stockholder of the Company.
(4) Mr. Smith is President and Chairman of the Board of Directors of the
Company.
(5) Mr. Zeiger is Chief Executive Officer, Chief Operating Officer and a
Director of the Company.
(6) Mr. Healey is Executive Vice President, Treasurer, Chief Financial Officer,
Secretary and a Director of the Company.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed in a timely manner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH CURRENT AFFILIATES OF THE COMPANY
On September 20, 1995, the Company entered into an Agreement and Plan of
Reorganization pursuant to which the Company agreed to acquire 100% of the
issued and outstanding stock of VSL, in exchange for the distribution to
Viragen, of newly-issued shares of Convertible Preferred Stock that upon
conversion represented 5,600,000 shares of Common Stock of the Company or
approximately 94% of the then outstanding capital stock interest of the Company.
On November 7, 1995, the Company, VSL, and Viragen entered into an
Amendment to Agreement and Plan of Reorganization (the "Amendment") to extend
the Closing Date to December 8, 1995. Additionally,
14
<PAGE> 17
the Amendment provided for an interim loan of $500,000 to VSL which is to be
deemed satisfied at the Closing. The Amendment also provided for an additional
cash capital contribution of $300,000, payable at closing. Upon the consummation
of the transactions contemplated by the Agreement and the Amendment in December
1995, VSL became a wholly-owned subsidiary of the Company. In July 1995, VSL
entered into a License Agreement with Viragen Technology, Inc., a wholly-owned
subsidiary of Viragen. Pursuant to the terms of the License Agreement, VSL is
obligated to pay a royalty commencing in calendar 1997 and an annual royalty
payment equal to the greater of (i) $2,000,000 or (ii) 10% of VSL's gross
revenues until such time as total royalty payments of $18 million has been paid
to VTI. Once the $18 million royalty amount has been paid, VSL is obligated to
pay VTI an amount equal to 8% of VSL's gross revenues until such time as total
royalty payments of $25 million has been paid to VTI. Once the $25 million
royalty amount has been paid, VSL is obligated to pay VTI an amount equal to 5%
of VSL's gross revenues thereafter. The term of the license agreement is for the
duration of the intellectual property that is the subject matter of the
agreement.
Mr. Gerald Smith, the Company's President and Chairman, is also the
Chairman and President of Viragen, the majority stockholder of the Company. Mr.
Robert H. Zeiger, Chief Executive Officer and Chief Operating Officer and a
Director of the Company is also the Chief Executive Officer and Chief Operating
Officer and a Director of Viragen. Mr. Dennis W. Healey, the Company's Executive
Vice President, Chief Financial Officer, Treasurer, Secretary and a Director
also serves in the same capacities for Viragen. Viragen currently owns 5,000,000
shares of Common Stock of the Company, representing 72% of the Company's
outstanding capital stock interest on September 20, 1996.
15
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS IN FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements -- See Index to Consolidated Financial
Statements.
2. Financial statement schedules -- See Index to Consolidated
Financial Statements.
3. Exhibits
(i) Certificate of Incorporation dated November 4, 1985.
(incorporated by reference to the Company's initial Registration
Statement, File No. 33-1952-NY ("Registration Statement")
(ii) Amended Certificate of Incorporation dated April 14, 1987.
(incorporated by reference to the Company's Registration Statement)
(iii) Amended Certificate of Incorporation dated October 9, 1987.
(incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1995 ("1994 10-KSB")
(iv) Amended Certificate of Incorporation dated November 18, 1987.
(incorporated by reference to the 1994 10-KSB)
(v) Amended Certificate of Incorporation dated December 9, 1987.
(incorporated by reference to the 1994 10-KSB)
(vi) Amended Certificate of Incorporation dated December 18, 1987.
(incorporated by reference to Post-Effective Amendment No. 3 to the
Company's Registration Statement filed on or about May 2, 1989
("Post-Effective Amendment No. 3")
(vii) Amended Certificate of Incorporation dated January 17, 1989.
(incorporated by reference to the 1994 10-KSB)
(viii) Amended Certificate of Incorporation dated June 9, 1989.
(incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1993 ("1993 10-KSB")
(ix) Amended Certificate of Incorporation dated August 2, 1993.
(incorporated by reference to the 1993 10-KSB)
4. Instrument defining the rights of security holders, including
indentures
(i) Amended Certificate of Incorporation dated December 13, 1993.
(incorporated by reference to the 1993 10-KSB)
(ii) By laws of the Company (incorporated by reference to
Post-Effective Amendment No. 3)
(iii) Form of Common Stock Certificate (incorporated by reference
to Form 8-A dated June 14, 1989)
(iv) Form of Class A Redeemable Common Stock Purchase Warrant
(incorporated by reference to Form 8-A dated June 14, 1989)
(v) Form of Class B Redeemable Common Stock Purchase Warrant
(incorporated by reference to Form 8-A dated June 14, 1989)
(vi) Warrant Agreement (incorporated by reference to Form 8-A dated
June 14, 1989)
(vii) Amendment to Warrant Agreement (incorporated by reference to
Post-Effective Amendment No. 3)
16
<PAGE> 19
(viii) Amendment to Warrant Agreement (incorporated by reference to
the 1993 10-KSB)
(ix) Forms of Securities Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1995 ("1995 10-KSB")
(x) Form of Common Stock Purchase Warrant (associated with
Securities Purchase Agreement) (incorporated by reference to the 1995
10-KSB)
(xi) Subscription Agreement and Investment Letter -- Sector
Associates Ltd., dated November 12, 1993 (incorporated by reference to
the 1993 10-KSB)
(xii) Securities Purchase Agreement dated January 25, 1995
(incorporated by reference to the 1994 10-KSB)
(11) -- Statement re: computation of per share earnings
(22) -- Subsidiaries of the registrant
(27) -- Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K filed during the fourth quarter.
None.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIRAGEN (EUROPE) LTD.
By /s/ DENNIS W. HEALEY
------------------------------------
Dennis W. Healey
Executive Vice President, Treasurer,
Principal Financial and Accounting
Officer
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ GERALD SMITH Chairman of the Board of September 27, 1996
- --------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and
President
/s/ ROBERT H. ZEIGER Chief Executive Officer and September 27, 1996
- --------------------------------------------- Director
Robert H. Zeiger
/s/ DENNIS W. HEALEY Executive Vice President, September 27, 1996
- --------------------------------------------- Treasurer and Principal
Dennis W. Healey Financial Officer
</TABLE>
18
<PAGE> 21
FORM 10-K -- ITEM 8
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen (Europe) Ltd.
and subsidiary are included:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants..................................... F-2
Consolidated balance sheets -- June 30, 1996 and 1995.................................. F-3
Consolidated statements of operations -- Year ended June 30, 1996 and eleven weeks
ended June 30, 1995.................................................................. F-4
Consolidated statements of stockholders' equity -- Year ended June 30, 1996 and eleven
weeks ended June 30, 1995............................................................ F-5
Consolidated statements of cash flows -- Year ended June 30, 1996 and eleven weeks
ended June 30, 1995.................................................................. F-6
Notes to consolidated financial statements -- June 30, 1996 and 1995................... F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Viragen (Europe) Ltd.
We have audited the accompanying consolidated balance sheets of Viragen
(Europe) Ltd. and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year and eleven weeks ended June 30, 1996 and 1995, respectively. 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 (Europe) Ltd. and subsidiary at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the year and
eleven weeks ended June 30, 1996 and 1995, respectively, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Miami, Florida
August 16, 1996
F-2
<PAGE> 23
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
---------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................. $4,985,897 $50,226
Advances to parent.................................................... 882,960 --
Other current assets.................................................. 51,313 --
---------- -------
Total Current Assets.......................................... 5,920,170 50,226
PROPERTY, PLANT AND EQUIPMENT
Equipment and furniture............................................... 5,985 --
Construction in progress.............................................. 21,811 --
---------- -------
27,796 --
Less accumulated depreciation......................................... (183) --
---------- -------
27,613 --
OTHER ASSETS
Deferred Expenses..................................................... 6,166 7,707
---------- -------
$5,953,949 $57,933
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses................................. $ 124,384 $ 7,307
Advances from parent.................................................. -- 48,386
---------- -------
Total Current Liabilities..................................... 124,384 55,693
Stockholders' Equity
Common stock, $.01 par value. Authorized 20,000,000 shares; issued and
outstanding 6,922,830 shares....................................... 69,228 --
Common stock, $1.61 par value. Authorized, issued and outstanding 100
shares............................................................. -- 161
Additional paid-in capital............................................ 6,192,005 1,453
Retained earnings (deficit)........................................... (474,725) 626
Foreign currency translation adjustment................................. 43,057 --
---------- -------
Total Stockholders' Equity.................................... 5,829,565 2,240
---------- -------
$5,953,949 $57,933
========== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 24
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED WEEKS ENDED
JUNE 30, JUNE 30,
1996 1995
---------- -----------
<S> <C> <C>
Income
Interest and other income........................................... $ 73,945 $ 626
---------- ------
73,945 626
Cost and Expenses
Research and development costs...................................... 56,424 --
General and administrative expenses................................. 491,148 --
Depreciation and amortization....................................... 1,724 --
---------- ------
549,296 --
---------- ------
Net (Loss) Income..................................................... $ (475,351) $ 626
========== ======
Net (loss) income per common share.................................... $ (0.13) $6.26
========== ======
Weighted average common shares outstanding............................ 3,685,705 100
========== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 25
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON COMMON PREFERRED ADDITIONAL COMMON RETAINED FOREIGN
STOCK, STOCK, STOCK PAID-IN STOCK EARNINGS CURRENCY
PAR $.01 PAR $1.61 SERIES B CAPITAL SUBSCRIBED (DEFICIT) TRANSLATION
-------- --------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Incorporation of VSL
in
April 1995 (100
shares)......... $ $ 161 $ $ 1,453 $ $ $
Net income......... 626
------- ----- -------- ---------- ----------- --------- -------
Balance at June 30,
1995............... 161 1,453 626
Exercise of VSL
options by
Directors and
Affiliate....... 12 390
Reverse acquisition
of Sector
Associates,
Ltd. ........... 1,198 (173) 20,000 144,160
Issuance of stock
to Directors and
Affiliate....... 243,000
Private placement
(December 1995),
net of issuance
costs........... 2,400 746,880
Private placements
(March 1996),
net of issuance
costs........... 5,101,752
Conversion of
Series B
preferred
stock........... 56,000 (20,000) (36,000)
Issuance of common
stock
subscribed...... 9,630 5,092,122 (5,101,752)
Foreign currency
translation
adjustment...... 43,057
Net loss........... (475,351)
------- ----- -------- ---------- ----------- --------- -------
Balance at June 30,
1996............... $ 69,228 $ -- $ -- $6,192,005 $ -- $(474,725) $43,057
======= ===== ======== ========== =========== ========= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 26
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED WEEKS ENDED
JUNE 30, JUNE 30,
1996 1995
---------- -----------
<S> <C> <C>
NET (LOSS) INCOME.................................................... $ (475,351) $ 626
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Issuance of stock to Directors and Affiliate.................... 243,000 --
Depreciation and amortization................................... 1,724 --
Increase (decrease) relating to operating activities from:
Other current assets............................................ 143,687 (7,707)
Accounts payable and accrued expenses........................... 69,736 7,307
---------- -------
Net cash (used in) provided by operating activities............. (17,204) 226
INVESTING ACTIVITIES
Additions to property, plant and equipment......................... (27,796) --
---------- -------
Net cash used in investing activities........................... (27,796) --
FINANCING ACTIVITIES
Proceeds from March 1996 private placements, net of related
expenses........................................................ 5,101,752 --
Cash acquired through reverse acquisition of Sector Associates,
Ltd............................................................. 768,823 --
Advances (to) from parent.......................................... (933,361) 50,000
Contributions from officers........................................ 400 --
---------- -------
Net cash provided by financing activities....................... 4,937,614 50,000
Effect of exchange rate fluctuations on cash......................... 43,057 --
---------- -------
Increase in cash..................................................... 4,935,671 50,226
Cash and cash equivalents at beginning of period..................... 50,226 --
---------- -------
Cash and cash equivalents at end of period........................... $4,985,897 $50,226
========== =======
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
During the year and eleven weeks ended June 30, 1996 and 1995,
respectively, the Company had the following non-cash investing and financing
disclosable activities:
<TABLE>
<S> <C> <C>
Other receivables acquired through reverse acquisition of Sector
Associates, Ltd................................................ $195,000 $ --
Liabilities assumed through reverse acquisition of Sector
Associates, Ltd................................................ 47,341 --
Issuance of stock to Directors and affiliate..................... 243,000 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 27
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation: Viragen (Europe) Ltd. ("VEL") and its
subsidiary are engaged in the research, development and manufacture of certain
immunological products for commercial application. The consolidated financial
statements include the accounts of Viragen (Europe) Ltd. and its wholly-owned
subsidiary, Viragen (Scotland) Ltd. ("VSL"), collectively known as the Company.
VSL is a private Scottish company. All material intercompany accounts and
transactions have been eliminated in consolidation. Viragen (Europe) Ltd. is a
majority-owned subsidiary of Viragen, Inc. See Note B for further discussion
relating to basis of presentation.
Name Change and Reverse Stock Split: Effective May 2, 1996, the Company's
name was changed from Sector Associates, Ltd. to Viragen (Europe) Ltd. The
common stock was reverse split one share for fourteen (1:14) and the par value
was changed from $.10 per share to $.01 per share. The number of authorized
common shares was reduced from 50 million shares to 20 million shares.
The effect of the reverse split has been reflected in the consolidated
financial statements and accompanying notes for all periods presented.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate their fair values.
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.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.
Income (Loss) Per Share: Income (loss) per share has been computed based
on the weighted average number of shares outstanding during each period. The
weighted average number of shares outstanding includes the assumed conversion of
the convertible preferred shares as of the issuance date, as they were issued
with the intention of granting Viragen control of VEL. Common stock subscribed
is assumed outstanding as of the completion of the March 1996 private placements
for purposes of the weighted average shares outstanding calculation. The effect
of warrants and stock options (common stock equivalents) are antidilutive.
Deferred Expenses: Deferred expenses are amortized on the straight-line
method, over their estimated benefit period ranging to 60 months.
Foreign Currency Translation: The financial statements of VSL have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated
using the current exchange rates at the balance sheet date. Income statement
amounts have been translated using the average exchange rate for the reporting
period. The translation adjustments resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in results of operations. These gains and losses result from
exchange rate changes between the time transactions
F-7
<PAGE> 28
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are recorded and settled and, for unsettled transactions, exchange rate changes
between the time transactions are recorded and the balance sheet date.
New Pronouncements: The Company adopted the provisions of FAS
121 -- Accounting for the Impairment of Long-Lived Assets, as of July 1, 1995.
FAS 121 requires impairment losses to be recorded on long-lived assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Also, on July 1, 1996, the Company plans to adopt the provisions of FAS
123 -- Accounting for Stock-Based Compensation. The Company will continue to
account for stock-based compensation plans under the provisions of APB
25-Accounting for Stock Issued to Employees. The Company will disclose the pro
forma information required for stock-based compensation plans in accordance with
FAS 123, upon adoption of the pronouncement.
NOTE B -- ACQUISITION -- BASIS OF PRESENTATION
On September 20, 1995, Sector Associates, Ltd. ("Sector") (now named VEL)
entered into an agreement and Plan of Reorganization (the "Agreement") with
Viragen, Inc. ("Viragen"), a Delaware corporation. Under the terms of the
Agreement, Sector was to acquire a 100% interest in VSL, in consideration for
Viragen receiving a 94% interest in Sector.
On November 7, 1995, the Agreement was amended to provide for an interim
loan of $500,000 by Sector to VSL, the filing of certain financial reports by
Sector prior to closing, a capital contribution of $300,000 into Sector within
thirty days, and the modification of a related investment banking agreement. The
$500,000 loan was funded November 9, 1995, bearing interest at 4% per annum,
secured by a 3.77% equity interest in VSL, and was guaranteed by Viragen, Inc.
Upon closing of the Agreement on December 8, 1995, the principal amount of the
note was deemed contributed capital to Sector.
On December 8, 1995, Sector finalized the Agreement and acquired 100% of
the stock of VSL in exchange for 2,000,000 voting shares of Series B Convertible
Preferred Stock, convertible into 5,600,000 shares of common stock or
approximately 94% of the then issued and outstanding shares, as well as 94% of
the voting privileges, of Sector. Viragen retained an 84% ownership interest in
Sector, as 71,429 of the preferred shares (convertible into 200,000 common
shares) were disbursed as finders' fees, and 142,857 of the preferred shares
(convertible into 400,000 common shares) were issued to the Directors and an
affiliate, in exchange for their common shares of VSL. The Company recognized
$243,000 in compensation expense related to the disbursement of stock to the
Directors and affiliate. As the Parent Company of VSL gained voting control of
Sector in this transaction, VSL became the acquiring entity and accounting
survivor. Accordingly, the transaction was accounted for as a reverse
acquisition whereby the historical financial statements contained herein reflect
those of the accounting acquirer, VSL, not the financial statements of the legal
acquirer, VEL (formerly Sector). The historical financial statements for all
periods presented up to December 8, 1995 included herein are, therefore, those
of the predecessor, or VSL, the accounting survivor of the reverse acquisition.
Moreover, since at the time of the acquisition the legal acquirer, VEL, was a
shell corporation with no operations, the stockholder's equity of the conformed
entity was recapitalized to reflect the capital structure of the surviving legal
entity and the accumulated deficit of VSL.
NOTE C -- COMMON STOCK
The Company initiated a series of Private Placement Offerings to raise the
agreed upon capital necessary to complete the planned reverse acquisition (see
Note B) and to raise the capital necessary to complete the construction of a
plant in Edinburgh, Scotland, fund initial product testing phases by VSL in
Scotland, and provide working capital.
F-8
<PAGE> 29
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, the Company completed a Private Placement Offering,
raising approximately $750,000 through the sale of 336,000 units for a purchase
price of $2.23 per unit. Each unit consists of approximately 0.71 share of
Common Stock, resulting in the issuance of 240,000 shares of Common Stock, and
2.5 Common Stock Purchase Warrants having an exercise price of $6.00 per share,
exercisable through November 3,1998. At June 30, 1996, there were 840,000 Common
Stock Purchase Warrants Outstanding resulting from this offering.
In March 1996, the Company completed two additional Private Placement
Offerings, issuing 768,000 shares of Common Stock and 216,500 Common Stock
Purchase Warrants having an exercise price of $12.00 per share, exercisable
through March 15, 1998. These two Offerings yielded net cash proceeds of
approximately $5,102,000 after related expenses of $601,400, of which $229,900
was paid through the issuance of 195,000 shares of Common Stock and 450,000
Common Stock Purchase Warrants having an exercise price of $8.00 per share,
exercisable through March 18, 1999.
Viragen's ownership interest in the Company was reduced to 72%, upon
completion of the March 1996 private placements.
On April 1, 1996, the Company granted Magnus Nicolson, Managing Director of
VSL, 50,000 options to purchase common stock in VEL, as part of his Employment
Agreement. One half of the options vest on March 30, 1997, and the balance vest
on March 30, 1998. The options are exercisable at $7.00 per share for a period
of five years from the vesting dates.
Shares of the Company's common stock reserved at June 30, 1996 for possible
future issuance are as follows:
<TABLE>
<CAPTION>
EXERCISE JUNE 30,
PRICE 1996
-------- ---------
<S> <C> <C>
December 1995 Private Placement Warrants........................ $ 6.00 840,000
Employee options................................................ 7.00 50,000
March 1996 Private Placement Warrants........................... 8.00 450,000
March 1996 Private Placement Warrants........................... 12.00 216,500
Class F Warrant (exercisable through November 1, 1998).......... 105.00 44,196
---------
1,600,696
=========
</TABLE>
On June 30, 1996, 10,120 Class B Warrants having an exercise price of
$133.00 per share expired.
NOTE D -- TRANSACTIONS WITH RELATED PARTIES
VSL was organized during April 1995 by Viragen to cause or to undertake
clinical trials in the EU and for sales of Viragen's natural leukocyte-derived
alpha interferon and related products in the EU and other countries outside the
United States. Accordingly, no financial data is available for Viragen (Europe)
Ltd. and subsidiary prior to April 1995.
Through a License Agreement (the "Agreement") granted by Viragen, VSL's
ultimate Parent, VSL secured certain rights to engage in the research,
development, and manufacture of certain proprietary products and technologies
that relate to the therapeutic application of human leukocyte interferon (the
"Product") for various diseases that affect the human immune system. Pursuant to
these rights, on July 20, 1995, VSL entered into a License and Manufacturing
Agreement with the Common Services Agency ("Agency"), an agency acting on behalf
of the Scottish National Blood Transfusion Service ("SNBTS") pursuant to which
SNBTS, on behalf of VSL, will manufacture and supply VSL's Product to VSL for
distribution in the European Union in return for certain fees. It was considered
critical to VSL's operations and to planned clinical trials to secure a
sufficient qualified source of human source leukocytes, a critical component in
the
F-9
<PAGE> 30
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manufacture of the Product. VSL was a newly formed corporation which commenced
operations concurrent with the execution of its agreement with SNBTS.
Pursuant to the terms of the Agreement, VSL is to prepay $2 million of
royalties to Viragen, within six months of the Effective Date (July 12, 1995).
Commencing one year from the Effective Date, VSL is to pay to Viragen royalties,
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.
Viragen has deferred the Effective Date of the Agreement until the date
when Viragen transfers the processes and technology, as defined by the
Agreement, to VSL. This transfer is expected to coincide with the completion of
the Scottish manufacturing plant, which is scheduled for early calendar year
1997.
NOTE E -- INCOME TAXES
As discussed in Notes B and C, the percentage of ownership in VEL held by
its Parent Company, Viragen, exceeded 80% only during the period December 8,
1995 through March 15, 1996. As a result, VEL will be included in the Parent
Company's consolidated federal and state income tax return for the period
December 8, 1995 through March 15, 1996.
VSL files separate income tax returns in the United Kingdom. Net operating
losses of approximately $104,000 are being carried forward to future periods.
As of June 30, 1996, the Company has net operating loss carryforwards
("NOL's") for U.S. income tax purposes of approximately $1.7 million that expire
at various dates between 2003 and 2009 and a capital loss carryforward of
approximately $0.8 million that expires in 1998. Sector had NOL's for U.S.
income tax purposes of approximately $1.2 million and capital loss carryforwards
of approximately $1.8 million, at June 30, 1995. In December 1995, Sector had a
change in ownership, as defined by Internal Revenue Code Section 382, which
caused these net operating and capital loss carryforwards to be limited to
approximately $48,000 per year.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, a valuation allowance of $918,400 at June 30, 1996 and $1,112,400 at
June 30, 1995 has been recognized to offset deferred tax assets. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards (U.S.).................... $ 623,400 $ 452,600
Capital loss carryforwards (U.S.).......................... 295,000 659,800
--------- -----------
Total deferred tax assets.......................... 918,400 1,112,400
Valuation allowance for deferred tax assets.................. (918,400) (1,112,400)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
F-10
<PAGE> 31
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, (loss) income before income taxes include
the following components:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN WEEKS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- ------------------
<S> <C> <C>
Pre-tax (loss) income:
U.S................................................... $(371,139) $ --
Foreign............................................... (104,212) 626
--------- ----
$(475,351) $626
========= ====
</TABLE>
NOTE F -- PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The pro forma financial data included herein reflects the results of
operations, as if the reverse acquisition of VEL had been completed at the
beginning of the current fiscal period and at the inception of VSL,
respectively. The pro forma financial data was calculated by pro rating the
results of operations of VEL (formerly Sector) for the applicable periods.
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN WEEKS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- ------------------
<S> <C> <C>
Net Loss........................................................ $ (558,403) $ (137,518)
========== =========
Loss per common share........................................... $ (0.09) $ (0.77)
========== =========
Weighted average common shares outstanding...................... 6,240,705 177,541
========== =========
</TABLE>
NOTE G -- CONTINGENCY
An action is pending against VEL (formerly Sector) alleging that Sector
mishandled payment of amounts due to a secured creditor. Sector has denied the
claim and has filed a counterclaim. Further, a shareholder of Sector has agreed
to indemnify VEL relating to this matter. The ultimate liability, if any, cannot
be determined at this time. Management intends to vigorously defend its
position.
NOTE H -- COMMITMENT
In June 1996, the Company executed a five-year lease on property located in
Edinburgh, Scotland that will serve as the Company's laboratory and production
facilities. Monthly rental on the property is approximately $10,000. In
addition, the Company may extend the term of the lease at its option, for four
five-year periods.
F-11
<PAGE> 32
EXHIBIT INDEX
VIRAGEN (EUROPE) LTD.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
(11) -- Statement re: computation of loss per share
(22) -- Subsidiary of the registrant
</TABLE>
<PAGE> 1
EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
ELEVEN WEEKS
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1996 1995
---------- ------------
<S> <C> <C>
Primary and Fully Diluted
Weighted average shares outstanding............................ 3,685,705 100
========== =====
Net (loss) income.............................................. $(475,351) $ 626
========== =====
Net (loss) income per common share............................. $ (0.13) $ 6.26
========== =====
</TABLE>
<PAGE> 1
EXHIBIT (22)
<TABLE>
<CAPTION>
PERCENTAGE
JURISDICTION OF OWNED BY
SUBSIDIARY INCORPORATION REGISTRANT
- ------------------------------------------------------------------- --------------- ----------
<S> <C> <C>
Viragen (Scotland) Ltd.(1)......................................... Scotland (UK) 100%
</TABLE>
- ---------------
(1) Incorporated January 17, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VIRAGEN (EUROPE) LTD. FOR THE YEAR ENDED JUNE 30, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,985,897
<SECURITIES> 0
<RECEIVABLES> 882,960
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,920,170
<PP&E> 27,796
<DEPRECIATION> 183
<TOTAL-ASSETS> 5,953,949
<CURRENT-LIABILITIES> 124,384
<BONDS> 0
0
0
<COMMON> 69,228
<OTHER-SE> 5,760,337
<TOTAL-LIABILITY-AND-EQUITY> 5,953,949
<SALES> 0
<TOTAL-REVENUES> 73,945
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 549,296
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (475,351)
<INCOME-TAX> 0
<INCOME-CONTINUING> (475,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475,351)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
