<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17827
VIRAGEN (EUROPE) LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-2788282
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
865 SW 78TH AVENUE, SUITE 100, 33324
PLANTATION, FLORIDA (Zip Code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: (954) 233-8377
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the common stock on September 24,
1999 was approximately $867,000.
As of September 24, 1999, the Company had outstanding 16,067,153 shares of
common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VIRAGEN (EUROPE) LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 15
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
Item 13. Certain Relationships and Related Transactions.............. 20
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 21
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
INTRODUCTION
Viragen (Europe) Ltd. is in the business of researching and developing
products which help the human immune system resist viral infections. We operate
primarily through our wholly-owned subsidiary, Viragen (Scotland) Ltd. Viragen
(Scotland) is a Scottish private company formed in 1995. Through a license
granted to us by Viragen in July 1995, we secured certain exclusive rights to
the European Union and certain non-exclusive rights throughout the world, but
specifically, excluding the United States and its territories, to manufacture
and sell certain immunological products including Omniferon(TM). Our primary
product is an injectible natural interferon product named Omniferon(TM), which
is produced from human white blood cells. Natural interferon stimulates and
controls the human immune system. In addition, interferon may stem the growth of
various viruses including those involved with diseases such as hepatitis,
multiple sclerosis, and certain cancers.
Viragen (Europe) is an 87% owned subsidiary of Viragen, Inc. Viragen, Inc.
is a U.S. publicly traded company which trades under the symbol VRGN.
You may obtain additional information about us on Viragen's Internet
website www.viragen.com.
Our product has not been approved by the United States Food and Drug
Administration or the European Union regulatory authorities. We intend to seek
European Union regulatory authority approval for various uses of its Omniferon
product in the future. This approval requires several years of clinical trials
and substantial additional funds. Using funds raised in a series of equity
financings by Viragen and ourselves, we are concentrating our efforts in
obtaining approval for our Omniferon product initially in the European Union for
the treatment of hepatitis C.
Through Viragen (Scotland), we entered into a license and manufacturing
agreement with the Common Services Agency of Scotland, and the Scottish National
Blood Transfusion Service in July 1995. Under the terms of this agreement, the
Blood Transfusion Service will assist in the manufacture of Omniferon for
exclusive distribution in the European Union and on a non-exclusive basis
worldwide. The Blood Transfusion Service will receive royalties and special
access to our Omniferon product. Viragen also entered into agreements with the
American Red Cross, America's Blood Centers and the German Red Cross for
supplies of white blood cells, also known as "buffycoats" or "leukocytes". These
sources of white blood cells will enable us to manufacture Omniferon in
sufficient quantities to conduct planned European Union clinical trials and,
subject to regulatory approvals, also provide for commercial manufacturing in
the future.
In November 1997, we formed Viragen (Germany) GmbH a German corporation, to
conduct operations on our behalf in Germany, primarily the acquisition of
leukocytes. In March 1999, Viragen Germany entered into an agreement with the
German Red Cross providing it with access to leukocytes.
Currently we are concentrating our efforts on preparing for clinical trials
necessary to obtain approvals for Omniferon within the European Union. We
commenced our preclinical studies with Omniferon in March 1998 and obtained
approval of our Clinical Trial Exemption Application to begin human clinical
trials in July 1999. We plan to begin clinical trials of Omniferon during the
fourth calendar quarter of 1999.
BACKGROUND
Viragen (Europe) Ltd., is a Delaware corporation, formed in November 1985.
We were initially organized to acquire other companies with active operations
sufficient to establish a viable business. Our efforts proved unsuccessful and
by 1995 we became essentially dormant. In September, 1995, when our corporate
name was Sector Associates, Ltd., we entered into an Agreement and Plan of
Reorganization to acquire 100% of the outstanding stock of Viragen (Scotland).
In exchange for the ownership interest in Viragen (Scotland), we issued Viragen,
Viragen (Scotland)'s owner, shares of a newly issued preferred stock. The
preferred stock we issued represented a 94% interest of our then issued and
outstanding capital stock. As
1
<PAGE> 4
Viragen received voting control in our stock in this transaction, the stock
exchange represented a reverse acquisition.
On May 2, 1996, we changed our name from Sector Associates, Ltd. to Viragen
(Europe) Ltd. At that time, we reduced the par value of our common stock from
$.10 per share to $.01 per share and our common stock was reverse split one for
fourteen (1:14).
OPERATIONS
Viragen (Scotland) was organized to manufacture and distribute Omniferon
and related products in the European Union and other countries outside the
United States. Viragen has transferred patent and proprietary rights associated
with the production of Omniferon and related technology to Viragen (Scotland)
under a grant of license. Viragen (Scotland) has provided the Transfusion
Service with an exclusive license to use the proprietary rights covered by the
License and Manufacturing Agreement for the manufacture and distribution of
Omniferon within the European Union. The Transfusion Service has committed to
participate with us in the manufacture of Omniferon in sufficient scale to
accommodate the European Union clinical trials and also to conduct studies
relevant to the product and cooperate with us in complying with the laws and
regulations of the European Union in connection with the production of
Omniferon.
Capital investments made through a series of private placements completed
in 1996, provided us with the capital necessary
- for the construction of its manufacturing facilities in Scotland;
- for the purchase of laboratory equipment at our Scottish facilities; and
- to provide working capital.
In July 1999, we received regulatory approval of our Clinical Trial
Exemption Application, to commence Phase I/II human clinical trials of our
Omniferon product, initially for the treatment of Hepatitis C. We anticipate the
commencement of the clinical trials in the fourth calendar quarter of 1999.
Clinical testing toward European Union approval is an expensive process
which is expected to take several years to accomplish with no assurance that
such approvals will be obtained.
LICENSE AND MANUFACTURING AGREEMENTS
In certain instances, European Union regulations may require less stringent
preclinical studies for naturally occurring substances such as our Omniferon
product than for genetically engineered products. Accordingly, while we cannot
assure you, we expect to possibly receive an expeditious review of the various
European Union processes and clinical trials prior to market approval in the
European Union.
Through a license granted on July 12, 1995, from Viragen, we secured
certain exclusive rights applicable to the European Union countries and
non-exclusive rights throughout the world, specifically excluding the United
States and its territories, to engage in the manufacture and distribution of
certain proprietary products and technologies relating to the therapeutic
application of human leukocyte-derived interferon. The initial term of the
license is for 15 years, which is automatically renewed for two successive 15
year periods.
In July 1995, Viragen (Scotland), entered into a License and Manufacturing
Agreement with the Common Services Agency of Scotland to secure a sufficient
source of needed raw materials as well as expertise in the area of blood-derived
products and the regulatory approval process. The Agency is an adjunct of the
Scottish Government which acts on behalf of the National Health Service in
Scotland and the Scottish National Blood Transfusion Service. The Agency owns
and operates a blood fractionation facility in Edinburgh, Scotland, and has the
physical and technical capacity to supply leukocytes and manufacture alpha
interferon from human leukocytes employing our processes. We believe that
securing a sufficient qualified long-term source of blood-derived raw materials
within the European Union is critical to enable us to conduct European Union
clinical trials as well as providing a sufficient source of raw materials
necessary for subsequent commercial manufacturing.
2
<PAGE> 5
During fiscal 1998, we were notified that due to concerns over the possible
presence of New Varient Creutzfeld-Jacob disease also known as Mad Cow disease,
in the UK blood supply, human leukocytes collected in Scotland, including those
intended to be supplied under the License and Manufacturing Agreement, would not
be approved for use in our planned clinical trials or potential commercial
production until the European regulatory authorities were satisfied that the
risk of contamination had been minimized. Due to their situation, we intend to
utilize leukocytes produced in Germany, under its German Red Cross contractual
arrangements, as well as other approved sources to continue with planned
clinical trials and possibly the commencement of commercial scale production if
needed.
Under the terms of the License and Manufacturing Agreement, we are
providing the Transfusion Service with full access to our proprietary technology
and specialized equipment. We are also absorbing all costs associated with
securing permits and regulatory approvals, augmenting the Transfusion Service
facilities, if necessary, to participate in the manufacture of Omniferon and
securing documentation demonstrating compliance with European Union regulatory
requirements. We have agreed to pay the Transfusion Service for product
manufactured for use in clinical trials in the European Union, for product
manufactured for sales prior to obtaining new drug application approval, and for
sales following such approval. Under this arrangement, payments will be made at
varying percentages in relation to costs. For products manufactured for use in
clinical trials, they are entitled to cost plus 25 %, for sales prior to
obtaining new drug application approval, cost plus 40%, and for sales following
such approval, cost plus 50%. Products manufactured and utilized for
humanitarian purposes or for medical use by patients of the Scottish National
Health Services or the United Kingdom National Health Services will involve
either no payments to the Agency or payments at substantially discounted prices.
We also have agreed to pay the Transfusion Service for providing process
documentation for any additional manufacturing facilities we might establish.
The term of the License and Manufacturing Agreement is for a five-year
period with two additional five-year extension terms at our option. The License
and Manufacturing Agreement also contains provisions protecting our proprietary
rights and limits of certain competitive activities by the Transfusion Service.
THE PRODUCT
We derive our Omniferon product from human white cells, also known as
"leukocytes." Natural interferon is one of the body's natural defensive
responses to foreign substances such as viruses, and is so named because it
"interferes" with viral growth. Natural interferon consists of protein molecules
that induce antiviral, antitumor and immunomodulatory responses within the body.
Medical studies have indicated that interferons may inhibit malignant cell and
tumor growth without affecting normal cell activity.
There are two basic types of interferon, differentiated primarily by their
method of manufacture and resulting composition. The first, the type we produce,
is a multi-species natural, human leukocyte-derived alpha interferon produced by
cultivated human white blood cells, which are stimulated by the introduction of
a harmless agent. This process induces the cells to produce natural interferon.
Natural interferon is then separated from other natural proteins and purified to
produce a highly concentrated product for clinical use. The second type of
interferon is recombinant or synthetic interferon (alpha or beta), which is a
genetically engineered interferon generally produced from a single human gene in
bacterial cells by recombinant DNA techniques.
Clinical studies suggest that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon in certain cases may cause an
immunological response through the production by the human immune system of
neutralizing and/or binding antibodies. These antibodies may reduce the
effectiveness of the treatment or may cause adverse side effects. We believe
that the production of neutralizing and/or binding antibodies is virtually non-
existent in patients treated with natural interferon. Furthermore, primarily due
to biological differences, the side effects of treatment with natural
interferon, in certain instances, may be less severe than with a recombinant or
synthetic interferon.
3
<PAGE> 6
THE INTERFERON INDUSTRY
Prior to 1985, natural interferon was the only type of interferon
commercially available. Research institutions and other biomedical companies
similar to us 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. Both of these
companies subsequently received Food and Drug Administration approval to produce
and market their recombinant alpha interferon products for the treatment of
hairy cell leukemia, hepatitis B & C 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, due primarily to its
limited availability and its higher cost of production. Most clinical studies
thereafter were based on a synthetic product.
Hoffman-LaRoche, Inc. and Schering-Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their respective
synthetic interferon products. In 1993 Chiron Corp. received Food and Drug
Administration approval of BetaSeron(TM), its recombinant beta interferon for
the treatment of relapsing/remitting multiple sclerosis. In 1996, Biogen, Inc.
received Food and Drug Administration approval for Avonex(TM) its recombinant
beta interferon for relapsing/remitting multiple sclerosis. In 1997, Teva
Pharmaceuticals received Food and Drug Administration approval of its peptide
chemical compound, Copaxone(TM), for relapsing/remitting multiple sclerosis.
In addition to the manufacturers of synthetic interferons, a domestic
manufacturer of natural interferon-alpha, Interferon Sciences, Inc., received
Food and Drug Administration approval in 1989 to sell, in injectable form,
Alferon(TM) their natural interferon product for genital warts.
APPLICATIONS OF INTERFERON
Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to certain viral infections. We believe
interferons can arrest the progress of certain viral based infections, reducing
symptoms and disease related complications with a minimum of side effects.
Hepatitis C
The hepatitis C virus is a major worldwide cause of acute and chronic
hepatitis. Hepatitis C, previously known as "non-A, non-B hepatitis", affects an
estimated 4 million Americans with approximately 30,000 new cases diagnosed each
year and is responsible for an estimated 8,000 deaths annually. Hepatitis C is
currently the leading cause of liver transplantation in the United States. Based
on reviews of published literature and evaluation by our scientific staff and
advisors, we believe that our Omniferon product may prove efficacious in the
treatment of this indication.
Hepatitis B
Approximately 45% of the world population live in areas with a high
prevalence of hepatitis B infection where the lifetime risk of infection can
exceed 60%. Most infections in these areas are acquired at birth or during early
childhood where the risk of developing chronic infection is highest. In the
United States, which is not in a high prevalence area, approximately 300,000
cases of acute hepatitis B are diagnosed annually with 2% to 10% of these
patients developing chronic infections, putting the patients at risk of
progressive liver disease possibly leading to cirrhosis and/or hepatocellar
carcinoma.
Synthetic interferon alpha is the only Food and Drug Administration
approved drug for hepatitis B and has been found to be an effective treatment in
some cases. We believe that Omniferon may also prove effective in the treatment
of hepatitis B.
4
<PAGE> 7
Multiple Sclerosis
In 1988, following State of Florida regulatory approval for use of the
Viragen's product by Health and Rehabilitative Services for the treatment of
multiple sclerosis, Viragen entered into a research agreement with the
University of Miami School of Medicine, Department of Neurology Multiple
Sclerosis Center. Conducted under the Florida 499 program, this study was a
patient funded, multi-phase clinical trial for the treatment of multiple
sclerosis with Alpha Leukoferon(TM), Viragen's first generation natural
human-leukocyte derived interferon product. The study was conducted on a
double-blind basis with certain patients receiving different dosage levels of
Alpha Leukoferon and certain patients receiving a placebo. The study terminated
in mid-1992. Published information on these trials indicated that, in many
cases, Viragen's interferon product provided favorable results in the treatment
of patients afflicted with relapsing/remitting, relapsing progressive and
chronic progressive multiple sclerosis.
The Principal Investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of Viragen's Alpha Leukoferon product in the treatment of various types
of multiple sclerosis. The abstract titled: "Stabilization of
Relapsing-Remitting and Progressive Multiple Sclerosis with Natural Interferon
Alpha: A Preliminary Trial," was published in the Annals of Neurology, the
official journal of the American Neurological Association in 1994. An additional
article was published by the investigators and Viragen titled: "Natural Alpha
Interferon in Multiple Sclerosis: Results of Three Preliminary Series," appeared
in the Journal of International Medical Research in 1996.
Chronic Myelogenous Leukemia
Chronic myelogenous leukemia is one of a group of diseases called
myeloproliferative disorders and is usually recognized by a distinctive
abnormality, the Philadelphia Chromosome. The current treatment for chronic
myelogenous leukemia is high dose chemotherapy with bone marrow transplantation.
Interferon therapy has emerged as a possible effective initial treatment in this
disease affecting both the presence of Leukemia cells as well as the number of
bone marrow cells having the Philadelphia Chromosome.
HIV/AIDS
In July 1990, Viragen received approval from the Florida HRS for an
HIV/AIDS treatment protocol using Alpha Leukoferon in injectable form. In
September 1993, Viragen initiated distribution on a limited basis of its product
under this protocol. However, in December 1994, HRS informed Viragen that no new
patients may be enrolled under the 499 Program, including those patients with
HIV/AIDS, ARC and Kaposi's Sarcoma, until Viragen has satisfied HRS regarding
compliance with Food and Drug Administration promulgated current Good
Manufacturing Practice requirements. In July 1995, Viragen discontinued
enrollment of new patients in its 499 Program and in August 1995, reached a
settlement agreement with the Florida HRS which provided for the elimination of
the enrollment of new patients in its 499 Program, with the possible exception
of certain limited enrollments approved by the Florida HRS for humanitarian
purposes, the continued participation by previously enrolled patients in the 499
Program and the resolution of other issues.
In March 1996, Viragen in collaboration with Biodoron, a Hollywood, Florida
based clinic, received approval from the Florida Health and Rehabilitation
Services, under Florida's Investigational Drug Program, to conduct an
investigational study in Florida of Viragen's natural human alpha interferon
product, Alpha Leukoferon, for the treatment of HIV/AIDS in hemophiliacs.
Viragen entered into an agreement with Quantum Health Resources, Inc., which
provided Viragen with $330,000 towards the cost of the study. Quantum, a
subsidiary of Olsten Services Corp., is a national provider of alternate site
therapies and support services for people affected by chronic disorders,
including hemophilia. The study commenced in March 1996, with 35 patients
enrolled to receive Alpha Leukoferon for a minimum of six months in combination
with a comprehensive HIV/AIDS treatment program. While the study suggested that
Alpha Leukoferon was safe and well tolerated, the overall study results proved
to be inconclusive due to a smaller than anticipated number of patients that
finished the study.
5
<PAGE> 8
MANUFACTURE OF INTERFERON
Human white blood cells, also known as leukocytes and a stimulating agent,
raw materials which are readily available to us, are needed to produce human
interferon. A stimulating agent, which is harmless to humans, is introduced into
the white blood cell, which induces the cell to produce interferon. The
interferon is then separated from other proteins, extracted and purified.
Viragen (Europe)'s Omniferon product is currently being manufactured in its
Scottish facility for use in planned human clinical trials anticipated to
commence in the fourth quarter of calendar 1999. Viragen's first generation of
natural interferon was manufactured and distributed in Florida under the 499
Program under the name Alpha Leukoferon. Production of Alpha Leukoferon was
discontinued in January 1995.
Production methods that we have developed, as well as enhanced methods
currently under development, could serve to reduce our costs of production and,
ultimately, the market price of Omniferon to patients. However, we cannot assure
you that our new manufacturing technology will enable us to achieve the level of
manufacturing proficiency and product improvement hoped for.
RESEARCH AND DEVELOPMENT
The entire process of research, development and European Union regulatory
approvals, if obtained, of a new biopharmaceutical product takes several years
and requires substantial funding. In July 1999, we received approval of our
European Clinical Trial Exemption Application to commence clinical trials of
Omniferon for the treatment of hepatitis C. The completion of these clinical
studies is required before we can receive regulatory approval to market
Omniferon. Our completion of these studies is dependent upon our receiving
significant additional fundings.
Following the receipt of additional funding from a series of Private
Placements completed in March 1996, our research efforts increased together with
associated costs. These increases can be expected to continue as we continue our
product development and production scale-up efforts. Research and development
costs totaled $2,742,154, $1,585,837, and $319,076 for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively.
INTELLECTUAL PROPERTY
We believe our production techniques are unique and are capable of yielding
a superior quality product. We believe our production techniques will allow us
to offer Omniferon at a price competitive with the recombinant interferons
currently being marketed.
Viragen has filed two patent applications covering Omniferon production
techniques. They have also submitted several foreign patent applications
relating to natural interferon for topical use, several of which have been
granted. During fiscal 1999, their patent issued in Japan for the topical use of
interferon was challenged by a Japanese company. They defended their patent
position and were successful in their defense.
Under a license agreement between Viragen and Viragen (Europe) Ltd. dated
July 12, 1995, we were granted exclusive rights to Viragen's proprietary
technologies, including those technologies covered by patent, for all countries
comprising the European Union. In addition, this agreement granted us the
non-exclusive rights to Viragen's technology throughout the world, excluding the
United States and its territories. This agreement provides that we will pay
Viragen a royalty ranging from 10% to 5% of sales, with a minimum of $2 million
per year, subsequently modified to $167,000 per month. The minimum royalty
payment has been deferred by Viragen until as we have the necessary cash flow to
meet this payment. This agreement has an initial term of 15 years and
automatically renews for two successive 15-year periods.
United States patents have been issued to others with respect to
genetically engineered and human-derived interferon. Subject to other existing
patent claims, Viragen (Europe) and/or Viragen may have to negotiate license
agreements with other patent holders to use their processes and products. We
believe that the technology we use to manufacture Omniferon does not infringe
upon any current patent.
6
<PAGE> 9
The validity and enforceability of a patent can be challenged by litigation
after its issuance. If the outcome of that litigation is against the owner of
the patent, other parties may be free to use the subject matter covered by the
patent. The degree of protection afforded by foreign patents may be different
than in the United States. We cannot assure you that patents obtained in the
future will be of substantial protection or commercial benefit to us.
REGULATION
We completed our preclinical studies of Omniferon in fiscal 1999 and in
July 1999 received approval to commence clinical trials on humans. We anticipate
commencing clinical trials in the fourth calendar quarter of 1999. The European
Union regulations specifically provide for the possibility of more abbreviated
preclinical studies for naturally occurring substances such as our product than
for genetically engineered products. Accordingly, while we cannot be sure, we
believe we may receive a more expeditious review of the various European Union
processes and clinical trials necessary for market approval.
Our activities and the product and processes resulting from our activities
are subject to substantial government regulation in Scotland, the UK and within
European Union member nations. Obtaining regulatory approval for
commercialization of any new biopharmaceutical product takes significant time
and capital, and involves extensive testing procedures and lengthy clinical
trials. The preclinical and clinical trial process initially includes extensive
annual testing to demonstrate product safety and dosage information. Subsequent
human tests are then undertaken to show the same and document findings related
to effectiveness, toxicity, and side effects. Biostatistical analysis of data is
then gathered in these studies, followed by the submission of all information
and data to the regulatory authorities.
To secure physical resources, expertise, and a continuing leukocyte supply
for clinical trials and, subject to regulatory approval, and in the
commercialization of the product, on July 20, 1995, we entered into the Scottish
Agreement with the Common Services Agency in Scotland and the Scottish National
Blood Transfusion Service. The Transfusion Service operates a blood
fractionation facility near Edinburgh, Scotland, located near our production
facility. The Transfusion Service has the physical and technical resources to
assist in the implementation of our proprietary technology in the manufacture of
Omniferon. The Scottish Agreement provided us with access to leukocytes which
was considered critical for us to successfully conduct European Union clinical
trials, as well as to provide for expected commercial manufacturing upon
regulatory approval.
During fiscal 1999, we received notification that due to concerns over the
possible presence of New Varient Creutzfelt-Jacob disease, also known as Mad Cow
Disease, in the UK blood supply, human leukocytes collected in Scotland,
including those intended to be supplied under the Scottish Agreement, would not
be approved for use our planned clinical trials or potential commercial
production until the European regulatory authorities are satisfied that the risk
of contamination had been minimized. Due to this situation we intend to use
leukocytes collected in Germany under our German contractual arrangements as
well as other approved sources to continue with our planned clinical trials and
possibly the commencement of commercial scale production if needed.
In Europe as in the United States, human clinical trial programs generally
involve a three phase process. Typically, Phase I trials are conducted in
healthy volunteers to determine an early side effect profile and the pattern of
drug distribution and metabolism. Phase II trials are then conducted in groups
of patients afflicted with the target disease to provide sufficient data for the
statistical proof of effectiveness and safety required by regulatory agencies.
If Phase II evaluations indicate that a product demonstrated potential
effectiveness and has an acceptable safety profile, Phase III trials are
undertaken to conclusively demonstrate clinical effectiveness and safety within
an expanded patient population from multiple clinical study sites. Regulatory
authorities may also require Phase IV studies to track patients after a product
is approved for commercial sale.
Regulatory approvals of a new pharmaceutical or biopharmaceutical product
can often take five years or longer unless accelerated in certain instances for
life-threatening diseases. In all cases this process involves the use and
expenditure of substantial resources. Approval depends on a number of factors,
including the severity
7
<PAGE> 10
of the disease in question, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials.
American pharmaceutical manufacturers who sell outside of the United States
are also subject to Food and Drug Administration jurisdiction. Semi-finished
drugs may be shipped under certain controlled circumstances for further
processing, packaging, labeling and distribution to third parties residing in
approved foreign countries, subject to the laws that apply in those countries.
For Viragen to conduct this type of sale, we must comply with all Food and Drug
Administration rules and regulations as well as those of the country to which we
intend to ship the product before we would be permitted to export crude or
finished interferon products outside the United States.
COMPETITION
Competition in the immunological and pharmaceutical products industry is
intense. Competitors include major pharmaceutical companies, some of which have
already marketed genetically engineered alpha and beta interferon products for
various diseases and others which have expanded or plan to expand into modern
biotechnology. Several large companies including Hoffman-La Roche, Inc.,
Schering-Plough Corporation, Glaxo-Wellcome, Biogen, Inc., Chiron Corp., Berlex
Laboratories and Ares-Serono are producing, selling and conducting clinical
trials with recombinant interferons (alpha and beta) and other immunological
products for the treatment of certain cancers, and viral infections, including
hepatitis C, our first targeted use of Omniferon. Competition is expected to
increase in the future based upon the perceived potential commercial
applications for such products. Many of our competitors have existing programs,
more experience in research, development and clinical testing of pharmaceutical
products, and substantially greater financial, marketing and human resources
than we do.
In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of natural interferon received Food and
Drug Administration approval in 1989 to sell, in injectable form, their natural
interferon product for genital warts.
We believe that competition is also based on production ability,
technological superiority and administrative and regulatory expertise in
obtaining governmental approvals for testing, manufacturing and marketing of the
product.
The timing of the entry of a new pharmaceutical product into the market is
an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. Our
ability to develop products, complete clinical studies and obtain governmental
approvals in the past had been hampered by a lack of adequate capital. We are
not presently a competitive factor in revenue participation in the
biopharmaceutical industry.
EMPLOYEES
As of September 24, 1999, we had twenty-six full-time employees, including
Dr. D. Magnus Nicolson, the Managing Director of Viragen (Scotland) and Chief
Operating Officer of Viragen, Inc. Through the provisions of the Scottish
Agreement, we have access to additional personnel within our production facility
in Scotland and departments within the Scottish Transfusion Service. We also
retain external consultants as needed.
ITEM 2. PROPERTIES
Viragen, Inc. currently owns a 14,000 square foot building in Hialeah,
Florida, which serves as Viragen's chief laboratory and research facility in the
United States. Viragen intends to sell its Florida laboratory facility during
fiscal 2000, consolidating all research and production assets in our Edinburgh
Scotland facility.
Viragen and Viragen (Europe) also maintain administrative offices in a
15,000 square foot facility, located at 865 S.W. 78th Avenue, Suite 100,
Plantation, FL 33324.
8
<PAGE> 11
In November 1996, Viragen (Scotland) executed a five year lease with
Lothian and Edinburgh Enterprise Limited for a newly constructed laboratory and
manufacturing facility located in the Pentlands Science Park in the Edinburgh
area of Scotland. The facility consists of approximately 15,000 square feet with
an annual base lease rate of 71,700 UK pounds ($119,700 per year) plus common
area and maintenance charges. The lease further provides for up to four five
year extensions at our option. As part of the lease agreement, Lothian and
Edinburgh Enterprise Limited provided us with a 8.68% per annum, working capital
loan in the amount of 100,000 UK Pounds (approximately $166,000), payable over a
20 year term with quarterly payments due through maturity, August 2017.
We consider all of our properties as suitable and adequate to carry on our
business. We also believe that we maintain sufficient insurance coverage on all
of our real and personal property.
ITEM 3. LEGAL PROCEEDINGS
In July 1994, an action was filed in the Circuit Court of Dade County,
Florida against Viragen (Europe), then named Sector Associates, Ltd., alleging
that Sector Associates, Ltd., prior to the reverse acquisition by Viragen and
Viragen (Scotland), mishandled payment of amounts due to Roy Woods, a secured
creditor (Roy Woods as Trustee v. Sector Associates, Ltd.). Specifically, the
suit alleges (1) that Sector collected certain receivables of Drew
Communications Group, Inc. in which the Plaintiff held a security interest, and
(2) that Sector had a duty as a stockholder to liquidate Drew Communications
Group, Inc. for the benefit of the creditors. The suit seeks recovery of damages
in the amount of $200,000 plus an additional unspecified monetary amount. We
have denied the claim and have filed a counterclaim. In addition, Mr. George
Levin of Miami, FL, a former principal stockholder of Sector Associates, Ltd.,
is obligated and has agreed to indemnify us 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 a
material liability. No accrual for loss has been recorded related to this
litigation.
We know of no other material litigation or claims pending, threatened or
contemplated to which we are 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 our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Viragen (Europe) Ltd.'s common stock was traded on the NASDAQ SmallCap
Market until March 23, 1999, under the symbol "VERP." Our stock commenced
trading on the over-the-counter bulletin board on March 24, 1999. The stock
symbol continues to be "VERP". The following table sets forth the high and low
bid quotations for our common stock since July 1, 1997.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1998-1999 PERIOD
First Quarter ended 09/30/98................................ $3.44 $1.94
Second Quarter ended 12/31/98............................... 2.31 .75
Third Quarter ended 03/31/99................................ .88 .25
Fourth Quarter ended 06/30/99............................... 1.00 .25
1997-1998 PERIOD
First Quarter ended 09/30/97................................ 6.25 4.00
Second Quarter ended 12/31/97............................... 7.38 1.88
Third Quarter ended 03/31/98................................ 5.16 1.94
Fourth Quarter ended 06/30/98............................... 4.00 3.00
</TABLE>
The above quotations reflect prices between dealers, do not include retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.
As of September 24, 1999, the approximate number of record holders of our
common stock was 120 with an estimated total number of stockholders of 1,200. At
that date the closing price of the common stock was $0.47 per share.
We have not paid any cash dividends on our common stock since
incorporation. Since we have experienced losses since inception, have an
accumulated deficit, and significant capital requirements in the future and
presently intend 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 our earnings, if any,
capital requirements, expansion plans, financial condition and other relevant
factors.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest and other income.................... $ 49,762 $ 37,474 $ 233,552 $ 73,945
Net loss..................................... (4,930,453) (4,642,126) (859,214) (475,351)
Net loss per average common share
outstanding................................ (0.46) (0.65) (0.12) (0.13)
Weighted average shares outstanding.......... 10,607,393 7,116,059 7,048,967 3,685,705
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1999 1998 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Working capital (deficit)....................... $ (582,995) $ 213,246 $3,197,265 $5,795,786
Total assets.................................... 4,909,596 5,053,272 7,750,737 5,953,949
Long-term debt.................................. 131,973 160,043 157,686 --
Stockholders' equity............................ 2,480,500 1,823,623 6,452,137 5,829,565
</TABLE>
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding our expectations, hopes, intentions,
beliefs, or strategies regarding the future. Forward looking statements include
our statements regarding liquidity, anticipated cash needs and availability, and
anticipated expense levels in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including expected product clinical trial
commencement dates, product introductions, expected research and development
expenditures and related anticipated costs. All forward looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to update any of our forward looking
statements. It is important to note that our actual results could differ
materially from those contained in our forward looking statements.
Among the factors that could cause actual results to differ materially are
the factors detailed below and the risks discussed in the "Risk Factors" section
included in our Registration Statement Form SB-2 (No. 333-7303) declared
effective by the Securities and Exchange Commission on July 12, 1996 and related
Post-Effective Amendment on Form S-3 (No. 333-7303) dated April 15, 1997. You
should also consult updated risk factors, which will be listed from time to time
in future Reports on Forms 10-Q, 10-Q/A, 8-K, 10-K and annual reports to the
stockholders.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect our financial condition and results of operations.
Our future success depends greatly on our ability to obtain additional
financing capital. We cannot assure you that we will be able to obtain the
capital necessary to continue with our operations. Our future success also
depends in part upon our intellectual property, including future patents, trade
secrets, know-how and continuing technology innovation. While Viragen has
recently filed two patent applications related to Omniferon, there can be no
assurance that the steps taken by us or Viragen to protect intellectual property
will be adequate to prevent misappropriation or that others will not develop
competitive technologies or products. We cannot provide assurance that any
patent owned by us or Viragen, in the future, will not be invalidated,
circumvented or challenged, or that the rights granted to us, will provide
competitive advantages. We cannot assure you that any of our or Viragen's future
patent applications will be issued with the scope of the claims sought, if at
all. Furthermore, we cannot provide assurance that others will not develop
technologies that are similar or superior to our technology, duplicate our
technology or design around possible patents owned by us or Viragen.
LIQUIDITY AND CAPITAL RESOURCES
As of September 24, 1999, Viragen (Europe) has limited capital to sustain
its operations. The fiscal 1999 report of independent certified public
accountants noted our financial condition raises substantial doubt as to our
ability to continue as a going concern. We are actively seeking new investment
capital however, we cannot assure you as to the timing of any new investment, if
at all. If we are unable to attract new investment capital in the near-term, it
would be necessary for us to significantly reduce or completely suspend all
operations.
Through a license granted by Viragen, Viragen (Scotland)'s parent, Viragen
(Scotland) secured certain rights to engage in the development, manufacture and
distribution of certain proprietary products and technologies that relate to the
therapeutic application of human leukocyte derived multi-species interferon for
various diseases that affect the human immune system. On July 20, 1995, Viragen
(Scotland) entered into a License and Manufacturing Agreement with the Common
Services Agency, an agency acting on behalf of the Scottish National Blood
Transfusion Services. This agreement provided that the Transfusion Service would
assist us in the manufacture of our Omniferon product and upon regulatory
approval, if obtained, aid in the distribution of the product in the European
Union in return for certain fees and additional rights.
11
<PAGE> 14
The Transfusion Service has committed to assist in the manufacture of
Omniferon in sufficient scale to accommodate the European Union clinical trials
and may simultaneously or subsequently engage in commercial sales in amounts to
be agreed upon by the parties and the European regulatory authorities. The
Transfusion Service will also cooperate with us in studies relevant to the
product and with eventual production, clinical trials and distribution. Our
management considered it critical to our operations and to planned clinical
trials to have secured a sufficient source of human leukocytes, a critical
component in the manufacture of Omniferon. Viragen (Scotland) was a newly formed
company which commenced operations upon the execution of its agreement with the
Transfusion Service in 1995.
During fiscal 1999, we received notification that due to concerns over the
possible presence of New Varient Creutzfelt-Jacob disease, also known as Mad Cow
Disease, in the United Kingdom blood supply, human leukocytes collected in
Scotland, including those intended to be supplied under the Scottish Agreement,
would not be approved for use in our planned clinical trials or potential
commercial production. This ban is expected to stay in place until the European
regulatory authorities are satisfied that the risk of contamination of any
product using these leukocytes has been minimized. We intend to use leukocytes
produced in Germany under our German contractual arrangements, as well as other
approved sources, to continue with its planned clinical trials and possibly the
commencement of commercial scale production, if needed.
Under the terms of our license agreement with Viragen, a $2,000,000 Initial
prepayment and deposit was paid to Viragen in June 1997. In September 1997, we
mutually agreed with Viragen to extend the technology transfer completion dates.
Accordingly, the agreement was modified such that the $2,000,000 initial
prepayment would represent the contractual prepayment for the one year period
commencing November 1, 1997. The agreement was further modified to provide that
in the event the proprietary technology was not transferred pursuant to the
provisions of that agreement, the initial prepayment would have been refunded to
us. The technology transfer was completed on November 1, 1997, and the prepaid
licensing fee was fully expensed at that time. This accounting treatment is
consistent with SFAS No. 2, "Accounting for Research and Development Costs," as
we are in the process of obtaining European Union regulatory approval for
marketing the licensed technology.
We 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 our Scottish facility and for our
initial product testing in Scotland. In December 1995, we 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 consisted of 0.71 shares of common
stock and 2.5 common stock purchase warrants having an exercise price of $6.00
per share. This offer represented a total of 240,000 shares and 840,000
warrants. In March 1996, we 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 us with the
initial capital necessary:
- for the construction of manufacturing facilities in Scotland,
- for the purchase of equipment for our Scottish facilities,
- to provide $2,000,000 minimum royalty to Viragen,
- to increase our number of employees and
- for general working capital purposes.
In November 1996, we executed a five year lease agreement, subsequently
amended to include additional space, in a biotechnology park in the Edinburgh
area of Scotland. This facility, comprised of approximately 12,000 sq. ft.,
contains our European laboratory and production facilities. Monthly rental for
the facility is 5,974 British Pounds or approximately US$9,975, subject to
adjustment for common area maintenance charges. The lease provides for four
five-year extensions at our option. Other productive assets located within the
Transfusion Service facility are available to us under the Scottish Agreement.
We commenced safety and preclinical trials of Omniferon in March 1998.
These trials were concluded in December 1998. We received the final preclinical
study results in April 1999. Results of the study indicated no
12
<PAGE> 15
unexpected toxicity. In July 1999, our Clinical Trial Exemption Application to
commence human clinical trials was approved. We intend to commence our clinical
trials in the fourth calendar quarter of 1999.
Our present focus is the continued development of Omniferon, initially for
the treatment of hepatitis C. The entire process of research, development and
European Union regulatory approvals, if obtained, of a new biopharmaceutical
product takes several years and requires substantial funding.
In November 1998, we signed an exclusive supply and distribution agreement
with AGC, a Pakistan-based, multinational conglomerate, for Omniferon. Under the
terms of this agreement, AGC's designated territories include Saudi Arabia,
Kuwait, Yemen, Oman, UAE, Brunei and other Middle Eastern countries, as well as
India and Pakistan. The AGC agreement calls for AGC to purchase a minimum of $20
million of Omniferon over five years commencing with AGC's receipt of the
required regulatory approvals for product commercialization in the designated
territories, and our receipt of regulatory approvals to export Omniferon from
our facility in Edinburgh, Scotland. The purchase minimums will be secured by a
$1 million irrevocable revolving letter of credit. These minimums increase
significantly upon our obtaining regulatory approval for commercialization of
Omniferon in the United States and/or Europe.
Under the terms of the AGC agreement, AGC is responsible for clinical and
regulatory costs to obtain approvals for commercialization of Omniferon in its
designated territories and all subsequent sales, marking and distribution
activities. The AGC agreement also calls for AGC to build, own and operate, at
its own expense, a pharmaceutical distribution facility in a mutually agreeable
location within their distribution territory. AGC has informed us they will
initially focus on distributing our natural alpha interferon for hepatitis B and
C, diseases that are at epidemic proportions in the designated territories.
During fiscal years 1999 and 1998, we expended $390,000 and $914,000
respectively, in property, plant and equipment primarily related to the
continued development of its Scottish manufacturing facility.
We will incur additional future losses as we enter the clinical trial phase
scheduled to commence in the fourth calendar quarter of 1999. Accordingly,
Viragen has agreed to provide us, to the extent they are able, with the working
capital necessary to fund operations at least through calendar 2000. Advances
from parent and affiliates at June 30, 1999 and 1998, represent cash advanced by
Viragen and its subsidiaries. During fiscal 1999, Viragen has contributed to
capital approximately $5,828,000 in intercompany advances in exchange for an
additional 8,951,094 shares of our common stock. Viragen has additionally agreed
to defer the $166,667 minimum monthly payments due under the Licensing Agreement
that began November 1, 1998 until we are able to fund this obligation.
Significant additional funding will be required to complete the clinical trials
and administrative filings necessary to apply for final European Union
regulatory approvals. Our management believes that these additional funding may
be more readily available as we complete various phases of our clinical trials.
Estimated funding requirements related to the approval of Omniferon for
hepatitis C, the first approval we are seeking, include: Phase I/II
trials -- $3.2 million and Phase II studies -- $9.1 million.
RESULTS OF OPERATIONS
1999 Compared to 1998
As the discussion of Liquidity and Capital Resources noted, our fiscal 1999
report of independent certified public accountants noted our financial condition
raises substantial doubts as to our ability to continue as a going concern.
Research and development costs for fiscal 1999 totaled $2,742,154, an
increase of approximately $1,156,000 (73%) over the preceding year. This
increase reflects increased costs associated with development and scale-up
projects associated with the transfer of technology from our parent, Viragen,
relating to Omniferon. Components of this increase include an increase of
$640,755 in scientific salaries and support fees, increases in laboratory
supplies expense of $146,288 and increases in repairs and maintenance expenses
associated with plant equipment totaling $115,762.
13
<PAGE> 16
General and administrative expenses totaled $880,762 for the year ended
June 30, 1999 compared with $1,078,287 for the preceding year. This decrease of
$198,000 (18%) was attributable primarily to a decrease in legal fees of $64,302
from the prior year. This decrease is attributable to the settlement of
litigation during the prior year. Also included in the reduction was a
negotiated reduction in real property taxes of $133,350 payable on our Scottish
facility.
1998 Compared to 1997
Revenue for the fiscal year ended June 30, 1998 of $37,474, represents
interest earned on the investment of proceeds from a series of private
placements completed in fiscal 1996. The decline in interest income from
$233,552 from the preceding year reflects the reduction in principal invested
between the periods. This reduction in cash balances resulted primarily from the
payment of a $2 million initial royalty prepayment and deposit to Viragen in
June 1997 under the License Agreement between Viragen (Scotland) and Viragen.
Also, we incurred operational losses of $4,642,126 and expenditures associated
with the continued equipping of our laboratory and manufacturing facility in
Scotland.
Research and development costs totaled $1,585,837 for the year, an increase
of $1,266,761 over the previous year. This sharp increase is attributable to
significantly expanded development and scale-up projects associated with the
transfer of technology from our parent, Viragen, relating to our Omniferon
product. Components of this increase during fiscal 1999 include increases in
scientific salaries and support fees of approximately $270,800, increases in
laboratory supplies expense of approximately $342,400 and an increase in
research related scientific professional fees paid to the Scottish National
Blood Transfusion Service under the Scottish Agreement of $200,100. Research and
development costs will continue to increase as we continue our process
development refinements and scale-up projects prior to the planned commencement
of clinical trials of the product.
Licensing expense of $2,000,000 represents the $2 million initial licensing
payment and deposit we paid to Viragen under the terms of our license agreement
with Viragen. The $2 million was paid in June 1997. We will be required to incur
a minimum $2 million of licensing expenses annually, payable at $166,667 per
month, for the duration of the license agreement. Viragen has agreed to defer
payment of the minimum monthly licensing fee due commencing November 1, 1998,
until such time as we were able to fund this payment.
General and administrative expenses increased sharply during the year
totaling $1,078,278 for the year compared to $768,158 for the preceding year.
This increase between the periods reflects an increase in the administrative
support functions associated with establishment of our laboratory and
manufacturing facility in Scotland and related transfer of technology and
process scale-up projects during fiscal 1998. Also included in the components of
this increase were legal fees which increased by approximately $63,900 between
the periods. The increase in legal fees is attributable to the establishment of
our German subsidiary, as well as the settlement of litigation. The $25,000
settlement was included in general and administrative expenses. Rent expense
also increased by approximately $169,200, due primarily to increased space
leased in our Scottish manufacturing facility.
The increase in interest expense reflects a full year's interest on the
$166,000, 8.68% per annum working capital loan obtained from the Lothian and
Edinburgh Enterprise Limited in November 1997.
YEAR 2000
Viragen (Europe) recognizes the potential problem posed to its operations
by its dependence upon date sensitive computer systems and applications
throughout its business and the operations of third parties upon whom we are
dependent. We rely heavily on computerized laboratory equipment both for ongoing
research and production scale-up projects as well as computer controlled
commercial scales manufacturing equipment in place in our Scottish facility. In
addition, through strategic alliance and supply agreements currently in place,
we are also dependent upon Year 2000 compliance by third parties for the supply
of critical raw materials as well as certain manufacturing steps and storage of
product produced for planned clinical trials and eventually for commercial scale
production.
14
<PAGE> 17
We have been using both internal and external resources to isolate and as
necessary, reprogram, update or replace hardware or software found to be non
Year 2000 compliant. The evaluation phase of our Year 2000 compliance program
began in the fourth fiscal quarter of 1998. Due to the limited size of our
administrative staff, most of this work is being completed by outside
contractors retained specifically for this project. We expect to complete our
internal Year 2000 project by October 1999. The total estimated cost to complete
our internal Year 2000 project is $30,000 to $40,000, including projected
hardware replacements indicated. Funding for the evaluation and correction
phases is being provided from general working capital.
We have contacted certain external third parties, including raw material
vendors and scientific equipment manufacturers considered critical to our
ongoing operations to discuss and evaluate their own compliance programs. After
evaluation of third party responses we will prepare a contingency plan to
mitigate third party Year 2000 issues, if necessary.
The costs and projected completion dates of our Year 2000 compliance
program is based on our best estimates and is dependant in large part upon
compliance programs of external third parties or scientific equipment and
software vendors over whom we have no direct control. Accordingly, our inability
or the inability of the critical vendors to meet Year 2000 compliance deadlines
could have a material adverse impact on our operations, product development,
clinical trial or commercial manufacturing standpoint, negatively affecting our
financial condition, results of operations and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
Securities Act Release No. 7386 which requires that we disclose our policies
used to account for derivatives and certain quantitative and qualitative
information about market risk exposures. Market risk generally represents the
risk of loss that may result from the potential change in value of a financial
instrument as a result of fluctuations in interest rates and market prices.
We have not traded or otherwise transacted in derivatives nor do we expect
to do so in the future. We have established policies and internal processes
related to the management of market risks which we use in the normal course of
our business operations.
INTEREST RATE RISK
The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 1999, a change in
interest rates would not have a material impact on our future operating results
or cash flows.
FOREIGN CURRENCY EXCHANGE RISK
We believe our foreign currency risk is not material. At the present time
we do not have sales revenues or related receivables. Also, we do not purchase
foreign currencies on a regular basis. Transfers of funds to our foreign
subsidiary in Scotland are infrequent and are transferred at the then current
exchange rate.
We were not impacted by the European Union's adoption of the "Euro"
currency. Our foreign operations are located in Scotland and the United Kingdom
did not participate in the adoption of the Euro. The United Kingdom does not
have a scheduled date for the eventual adoption of the Euro.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
15
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS
OFFICER AND/OR
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- ---- --- ------------------------- ---------------
<S> <C> <C> <C>
Gerald Smith........................... 69 Chairman of the Board 1995
President 1995
Director of Viragen (Scotland) Limited 1995
Dennis W. Healey....................... 51 Executive Vice President 1996
Treasurer, Secretary and Director 1996
Director of Viragen (Scotland) Limited 1995
Dr. Magnus Nicolson.................... 39 Managing Director of Viragen (Scotland) 1996
Ltd.
Director 1997
</TABLE>
Our directors are collectively elected at the annual meeting of
stockholders and hold office for one year and until their successors are elected
and qualified. Officers are appointed by the board of directors and serve at the
pleasure of the board.
GERALD SMITH became the president and chairman of the board of directors on
December 8, 1995. Mr. Smith has also served as a director of Viragen (Scotland)
Ltd. since, its inception in April 1995. Since February 5, 1993, Mr. Smith has
served as a director of Viragen, Inc., our majority stockholder, 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, Mr. Smith was a principal stockholder,
president, chief executive officer and director of Business Development Corp. 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. 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, both computer-oriented companies which
developed database technology using the personal computer for audio, video,
animation and real time communication. Mr. Smith has wound down Business
Development Corp.'s operations in order to devote substantially all of his time
to Viragen (Europe) and Viragen.
DENNIS W. HEALEY is a certified public accountant and was appointed
executive vice president, chief financial officer, treasurer, secretary and a
director in January, 1996. Mr. Healey has also served as a director of Viragen
(Scotland) Ltd. since its inception in April 1995. In April 1993, he was
appointed chairman of the board and chief executive officer of Viragen, Inc. and
in June 1994, Mr. Healey relinquished the position of chairman 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 publicly traded affiliate, Techdyne, Inc. 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, a publicly traded subsidiary of Medicore.
D. MAGNUS NICOLSON, Ph.D. was appointed chief operating officer in August,
1999. Dr. Nicolson was elected a director in 1997 and has served as the managing
director of Viragen (Scotland) Ltd., 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
16
<PAGE> 19
independent marketing consultant. In 1988, Dr. Nicolson was awarded a Doctorate
in Immunology from the University of Strathclyde, in addition to acquiring
Masters Degrees in both Immunology and Business in 1985 and 1992, respectively.
Dr. Nicolson is a Fellow of the Royal Society of Medicine, a Member of the Royal
Society of Chemistry, and a Member of the Chartered Institute of Marketing.
There is no family relationship between any of the officers and directors.
As the operations of Viragen (Europe) and its parent, Viragen, remain
parallel at this time, Viragen's executive committee and audit, finance and
compensation committee, operating on behalf of Viragen, provides a comparable
function for Viragen (Europe). Viragen's executive committee consists of Carl M.
Singer (Chairperson), Gerald Smith and Robert H. Zeiger, and the audit, finance
and compensation committee consists of Charles J. Simons (Chairperson), Sidney
Dworkin, Robert C. Salisbury and Dennis W. Healey. Mr Healey abstains from any
discussions or votes concerning his salary or other forms of compensation.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation and
employment agreements of the chief executive officers and the four most highly
compensated executive officers at June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL
ANNUAL RESTRICTED OTHER
NAME AND PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD SARS(#) PAYOUTS SATION
------------------ ---- -------- ----- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith(1)................................ 1999 $ 82,000
Chairman of Board 1998 69,615 -- -- -- -- -- --
and President 1997 2,923 -- -- -- -- -- --
Robert H. Zeiger(2)............................ 1999 $ 2,582 -- -- -- -- -- --
Chief Executive Officer 1998 9,616 -- -- -- -- -- --
and Director 1997 -- -- -- -- -- -- --
Jay Sawardeker................................. 1999 $ 9,039 -- -- -- -- -- --
Chief Executive Officer 1998 -- -- -- -- -- -- --
and Director 1997 -- -- -- -- -- -- --
Dennis W. Healey(3)............................ 1999 $ 57,000 -- -- -- -- -- --
Exec. Vice Pres., Chief Finan. Off., 1998 53,654 -- -- -- -- -- --
Secretary, Treasurer and Director 1997 64,982 -- -- -- -- -- --
D. Magnus Nicolson(4).......................... 1999 $115,000 -- -- -- -- -- --
Chief Executive Officer 1998 100,054 -- -- -- -- -- --
and Director 1997 83,080 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Smith became the chairman of the board, chief executive officer,
president and a director of Viragen (Europe) on December 8, 1995. Mr. Smith
entered into a two-year employment agreement on March 1, 1997, which
provided for an annual salary of $10,000 and $20,000 for the first and
second years, respectively. This agreement was amended on July 3, 1997,
providing for an annual salary of $72,000 for the year ended June 30, 1998
and $82,000 for the period from July 1, 1998 through February 28, 1999.
(2) Mr. Zeiger was appointed a director and chief executive officer which
position was relinquished by Mr. Smith. On July 31, 1998, Mr. Zeiger
resigned for health reasons his position as chief executive officer and a
director, effective September 30, 1998.
(3) Mr. Healey serves as executive vice president, chief financial officer,
secretary and a director . On July 30, 1996 Viragen (Europe) entered into a
two-year employment agreement with Mr. Healey providing for a salary of
$14,200 for the two month period ending September 30, 1996 and $85,000 for
the period October 1, 1996 to September 30, 1997. On March 1, 1997, Mr.
Healey entered into a revised employment agreement to run concurrent with
Mr. Smith's, superceding all previous agreements. This agreement as amended
on July 3, 1997 provided for a salary of $31,700 for the four month period
ending June 30, 1997, $52,000 per annum for the year ended June 30, 1998 and
$57,000 per annum for the eight month period ending February 28, 1999.
17
<PAGE> 20
(4) Dr. D. Magnus Nicolson serves as the managing director of Viragen (Scotland)
Ltd. On August 6, 1998, Dr. Nicolson was appointed chief operating officer
of Viragen (Europe). On April 6, 1996 Dr. Nicolson entered into a two-year
employment agreement, providing for a salary of $74,250 per annum prorated
over the first six month period of the agreement and further provided for an
annualized increase of $8,250 to be prorated during each of the three
subsequent six month periods thereafter and options to acquire 50,000 shares
of common stock of Viragen (Europe) at $7.00 per share. On September 4,
1997, Dr. Nicolson's employment agreement was amended and extended through
March 31, 2000, providing for an annual salary of $107,000 and $115,000 for
the first and second years, respectively, options to acquire 75,000 shares
of common stock exercisable at $5.72 per share and reimbursement of
automobile and related expenses.
On July 1, 1999, Dr. Nicolson entered into a two year employment agreement
with Viragen (Scotland) to serve as its managing director at an annual
salary of 72,700 UK pounds (US$116,300). Terms of this agreement also
provide Dr. Nicolson with health insurance and similar benefits generally
available to our executive officers, use of an automobile and related
maintenance and reimbursement of business related expenses.
Upon entering into this agreement, Dr. Nicolson received a grant of 200,000
options to purchase common stock of Viragen, Inc. with an exercise price of
$0.75 per share. The options are exercisable for a period of five years
from vesting and vest one-half on the first anniversary of the grant date
and one half on the second anniversary.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended June 30,
1999 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARES) DATE
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Gerald Smith..................................... -- -- -- --
Robert H. Zeiger................................. -- -- -- --
Jay Sawardeker................................... -- -- -- --
Dennis W. Healey................................. -- -- -- --
D. Magnus Nicolson............................... -- -- -- --
</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,
1999 to each person named in the Summary Compensation Table and the unexercised
options held as of the end of the 1999 fiscal year.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1999 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT FY-END
LESS EXERCISE ---------------------------- VALUE OF UNEXERCISED IN THE
VALUE REALIZED MONEY OPTIONS AT FY-END
MARKET PRICE (BASED ON FY-END PRICE OF
SHARES AT EXERCISE $0.41/SHARE)
ACQUIRED LESS PRICE ------------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith....................... -- -- -- -- -- --
Robert H. Zeiger................... -- -- -- -- -- --
Jay Sawardeker..................... -- -- -- -- -- --
Dennis W. Healey................... -- -- -- -- -- --
D. Magnus Nicolson................. -- -- 87,500 37,500 $ 0 $ 0
</TABLE>
18
<PAGE> 21
ADDITIONAL STOCK OPTIONS
On September 4, 1997, Dr. D. Magnus Nicolson, chief operating officer and a
director of Viragen (Europe) and managing director of Viragen (Scotland),
amended and extended his employment agreement through March 31, 2000. Provisions
of amended employment agreement included the grant of 75,000 options to purchase
common stock of Viragen (Europe) exercisable at $5.72 per share for a period of
five years from the grant date. The options granted are exercisable: (i) 37,500
options upon the earlier of the first anniversary of the option grant or upon
filing a Clinical Trial Exemption Application for our Omniferon product in the
European Union or United Kingdom and (ii) 37,500 options upon the earlier of the
second anniversary of the option grant or upon acceptance of the Clinical Trial
Exemption Application by European Union or United Kingdom regulatory authorities
and at least six months had elapsed since the filing of the Clinical Trial
Exemption Application.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding our common
stock beneficially owned at September 24, 1999 (1) by each person who is known
by us to own beneficially or exercise voting or dispositive control over 5% or
more of our common stock, (2) by each of our directors, and (3) by all officers
and directors as a group. A person is considered to be a beneficial owner of any
securities for which the person has the right to acquire beneficial ownership
within sixty days. At September 24, 1999, there were 16,067,153 shares of common
stock outstanding.
<TABLE>
<CAPTION>
AMOUNT
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OWNERSHIP
- ------------------------------------ ------------- ---------
<S> <C> <C>
Viragen, Inc.(3)............................................ 13,951,094 86.8%
Gerald Smith(4)............................................. 100,000 0.1
Dennis W. Healey(5)......................................... 100,000 0.1
Dr. Magnus Nicolson(6)...................................... 125,000 0.1
5% holders, officers and directors as a group (4 persons)... 14,276,094 88.9
</TABLE>
- ---------------
(1) Based upon information furnished to use by the principal security holders or
obtained from our stock transfer books. Other than indicated in the notes,
we have been informed that these persons have sole voting and dispositive
power with respect to their shares. All of the individuals listed are
officers and/or directors. Their address is 865 SW 78th Avenue, Suite 100,
Plantation, Florida 33324, which is also the address of Viragen, Inc.
(2) Based on 16,067,153 shares of common stock outstanding at September 24,
1999.
(3) Viragen, Inc. is the majority stockholder.
(4) Mr. Smith is president and chairman of the board of directors.
(5) Mr. Healey is executive vice president, treasurer, chief financial officer,
secretary and a director.
(6) Dr. Nicolson is the chief operating officer and a director. Includes (i)
50,000 Common Stock options exercisable at $7.00 per share granted pursuant
to Dr. Nicolson's service Agreement dated April 1, 1996 and (ii) 75,000
Common Stock options exercisable at $5.72 per share granted pursuant to Dr.
Nicolson's Amended Service Agreement date September 5, 1997.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of our equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in their ownership of common
stock and other equity securities. Officers, directors and greater than ten
percent (10%) stockholders are required by Securities and Exchange Commission
regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended June 30, 1999, that all
19
<PAGE> 22
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
On July 12, 1995 Viragen (Scotland) entered into a license agreement with
Viragen granting Viragen (Scotland) rights to certain proprietary technology,
including the right to manufacture and distribute Omniferon. Under the terms of
this agreement, we are obligated to pay an annual licensing fee equal to the
greater of (1) $2,000,000 or (2) 10% of our gross revenues until total licensing
payments of $18 million has been paid to Viragen. Once the $18 million licensing
fee has been paid, we are obligated to pay Viragen an amount equal to 8% of our
gross revenues until such time as total licensing fee of $25 million has been
paid to Viragen. Once the $25 million licensing fee has been paid, we are
obligated to pay Viragen an amount equal to 5% of our gross revenues thereafter.
The initial term of the license agreement is for fifteen years and
automatically renews for 2 successive fifteen years periods. In September 1997,
Viragen and Viragen (Scotland) mutually agreed to extend the technology transfer
completion dates. Accordingly, the agreement was modified providing that the
$2,000,000 initial prepayment paid to Viragen in June 1997 would represent the
contractual payment for the one year period commencing November 1, 1997. The
agreement was further modified to provide that the event the proprietary
technology was not transferred pursuant to the provisions of the agreement, the
initial prepayment would have been refunded to Viragen (Scotland). The
technology transfer was completed on November 1, 1997, and the prepaid licensing
fee was fully expensed at that time. This accounting treatment is consistent
with SFAS No. 2, "Accounting for Research and Development Costs," as we are in
the process of obtaining European Union regulatory approval for marketing the
licensed technology. The approval process entails performing extensive
preclinical and clinical research.
Mr. Gerald Smith, president and chairman of Viragen (Europe), is also the
chairman and president of Viragen, our majority stockholder. Mr. Robert H.
Zeiger served as chief executive officer, chief operating officer and a director
from January 8, 1996 until his resignation for health reasons effective August
6, 1999. Mr. Zeiger continues to serve as vice chairman senior pharmaceutical
advisor to the board and a member of the executive committee of the board of
directors of Viragen. Mr. Dennis W. Healey, executive vice president, chief
financial officer, treasurer, secretary and a director also serves in the same
capacities for Viragen. Dr. Magnus Nicolson assumed the position of chief
operating officer upon the resignation of Mr. Zeiger, is a director and also
serves as managing director of Viragen (Scotland). Upon the resignation of Dr.
Jay Sawardeker effective July 1, 1999, Dr. Nicolson assumed the position of
chief operating officer of Viragen.
Viragen currently owns 13,951,094 shares of common stock, representing
86.8% of our outstanding capital stock interest on September 24, 1999.
20
<PAGE> 23
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C> <C> <C>
(1) -- All financial statements -- See Index to Consolidated Financial
Statements
(2) -- Financial statements 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)
(ii) Amended Certificate of Incorporation dated April 14, 1987.
(incorporated by reference to the Company's Registration
Statement, File No. 33-1952-NY)
(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, 1994 ("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 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 12, 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)
(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)
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C> <C> <C>
(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)
(10) -- Material Contracts
(i) Employment Agreement between Gerald Smith and the Company
dated March 1, 1997 (incorporated by reference to the
Company's Annual Report on 10-K for the fiscal year ended
June 30, 1997 ("1997 10-K")
(ii) Employment Agreement between Dennis W Healey and the Company
dated March 1, 1997 (incorporated by reference to the 1997
10-K)
(iii) Amendment to the Service Agreement between the Company and
Donald Magnus Nicolson, Ph.D. dated September 5, 1997
(incorporated by reference to the 1997 10-K)
(iv) Addendum to Employment Agreement between the company and
Gerald Smith dated July 3, 1997 (incorporated by reference
to the 1998 10-K)
(v) Addendum to the Employment Agreement between the Company and
Dennis W. Healey dated July 3, 1997 (incorporated by
reference to 1998 10-K/A).
(vi) Indemnification Agreement between George Levin and the
Company dated October 20, 1995 (incorporated by reference to
1998 10-K/A).
(vii) License and Manufacturing Agreement with Common Services
Agency (incorporated by reference to Viragen, Inc.'s 1995
Form SB-2 File No. 33-88070 (filed August 9, 1995), Part II,
Item 27(10)(xxxvi))
(viii) License Agreement between Viragen Technology, Inc. and
Viragen (Scotland) Ltd. dated July 12, 1995 (incorporated by
reference to 1998 10-K/A).
(ix) Amendment to License Agreement between Viragen Technology,
Inc. and Viragen (Scotland) Ltd. dated September 29, 1997
(incorporated by reference to 1998 10-K/A).
(x) Cooperation and Supply Agreement between Viragen, Inc.,
Viragen Deutschland GmbH and German Red Cross dated March
19, 1999 (incorporated by reference to Viragen, Inc.'s
Annual Report on Form 10-K/A for the year ended June 30,
1998).
(xi) Supply and Distribution Agreement between the Company and
the Adomjee Group of Companies dated November 16, 1998.
(xii) Letter of Intent between the Company and Drogson Healthcare
dated July 2, 1999.
(21) -- Subsidiaries of the registrant
(27) -- Financial Data Schedule (for Securities and Exchange Commission use only)
</TABLE>
(b) Reports on Form 8-K filed during the fourth quarter
None
22
<PAGE> 25
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 and Financial Officer
Dated: September 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD SMITH Chairman of the Board of September 27, 1999
- -------------------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and
President
/s/ DENNIS W. HEALEY Executive Vice President, September 27, 1999
- -------------------------------------------------------- Treasurer and Principal
Dennis W. Healey Financial Officer,
Director
/s/ DR. D. MAGNUS NICOLSON Director September 27, 1999
- --------------------------------------------------------
Dr. D. Magnus Nicolson
/s/ JOSE I. ORTEGA Controller and Principal September 27, 1999
- -------------------------------------------------------- Accounting Officer
Jose I. Ortega
</TABLE>
23
<PAGE> 26
FORM 10-K -- ITEM 8
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen (Europe) Ltd.
and subsidiaries are included:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated balance sheets -- June 30, 1999 and 1998....... F-3
Consolidated statements of operations -- Years ended
June 30, 1999, 1998 and 1997.............................. F-4
Consolidated statements of stockholders' equity - Years
ended June 30, 1999, 1998 and 1997........................ F-5
Consolidated statements of cash flows -- Years ended
June 30, 1999, 1998 and 1997.............................. F-6
Notes to consolidated financial statements.................. F-7
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 27
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 subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viragen (Europe) Ltd. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Viragen (Europe) Ltd. and subsidiaries will continue as a going
concern. As discussed in Note A to the consolidated financial statements, the
Company has incurred recurring operating losses and has an accumulated deficit
of approximately $11 million at June 30, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 17, 1999
F-2
<PAGE> 28
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 124,335 $ 656,139
Prepaid expenses and other current assets................. 256,460 312,282
------------ ------------
Total current assets.............................. 380,795 968,421
Property, Plant and Equipment
Leasehold improvements.................................... 1,893,992 1,947,310
Equipment and furniture................................... 2,512,216 2,342,273
Construction in progress.................................. 292,152 48,655
------------ ------------
4,698,360 4,338,238
Less accumulated depreciation............................. (559,878) (253,387)
------------ ------------
4,138,482 4,084,851
Due from parent............................................. 390,319 --
------------ ------------
$ 4,909,596 $ 5,053,272
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 955,911 $ 752,312
Current portion of long-term debt......................... 7,879 2,863
------------ ------------
Total current liabilities......................... 963,790 755,175
Licensing fee payable....................................... 1,333,333 --
Long-term debt, less current portion........................ 131,973 160,043
Advances from parent........................................ -- 2,314,431
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 16,067,153 and 7,116,059
shares at June 30, 1999 and 1998, respectively......... 160,672 71,160
Additional paid-in capital................................ 13,179,595 7,441,447
Retained deficit.......................................... (10,906,519) (5,976,065)
Accumulated other comprehensive income.................... 46,752 287,081
------------ ------------
2,480,500 1,823,623
------------ ------------
Total stockholders' equity........................ $ 4,909,596 $ 5,053,272
============ ============
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-3
<PAGE> 29
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Income
Interest and other income.............................. $ 49,762 $ 37,474 $ 233,552
----------- ----------- ----------
49,762 37,474 233,552
Costs and Expenses
Research and development costs......................... 2,742,154 1,585,837 319,076
Licensing fee.......................................... 1,333,333 2,000,000 --
General and administrative expenses.................... 880,762 1,078,278 768,158
Interest expense....................................... 23,966 15,485 5,532
----------- ----------- ----------
4,980,215 4,679,600 1,092,766
----------- ----------- ----------
Net loss................................................. $(4,930,453) $(4,642,126) $ (859,214)
=========== =========== ==========
Basic and diluted loss per common share.................. $ (0.46) $ (0.65) $ (0.12)
=========== =========== ==========
Basic and diluted weighted average common shares
outstanding............................................ 10,607,393 7,116,059 7,048,967
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-4
<PAGE> 30
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK, PAR PAID-IN RETAINED COMPREHENSIVE
$.01 CAPITAL DEFICIT INCOME
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at July 1, 1996...................... $ 69,228 $ 6,192,005 $ (474,725) $ 43,057
Exercise of $6.00 Warrants................... 1,592 953,782
Exercise of $8.00 Warrants................... 280 223,720
Exercise of $12.00 Warrants.................. 60 71,940
Foreign currency translation adjustment...... 230,412
Net loss..................................... (859,214)
-------- ----------- ------------ ---------
Balance at June 30, 1997..................... 71,160 7,441,447 (1,333,939) 273,469
Foreign currency translation adjustment...... 13,612
Net loss..................................... (4,642,126)
-------- ----------- ------------ ---------
Balance at June 30, 1998..................... 71,160 7,441,447 (5,976,065) 287,081
Capital contribution by Viragen, Inc......... 40,112 3,469,590
Capital contribution by Viragen, Inc......... 12,164 443,974
Capital contribution by Viragen, Inc......... 37,236 1,824,584
Foreign currency translation adjustment...... (240,329)
Net loss..................................... (4,930,453)
-------- ----------- ------------ ---------
Balance at June 30, 1999..................... $160,672 $13,179,595 $(10,906,519) $ 46,752
======== =========== ============ =========
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-5
<PAGE> 31
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss................................................ $(4,930,453) $(4,642,126) $ (859,214)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 336,135 241,698 15,122
Increase (decrease) relating to operating activities
from:
Prepaid licensing fee................................. -- 2,000,000 (2,000,000)
Other current assets.................................. 55,821 (118,374) (142,595)
Other assets.......................................... -- 6,166
Accounts payable and accrued expenses................. 203,599 72,798 555,130
Licensing fee payable................................. 1,333,333 -- --
----------- ----------- -----------
Net cash used in operating activities......... (3,001,565) (2,446,004) (2,425,391)
Investing Activities
Additions to property, plant and equipment, net....... (389,766) (913,991) (3,400,067)
----------- ----------- -----------
Net cash used in investing activities......... (389,766) (913,991) (3,400,067)
Financing Activities
Proceeds from exercise of warrants.................... -- -- 1,251,374
Proceeds from long-term debt.......................... -- -- 166,000
Payments on long-term debt............................ (14,440) (1,005) (2,089)
Advances from parent.................................. 3,122,910 1,859,256 1,338,135
----------- ----------- -----------
Net cash provided by financing activities..... 3,108,470 1,858,251 2,753,420
Effect of exchange rate fluctuations on
cash........................................ (248,943) 13,612 230,412
----------- ----------- -----------
Decrease in cash........................................ (531,804) (1,488,132) (2,841,626)
Cash and cash equivalents at beginning of period........ 656,139 2,144,271 4,985,897
----------- ----------- -----------
Cash and cash equivalents at end of period.............. $ 124,335 $ 656,139 $ 2,144,271
=========== =========== ===========
Supplemental Cash Flow Information
Interest paid......................................... $ 14,473 $ 9,960 $ 2,265
Income taxes paid..................................... -- -- 13,840
</TABLE>
During the years ended June 30, 1999, 1998 and 1997, the Company had the
following non-cash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contribution to capital of intercompany balances by
Viragen, Inc.......................................... $ 5,827,660 $ -- $ --
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-6
<PAGE> 32
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation. Viragen (Europe) Ltd. and its
subsidiaries are engaged in the research, development and manufacture of certain
immunological products for commercial application. The consolidated financial
statements include the parent company and all subsidiaries, including those
operating outside the U.S. All significant transactions among our businesses
have been eliminated. We made certain reclassifications to the 1998 and 1997
financial statements to conform to the 1999 presentation. Viragen (Europe) Ltd.
is a majority-owned subsidiary of Viragen, Inc.
In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, and asset valuation
allowances. We are also subject to risks and uncertainties that may cause actual
results to differ from estimated results such as changes in the health care
environment, competition, foreign exchange and legislation.
During 1999, 1998 and 1997, Viragen (Europe) incurred significant losses of
approximately $4,930,000, $4,642,000 and $859,000, respectively. Management
anticipates additional future losses as it enters into clinical trials.
Accordingly, Viragen has agreed to provide Viragen (Europe) the working capital
necessary to fund operations through June 30, 2000. Advances from parent were
contributed to capital during fiscal 1999. Viragen has also agreed to defer the
$166,667 minimum monthly payments due under the licensing agreement that began
November 1, 1999 until Viragen (Europe) is able to fund this obligation.
During fiscal 1999, however, Viragen incurred a loss of $10,650,832 and had
negative operating cash flow of $8,955,434. As a result, its accumulated deficit
increased to $50,521,028. These operating results were caused by a lack of
regulatory approval for the sale of our products. Viragen's management has plans
to increase working capital by its efforts related to obtaining additional
capital funding. Viragen's and Viragen (Europe)'s ability to continue as going
concerns are dependent on the availability of additional capital funding,
regulatory approval of our pharmaceutical products, and adequate downsizing to
operate at a reduced level of expense. Viragen's management plans to continue to
pursue available funding and adjust operating expenses accordingly. Viragen
(Europe)'s financial statements have been prepared assuming it will continue as
a going concern and do not reflect any costs or charges that could result from
this uncertainty.
Cash and Cash Equivalents. Cash equivalents include items almost as liquid
as cash. These items include demand deposits, certificates of deposit and time
deposits with maturity periods of three months or less when purchased.
Financial Instruments. The carrying amount of financial instruments,
including cash and cash equivalents and accounts payable approximate fair value
as of June 30, 1999. The Company's long-term debt approximates fair value since
it was recently negotiated
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 of the assets for
financial reporting purposes and using accelerated methods for income tax
purposes. The estimated useful lives used for financial reporting purposes are:
<TABLE>
<S> <C>
Building and improvements................................... 25 years
Equipment and furniture..................................... 5-10 years
</TABLE>
Management believes no impairment indicators exist at June 30, 1999, as
defined by SFAS 121.
Foreign Currency Translation. For foreign operations, local currencies are
considered their functional currencies. We translate assets and liabilities to
their U.S. dollar equivalents at rates in effect at the balance sheet date and
record translation adjustments in stockholders' equity. We translate statement
of income
F-7
<PAGE> 33
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts at average rates for the period. Transaction adjustments, which are not
material, are recorded in results of operations.
Research and Development Costs. Viragen (Europe) accounts for research and
development costs in accordance with SFAS No. 2 -- "Accounting for Research and
Development Costs." Accordingly, all research and development costs are expensed
as incurred.
Stock Based Compensation. Viragen (Europe) accounts for its stock-based
compensation plans under the provisions of APB 25 -- "Accounting for Stock
Issued to Employees," and accordingly, recognizes no compensation expense for
stock option grants where the exercise price equals or exceeds fair market value
at date of grant. The Company provides supplemental disclosures as required by
the provisions of SFAS 123 -- "Accounting for Stock-Based Compensation."
Income Taxes. Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.
Loss Per Common Share. Loss per common share has been computed based on
the weighted average number of shares outstanding during each period, in
accordance with SFAS 128 -- "Earnings per Common Share." The effect of warrants
and options are antidilutive. As a result, diluted loss per share data does not
include the assumed conversion of these instruments and has been presented
jointly with basic loss per share.
Comprehensive Loss. In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130 -- "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The adoption of SFAS No. 130 had no impact
on Viragen (Europe)'s net loss or stockholders' equity. Viragen (Europe)'s
comprehensive loss for fiscal years 1999, 1998, and 1997 totalled $5,170,782,
$4,628,514 and $628,802, respectively.
Recent Pronouncements. In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging
Activities" which is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement amends SFAS
No. 52 -- "Foreign Currency Translation", and supersedes SFAS No.
80 -- "Accounting for Future Contracts", No. 105 -- "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentration of Credit Risk", No. 107 -- "Disclosures about
Fair Value of Financial Instruments", and No. 119 -- "Disclosure about
Derivative Financial Instruments". The Company plans to adopt SFAS No. 133 in
fiscal 2000.
Management believes that the impact of SFAS No. 133 will not be significant
to Viragen (Europe).
NOTE B -- CAPITAL STOCK
COMMON STOCK.
During fiscal 1999, Viragen, Inc. contributed to capital a total of
$5,827,659 in intercompany balances. The capital contributions occurred on
December 31, 1998, February 28, 1998 and March 17, 1999 at stock prices ranging
between $0.375 and $0.875 per common share. Viragen received 8,951,094 common
shares, as a result of the capital contributions. Accordingly, Viragen's
ownership interest increased from 70% on June 30, 1998 to 87% by June 30, 1999.
F-8
<PAGE> 34
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS.
Viragen (Europe)'s 1997 incentive stock option plan has authorized the
grant of options to management personnel, directors, employees, or consultants
for up to 600,000 shares of common stock of which 525,000 remain available at
June 30, 1999.
On September 4, 1997, options to purchase 75,000 shares of common stock at
$5.72 per share were granted to Dr. Magnus Nicolson in connection with an
amended employment agreement. The options vest as follows: 37,500 shares the
earlier of one year from grant or the date of filing of a Clinical Trial
Exemption in the European Union; and 37,500 shares the earlier of two years from
the date of grant or acceptance of the Clinical Trial Exemption Application by
European Union regulatory authorities and at least six months had elapsed since
the filing of the Clinical Trial Exemption.
WARRANTS.
Class F warrants totaling 44,196 shares, with an exercise price of $105.00
per share, expired in November 1998.
In December 1998, 680,771 common stock purchase warrants, with an exercise
price of $6.00 per share, expired unexercised.
During March 1999, 632,500 common stock purchase warrants, with exercise
prices ranging between $8.00 and $12.00. expired unexercised.
STOCK BASED COMPENSATION.
Viragen (Europe) has elected to follow APB 25 and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Viragen (Europe) had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of zero percent for all periods; risk-free interest
rate of 6.09% for 1998; volatility factor of the expected market price of our
common stock of .723 for 1998; and a weighted-average expected life of the
option of 3 years. The weighted average fair value of each option granted in
fiscal 1998 was $2.97 per share.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Viragen
(Europe)'s pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Pro forma loss................................... $(5,005,947) $(4,779,490) $(904,588)
Pro forma loss per share......................... (0.47) (0.67) (0.13)
</TABLE>
F-9
<PAGE> 35
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of our stock option activity and related information for the
years ended June 30, follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding July 1, 1996............ 50,000 $7.00 -- $ --
Granted........................... -- --
Exercised......................... -- --
Canceled.......................... -- --
-------
Outstanding June 30, 1997........... 50,000 7.00 50,000 7.00
Granted........................... 75,000 5.72
Exercised......................... -- --
Canceled.......................... -- --
-------
Outstanding at June 30, 1998........ 125,000 6.23 50,000 7.00
Granted........................... -- --
Exercised......................... -- --
Canceled.......................... -- --
-------
Outstanding at June 30, 1999........ 125,000 $6.23 87,500 $6.45
=======
</TABLE>
The weighted average remaining contractual life of options outstanding as
of June 30, 1999 is 4.11 years.
COMMON SHARES RESERVED.
Shares of Viragen (Europe)'s common stock reserved at June 30, 1999, for
possible future issuance are as follows:
<TABLE>
<S> <C>
Employee options............................................ 125,000
</TABLE>
These options are exercisable through 2004, with exercise prices ranging
between $5.72 and $7.00 per share.
NOTE C -- TRANSACTIONS WITH PARENT
Through a fifteen-year license agreement granted by Viragen, Viragen
(Scotland) secured certain rights to engage in the 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, we entered into
a license and manufacturing agreement with the Common Services Agency of
Scotland, an agency acting on behalf of the Scottish National Blood Transfusion
Service pursuant to which the Transfusion Service, on behalf of Viragen
(Scotland), will participate in the manufacture and supply of our product for
exclusive distribution in the European Union in return for certain fees. The
term of the Scottish agreement is five years with two additional five-year
extension terms exercisable at the option of Viragen (Scotland).
Pursuant to the terms of the license, Viragen (Scotland) was to prepay $2
million to Viragen within six months of the effective date, July 12, 1995.
Commencing one year from the effective date, Viragen (Scotland) is to pay to
Viragen fees, as follows: the greater of $2 million annually or 10% of gross
revenues until the sum of $18 million has been paid; 8% of gross revenues until
the sum of $25 million has been paid; and 5% of gross revenues thereafter. The
license will renew automatically for two consecutive fifteen-year terms.
Both parties have modified the license deferring the initial payment until
the date when Viragen transferred the processes and technology, as defined by
the license, to Viragen (Scotland). Viragen had substantially transferred the
processes and technology to Viragen (Scotland) by the end of May 1997. Viragen
required the initial licensing payment be made. Completion of the technology
transfer occurred on
F-10
<PAGE> 36
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
November 1, 1997. At that time, Viragen was deemed to have completed the
transfer of the processes and technology. The prepaid licensing fee was fully
expensed on November 1, 1997. This accounting treatment is consistent with SFAS
No. 2 -- "Accounting for Research and Development Costs," as we are in the
process of obtaining European Union regulatory approval for marketing the
licensed technology. The approval process entails performing preclinical and
clinical research.
Viragen provides certain administrative services to us including management
and general corporate assistance. These expenses are charged on the basis of
direct usage, when identifiable, or on the basis of time spent. In our opinion,
this method of allocation is reasonable. The amount of expenses allocated by
Viragen totaled approximately $-0-, $27,000 and $99,800 for the years ended June
30, 1999, 1998 and 1997.
NOTE D -- INCOME TAXES
Even though Viragen, Inc.'s ownership percentage of Viragen (Europe)
exceeds 80% as of December 31, 1998, Viragen (Europe) may have to continue
filing separate income tax returns.
Viragen (Scotland) Ltd. files separate income tax returns in the United
Kingdom. Viragen (Germany) GmbH files separate income tax returns in Germany.
Net operating losses of Viragen (Scotland) totaling approximately $9,847,000 are
being carried forward to future periods at June 30, 1999.
As of June 30, 1999, Viragen (Europe) has net operating loss carryforwards
for U.S. income tax purposes of approximately $2,600,000, including $1,200,000
whose use is limited to $48,000 per year as a result of a change in ownership in
December 1995, as defined by Internal Revenue Code Section 382, that expire at
various dates between 2003 and 2018.
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. Significant components of
our deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Accrued liabilities (U.S.)............................... $ 22,000 $ 12,000
Net operating loss carryforwards (U.S.).................. 971,000 857,700
Capital loss carryforwards (U.S.).......................... -- 295,000
--------- -----------
Total deferred tax assets........................ 993,000 1,164,700
Valuation allowance for deferred tax assets.............. (993,000) (1,164,700)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
The change in the valuation allowance was a net decrease of $171,700 for
the year ended June 30, 1999.
For financial reporting purposes, loss before income taxes include the
following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Pre-tax loss:
U.S....................................................... $ (328,277) $ (401,130)
Foreign................................................... (4,602,176) (4,240,996)
----------- -----------
$(4,930,453) $(4,642,126)
=========== ===========
</TABLE>
F-11
<PAGE> 37
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory
rate applied to U.S. net loss is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate................................. (34.00)% (34.00)% (34.00)%
State taxes, net of federal................................ (3.63) (3.64) (3.63)
Non-deductible items....................................... 0.01 0.04 0.81
Change in valuation allowance.............................. (52.32) 32.20 42.46
Expiration of capital loss carryforward.................... 89.94 -- --
Other...................................................... -- 5.40 (5.64)
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>
NOTE E -- LONG-TERM DEBT
Long-term debt at June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Loan from Scotland Regional Development authority. Payable
quarterly over 20 years with an effective interest rate of
11.00%. Note matures on August 28, 2017................... $139,852 $162,906
-------- --------
139,852 162,906
Less current portion........................................ (7,879) (2,863)
-------- --------
$131,973 $160,043
======== ========
</TABLE>
Scheduled maturity of long-term debt at June 30, 1999 is: 2000 -- $7,879;
2001 -- $7,879; 2002 -- $7,879; 2003 -- $7,879; and 2004 and thereafter --
$108,336.
NOTE F -- COMMITMENTS
In November 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. Base monthly rental on the property is approximately
$9,975. In addition, the Company may extend the term of the lease at its option,
for four five-year periods.
During the years ended June 30, 1999, 1998 and 1997, the Company recognized
$195,000, $202,000 and $29,000 in rent expense and related charges arising from
the property lease. Future minimum lease payments on the facilities are:
2000 -- $119,700; 2001 -- $119,700; and 2002 -- $29,900.
Viragen (Europe) Ltd. has entered into employment agreements with three of
its officers. These agreements represent a commitment by the Company to pay an
aggregate amount of approximately $290,000 per year in salaries to these
individuals.
NOTE G -- CONTINGENCIES
In May 1997, Viragen (Europe) under the name of Sector Associates, Ltd. was
named as a defendant in an action brought in the United States Bankruptcy Court,
Southern District of Florida by the bankruptcy trustee. The suit alleges that
during the period from December 1993 to May 1994, prior to Viragen (Europe)'s
reverse acquisition of Sector Associates, Sector Associates received
preferential transfers of approximately $2.1 million. The suit was settled on
July 8, 1999 for a total of $25,000. The loss arising from settlement of the
suit was recognized during fiscal 1998.
F-12
<PAGE> 38
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An action is pending in the Circuit Court for Broward County, Florida
against Viragen (Europe), then named Sector Associates, Ltd., alleging that
Sector Associates, prior to the reverse acquisition, mishandled payment of
amounts due to Roy Woods, a secured creditor (Roy Woods as Trustee v. Sector
Associates, Ltd.). Viragen (Europe) has denied the claim and has filed a
counterclaim. In addition, a former stockholder of Sector Associates is
obligated and has agreed to indemnify Viragen (Europe) in this matter and has
assumed responsibility for defense of this lawsuit. The ultimate liability, if
any, cannot be determined at this time and no accrual for loss has been
recorded. Management intends to vigorously defend its position.
NOTE H -- GEOGRAPHIC INFORMATION
In 1997, the Company completed a manufacturing facility in Edinburgh,
Scotland. Identifiable assets in Scotland totaled $4,506,000 and $4,745,000 at
June 30, 1999 and 1998, respectively. Identifiable assets represent those assets
used in the operations of the geographic area.
F-13
<PAGE> 1
EXHIBIT 10(xi)
SUPPLY AND DISTRIBUTION AGREEMENT
This Agreement dated 16th of November 1998 between Viragen (Europe) Ltd., a
Delaware Corporation, having its offices at 865 SW 78th Avenue, Suite 100,
Plantation, Florida 33324-3212 ("VERP") and the Adamjee Group of Companies
("AGC"), a company incorporated under the laws of Pakistan having its offices at
Adamjee House, 1.1 Chundrigar Road, Karachi, Pakistan.
WHEREAS, VERP holds the exclusive Manufacturing and Distribution License
for countries which comprise the European Union (EU) to develop, manufacture,
clinically test and distribute Omniferon(TM), an injectible human
leukocyte-derived alpha interferon ("the Product"); and
WHEREAS, VERP currently owns and operates a manufacturing facility in
Edinburgh, Scotland under a collaborative agreement with the Scottish National
Blood Transfusion Service and intends to file an application for a Clinical
Trial Exemption ("CTX") or Investigation New Drug Application ("IND") in one or
more Tier I Counties, and
WHEREAS, AGC acknowledges that the Product is currently classified as an
experimental drug until such time as Phase I / II / III clinical trials have
been undertaken and the Product has been approved by the respective regulatory
authorities in each jurisdiction where the Product may be cold, which cannot be
assured; and
WHEREAS, AGC wishes to purchase the Product from VERP in accordance with
the terms and conditions herein set forth; and
WHEREAS, VERP is willing to sell the Product to AGC under the terms and
conditions herein set forth;
NOW, THEREFORE, VERP AND AGC, in view of the foregoing premises and in
consideration of the terms and conditions hereafter set forth and intending to
be legally bound, agree as follows:
1. Exclusive Territory -- The exclusive territories covered by this
Agreement are the countries: India, OAE, Pakistan, Kuwait, Saudi Arabia, Yemen,
Qatar, Bahrain, Oman, Sri Lanka, Bangladesh, Nepal, CIS Counties, Brunei, and
other Gulf Countries ("the Territory").
2. Term of Agreement -- The initial term of the Agreement shall be five (5)
years with automatic successive five (5) year renewal options granted by VERP,
said renewal options shall be reasonable provided the terms and conditions and
the purchase requirements set forth below are met.
AGC'S PRODUCE PURCHASE REQUIREMENTS
<TABLE>
<S> <C>
First Consecutive 12 Months................................. $2 Million
Second Consecutive 12 Months................................ $3 Million
Third Consecutive 12 Months................................. $5 Million
Fourth and After Consecutive 12 Months...................... $5 Million each year, respectively
</TABLE>
Upon approval of the Product by the FDA, EU and/or comparable regulatory
agency for commercialization, the minimum annual purchase by AGC shall be $10
Million per annum, subject to timely delivery of the Product by VERP. However,
it is further understood that until the respective regulatory approvals are
given for the sale of the Product, then any purchase by AGC used for clinical
study and/or sales research shall not serve to commence AGC's requirement to
purchase.
It is understood that AGC's commitment to purchase $10 Million of the
Product in the aggregate during the first three (3) years of this Agreement
shall commence at such time that VERP and AGC each receive their respective
regulatory approvals from regulatory agencies within each of the jurisdictions
within the Territory for the sale, purchase, clinical study and/or distribution
of the Product.
1
<PAGE> 2
3. Market Research -- Upon execution hereof, AGC agrees to commence
marketing and regulatory research and further agrees to submit the research
findings including, but not limited to: (I) importation requirements for the
targeted country, (ii) local licensing requirements for distribution, (iii)
total current and projected market, by indication, and (iv) competitive
environment, on or before March 31st, 1999 for at least one (1) country within
the Territory. Other findings shall be submitted by year end 1999.
4. Availability of the Product -- AGC and VERP shall each submit sliding
quarterly forecasts for 1999 for production and distribution, respectively, by
March 31st, 1999 to each other for at least one (1) country within the
Territory. Subsequent forecasts shall be submitted each calendar quarter but not
later than year end 1999.
5. Medical Indications -- VERP expects to file a CTX or IND Application in
order to conduct clinical trials estimated to commence in the first quarter of
1999 for Hepatitis C. Simultaneously, or thereafter, VRGN may file an
application for Multiple Sclerosis, although no assurance can be given.
Hepatitis C Clinical Trials (phase(s) 1 / II / III) are expected to take from
2-3 years. Multiple Sclerosis Clinical Trials are expected to take from 3-5
years, or longer, before commercialization by a regulatory agency which cannot
be assured.
6. Supply and Sale of the Product Prior to E.U. or U.S. Regulatory
Approval -- AGC may cause or undertake Clinical Trials within its Territory in
accordance with VERP's approved protocols. Such protocols will be provided to
AGC by VERP within sixty (60) days written notice by AGC of their intention to
commence clinical trials. AGC would be responsible for all costs and expenses in
connection with such trials and shall be responsible for the proper execution,
supervision, monitoring and data gathering to be obtained therefrom. VERP agrees
to supply Product to AGC during this period subject to receipt of appropriate
documentation permitting the exportation and importation of the Product in the
various jurisdictions.
7. Letter of Credit ("L/C") -- AGC shall establish a Letter of Credit
from a bank acceptable in form and substance to VERP for each order and shipment
and AGC will pay for VERP's discount charges. In addition, AGC will obtain and
deliver to VERP an acceptable Letter from the bank giving credibility of AGC to
do business for over one million U.S. dollars.
8. Establishment of Distribution Facility -- AGC shall build, own and
operate a pharmaceutical distribution facility in accordance with current Good
Manufacturing Practices (cGMP) in a jurisdiction selected by AGC and approved by
VERP. Such approval to be based on VERP's evaluation that the proposed facility
complies with cGMP requirements and complies with VERP prepared protocols
addressing transport and storage of the Product.
9. The Agreement --
9.1 If any term or provision of this AGREEMENT is held invalid or
unenforceable, the remaining terms and provisions hereof shall not be
affected, but shall be valid and enforceable to the fullest extent
permitted by law.
9.2 This AGREEMENT dated as of the date hereof, between the PARTIES
incorporate the entire understanding of the PARTIES in relation to the
subject matter hereof and revoke and supersede any and all agreements that
might have existed regarding such subject matter between the PARTIES.
9.3 This AGREEMENT, including the validity, construction,
interpretation, and performance hereof, shall be governed by the laws of
the United Kingdom, without giving effects to conflicts of law.
9.4 The headings used in this AGREEMENT are intended for help only and
shall not be considered part of the written understanding between the
PARTIES.
10. Appointment of Distributor --
10.1 VERP grants to AGC an exclusive license and AGC accepts the
exclusive right to purchase, distribute, promote, and resell the Product in
the TERRITORY during the TERM, subject to the terms and conditions set
forth in this AGREEMENT. Manufacturing rights and protocols shall be the
subject of a separate Transfer of Technology and Manufacturing License
Agreement (the "License") and this
2
<PAGE> 3
Agreement does not convey any such rights explicitly or implicitly by or
through this contract. However, AGC shall have the first right of refusal
to acquire the License for the Territory under terms and conditions in
effect. AGC shall have ninety (90) days to accept or reject such License
from the date of notice of "Availability to Acquire License".
10.2 AGC shall purchase from VERP all such quantities of products as
AGC shall require from time to time during the TERM for the purposes of
resale in the TERRITORY subject to Section 4 of this Agreement.
10.3 AGC shall not during the TERM purchase products similar to, or in
competition with, VERP's Product, from any Person other than VERP or a VERP
licensed supplier designated in writing. AGC is not authorized to itself
manufacture (except for required labeling and packaging of the product) the
product, unless otherwise separately agreed to under the express terms of a
written License Agreement with VERP and/or its affiliate, Viragen
Technology, Inc.
10.4 AGC shall not directly or indirectly promote, sell, or distribute
the Product outside the TERRITORY nor establish any sales branch or
warehouse outside the TERRITORY for the purpose of sales or distribution of
the Product outside the TERRITORY.
10.5 AGC may appoint sub-distributors for the Product in the TERRITORY
subject to VERP's prior written approval. The appointment of a
sub-distributor shall be on such terms and conditions as AGC may require,
but consistent with the terms and conditions of this AGREEMENT.
11. Independent Trade Status --
11.1 Each of the parties in performing this AGREEMENT shall be deemed
to be acting as an independent contractor. Accordingly, AGC shall purchase
the Product from VERP and resell it to AGC's customers in AGC's name and/or
for its own account. Neither of the PARTIES shall have any authority
whatsoever to act as agent or representative of the other PARTY nor any
authority or power to contract or create any obligation or liability on
behalf of the other or otherwise bind the other in any way for any purpose.
AGC may select any Agent(s) to distribute the Product as long as no
liability to VERP is incurred for which AGC will indemnify and hold VERP
harmless to any claim arising from this Agreement.
11.2 All costs and expenses connected with the purchase, direct sale,
promotion, distribution, and resale of the product in the TERRITORY shall
be borne by AGC except as otherwise specifically provided in this
AGREEMENT.
11.3 VERP shall have no control over AGC's choice of customers or any
other aspect of its business, unless VERP has good reason to believe that
AGC and/or its customers may be acting in violation of the terms of this
Agreement in which event any conflict shall be submitted to arbitration as
provided herein.
12. Price, Payment Terms, and Annual Minimum Purchase Quantities --
12.1 Subject to Section 3, the price of the Product shall be
established and agreed to by both parties prior to June 30, 1999. There
shall be added to such prices the costs incurred by VERP to ship products
to the PORT OF ENTRY and to ensure such shipments. The risk of loss or
damage in shipping to the PORT OF ENTRY, FOB VIRAGEN shall be borne by AGC
and/or the shipper(s).
12.2 Subject only to the exceptions described below, the prices
contemplated in Section 12.1 shall be firm for all purchase orders
requisitioning product to be shipped in the first ANNUAL PERIOD. For
delivery of Product in all succeeding ANNUAL PERIODS, VERP may increase the
per unit Product price to cover any increase in cost of materials, direct
labor, and overhead related thereto and, subject only to the exceptions
described below, such prices shall be firm for all purchase orders
requisitioning Products to be shipped in such ANNUAL PERIOD. Both AGC and
VERP recognize that the prices to be established in Section 12.1 will not
provide for unexpected, substantial currency fluctuations. Fluctuations
exceeding plus or minus 5% of the exchange ratio on the date hereof would
be considered
3
<PAGE> 4
substantial. AGC and VERP agree to negotiate in good faith a revised
selling price in the event of such fluctuations throughout the TERM.
12.3 The price of the Product delivered to AGC will be paid not more
than 30 days from the date of the airway bill in U.S. dollars by bank wire
transfer to VERP's designated bank account, and be deemed paid when
received. AGC shall bear all costs in connection with effecting payments.
AGC will under no circumstances be liable to pay for products not shipped
to AGC. VERP reserves the right to unilaterally require other payment terms
in the event of any uncured defaults by AGC in making timely payments for
ordered Products. In the alternative, purchase may be made as provided in
Section 7 above.
12.4 AGC will pay all import duties, if any, and any applicable sales
or goods and services taxes imposed by the Government's within the
Territory. VERP will pay any export duties, if any.
12.5 AGC shall be free to set its resale price for the Products.
13. Orders, Production Planning and Reports --
13.1 AGC shall order products from VERP utilizing VERP's standard
written purchase order form setting forth the number of vials ordered and
the desired delivery date. AGC acknowledges that orders should generally be
placed at least four (4) months prior to the desired delivery date. An
order shall be accepted only by written confirmation from VERP.
13.2 AGC shall furnish VERP with its projected requirements of Product
for each of the calendar quarters comprising the first ANNUAL PERIOD. On
the first day of the second quarter of the first ANNUAL PERIOD, and the
first day of every calendar quarter thereafter during the TERM, AGC shall
give VERP its projected requirement for each succeeding quarter updating
projections already given. The projections furnished shall be for the
purpose of aiding VERP's production schedule and shall be binding upon AGC.
13.3 Within thirty days from the end of each quarter of each ANNUAL
PERIOD, AGC shall furnish to VERP a schedule setting forth the number of
Products sold in that quarter, and shall furnish to VERP such additional
information concerning such matters as VERP may reasonably require from
time to time relating to Product sales, resales, clinical studies,
distribution, promotion and operations.
14. Quality of Products --
14.1 VERP warrants to AGC that upon delivery at the PORT OF ENTRY all
of the Products shall meet the SPECIFICATIONS.
14.2 NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE MADE
OR WILL BE DEEMED TO HAVE BEEN MADE BY VERP REGARDING THE PRODUCTS, EXCEPT
TO THE EXTENT EXPRESSLY STATED HEREIN. Neither AGC nor any of its
employees, agents, or representatives is authorized to give any warranties
or make any representations on behalf of VERP. In no event shall VERP be
held liable for any lost profits or any other incidental or consequential
damages in connection with any claims arising out of or related to any
products supplied by VERP or AGC.
14.3 Any claims by AGC regarding the quality or quantity of Products
delivered shall be made in writing specifying in reasonable detail the
nature or basis for the claim and citing relevant control numbers or other
information to enable specific identification of the products in question.
AGC shall be deemed to have waived all claims against VERP in connection
with any Products, and such Products shall be deemed to have met the
SPECIFICATIONS upon delivery of the PORT OF ENTRY, if no such claim is made
within sixty (60) days of shipment of such products. All claims timely
received by VERP from AGC regarding products shall be handled on a case by
case basis during which time VERP or its designee shall have the right to
first inspect any products involved before being required to take any
action with respect thereto. VERP and AGC acknowledge and agree that all
shipments shall be
4
<PAGE> 5
adequately insured, at AGC's cost and expense, to the PORT OF ENTRY and
each party hereto shall be responsible for and cooperate in submitting any
claims with respect to such shipments.
14.4 If the PARTIES fail to agree as to whether a delivered quantity
of products met the SPECIFICATIONS upon delivery at the PORT OF ENTRY, then
the PARTIES shall cooperate to have the batch in dispute analyzed by an
internationally recognized independent testing laboratory. The results of
said laboratory's testing shall be deemed final as to any dispute over
whether products met the SPECIFICATIONS upon delivery at the PORT OF ENTRY.
If said batch of products was determined to have met the SPECIFICATIONS
upon delivery at the PORT OF ENTRY, then AGC shall bear all costs of the
independent laboratory testing. If said batch of the products was
determined not to have met the SPECIFICATIONS upon delivery at the PORT OF
ENTRY, then AGC shall return to VERP or dispose of such quantity of the
products as was determined not to have met the SPECIFICATIONS upon delivery
at the PORT OF ENTRY in such manner as VERP shall direct and at VERP's
expense and VERP shall in such case bear all costs of the independent
laboratory testing.
14.5 Any quantity of the products found not to have met the
SPECIFICATIONS upon delivery at the PORT OF ENTRY will be replaced with
conforming products or VERP may, at its option, credit AGC's account for
the purchase price thereof, it being expressly agreed by the PARTIES that
such replacement or credit shall be the sole and exclusive remedy of AGC
for VERP's delivering Products that did not meet the SPECIFICATIONS upon
delivery at the PORT OF ENTRY.
14.6 AGC shall not make any alteration or permit alterations to be
made to the Products.
14.7 Each of the PARTIES agrees to promptly provide to the other all
clinical and technical information, data, and know-how, which it develops
during the TERM concerning the use and sale of the Products. Each PARTY
shall inform the other immediately of any adverse experience associated
with Products, which comes to its attention.
15. Third Party Claims --
15.1 VERP shall indemnify AGC against claims for death or personal
injury resulting from any proper third party claims, demands, proceedings,
actions, and judgements to the extent determined to have arisen out of and
been caused solely by the fault, negligence, or wrongdoing of VERP in the
manufacture of formulation of Products and provided that AGC shall have
first promptly notified VERP in writing of the existence of any such claim,
demand, proceeding, or action made against AGC and have permitted VERP to
deal with the same in such manner as VERP deems necessary or appropriate.
AGC shall render such assistance as VERP may reasonably request in dealing
with the same and AGC agrees not to settle any such claim or demand or take
any action which would compromise or prejudice VERP's interests relating
thereto without the prior consultation and written consent of VERP,
otherwise AGC shall have been deemed to have waived its indemnification
rights hereunder.
15.2 AGC shall defend, indemnify, and hold VERP harmless from and
against all claims, actions, demands, proceedings, judgements, damages,
losses, costs, expenses (including reasonable attorney's fees and costs),
or other liabilities of any kind which arise out of or are the result of
any fault, negligence, act or failure to act, or misconduct of AGC or any
of its employees, agents, representatives, or sub-distributors, or any
breach or default by it or them of any duty or obligation arising under
this AGREEMENT or under any sub-distribution agreement.
16. Compliance with Laws --
16.1 After such time as risk of loss passes to AGC, AGC shall be
responsible for compliance with all applicable laws and regulations in
relation to the handling, promotion, and resale of the product in the
Territory. AGC will take no action that would cause the export of the
products to violate any laws, rules or regulations of any jurisdiction.
16.2 AGC will comply with laws and regulations of government
authorities in the TERRITORY relating to advertising and labeling of the
products.
5
<PAGE> 6
16.3 VERP shall be responsible for compliance with all applicable laws
and regulations in relation to the products prior to such time as risk of
loss passes to AGC.
17. Governmental Approvals --
17.1 AGC will in its own name and at its own cost, obtain and maintain
such registrations, approvals, and consents from governments and health
authorities in the TERRITORY, including the performing of required clinical
trials or studies, as may be necessary to permit or facilitate the lawful
handling, promotion, and resale of products in the TERRITORY. In addition,
AGC may in its own name and at its own cost, obtain and maintain such
registrations, approvals, and consents from governments and health
authorities in the Territory, including the performing of required clinical
trials or studies as may be necessary to permit or facilitate the lawful
handling, promotion, and resale of the Product in the Territory, provided
that such action does not preclude VERP or its licensee or designee from
taking the same action. VERP and its affiliates shall assist AGC's
research, clinical studies and sales in the TERRITORIES.
17.2 AGC represents to VERP that it has or shall obtain all
registrations, approvals, and consents from governments in the TERRITORY as
are necessary to permit or facilitate the lawful handling, promotion, and
resale of Products in the TERRITORY. AGC will promptly notify VERP if any
such registration, approval, or consent lapses or if any additional such
registration, approval or consent becomes necessary.
17.3 VERP will provide, in advance of implementation, written details
of any and all significant changes to the manufacturing, processing,
handling, and packaging of the Product delivered to AGC, for the purpose of
permitting AGC to notify and obtain appropriate regulatory approvals for
said changes. VERP will implement said significant changes only after
written confirmation from AGC. Notwithstanding the foregoing, VERP may
unilaterally implement such changes if required to do so by law.
18. Promotion and Distribution Facility --
18.1 AGC will during the TERM maintain an active and efficient sales
and customer service organization with adequately trained personnel for
marketing and selling the products. Subject to VERP's obligation to fill
AGC's confirmed orders, AGC will use all reasonable efforts to maintain an
adequate stock of the product to meet market demand. AGC will use its best
efforts, including adequate financial resources to effectively advertise,
promote, and develop demand for and maximize sales of the Product in the
TERRITORY. VERP agrees to reasonably consult with and advise AGC as AGC may
require from time to time. VERP shall not bear any distribution, promotion,
marketing or clinical costs or expenses in connection with AGC's
undertakings as set forth in this Agreement. Further, the parties agree to
enter into a separate memorandum setting forth the duties, obligations and
responsibilities of the Parties within 120 days from the date of execution
of the Agreement, the substance of which is to assist and facilitate the
construction and operation of said facility.
19. Trademarks --[TO COME]
20. Confidentiality --
20.1 AGC acknowledges that manufacturing of the products is dependent
on confidential proprietary information and production protocols and
formulae owned by VERP. Furthermore, all data provided from VERP to AGC
under this AGREEMENT is deemed confidential and proprietary information of
VERP. AGC agrees to hold in strictest confidence and not to disclose to
third parties or itself use any such information except to the extent
necessary in connection with this AGREEMENT in accordance with the terms
and conditions contained herein.
20.2 AGC's obligations of confidentiality will not apply to the extent
that it is required to disclose or use the information in question in
obtaining governmental registration, consents, or approvals hereunder or to
the extent necessary to engage in clinical trials and/or distribute the
Product; provided that AGC shall, to the extent possible, inform the
PERSONS to whom such information is disclosed of the confidential nature of
such information and request confidential treatment of such information.
6
<PAGE> 7
20.3 VERP hereby agrees to hold in strictest confidence and not to
disclose to third parties or itself use (except to the extent necessary in
connection with this AGREEMENT) any information or reports delivered by AGC
to VERP and any information designated in writing as confidential by AGC of
which VERP becomes informed during the TERM.
20.4 Upon termination of this AGREEMENT for any reason, each PARTY
will promptly return to the other PARTY all confidential information of the
other PARTY in its possession or control.
20.5 The confidential obligations in Section 12.1 and 12.3 shall not
apply to confidential information received by one PARTY from the other to
the extent:
(a) it was known to the receiving PARTY before receipt from the
other PARTY and can be documented as such by competent proof by the
receiving PARTY;
(b) it was in the public domain at the time of its receipt or
entered the public domain through no fault of the receiving PARTY;
(c) it was disclosed to a PARTY by a third party who was under no
obligation of confidentiality to the other PARTY;
(d) disclosure of such information is required by law; or
(e) necessary to enforce this AGREEMENT.
21. Force Majeure --
21.1 A PARTY shall not be held liable to the other for failure of any
performance or obligation required of that PARTY under this AGREEMENT to
the extent such is prevented by reason of force majeure including, but not
limited to, industrial disputes, strikes, lockouts, riots, mobs, floods,
fires, or other natural disasters or Acts of God, wars declared or
undeclared, embargo, or events caused by reason of laws, regulations, or
orders by any governments, governmental agency, or instrumentality or by
any other supervening unforeseeable circumstances whatsoever beyond the
control of either PARTY.
21.2 The PARTY affected by an event of force majeure shall give prompt
written notice to the other PARTY with description in reasonable details of
the same. A PARTY shall be excused from performance only to the extent
affected and only for the period of the force majeure.
22. Default Termination --
22.1 Either of the PARTIES shall have the right without prejudice to
any rights exercisable or claims for damage or other relief, to terminate
this AGREEMENT immediately for cause by written notice to the other PARTY
in any of the following events:
(a) if the other PARTY applies for judicial or extra-judicial
settlement with its creditor, makes an assignment for the benefit of its
creditors, voluntarily files for bankruptcy, or otherwise discontinues
business; or the entry of an order or decree adjudging the other PARTY
bankrupt or insolvent, or appointing a receiver or trustee in
bankruptcy, or commencing liquidation or dissolution proceedings, and
the continuance of any such order or decree unstayed and in effect for a
period of 60 consecutive days; or
(b) if the other PARTY breaches any of the material terms or
conditions of this AGREEMENT and shall fail to fully cure such breach
within 30 days of receipt of written notice from the PARTY asserting the
breach; provided that the cure period for any default in payment by AGC
for purchased products shall be fifteen business days from VERP's
written notice of default. If the breach, for any reason, is caused
beyond the control of the defaulting party with the exception of payment
by AGC, then reasonableness shall be applied in the time needed to cure
the defect.
22.2 After termination of this AGREEMENT for any reason, AGC shall
have the right to buy a sufficient quantity of products from VERP, on the
terms of this AGREEMENT, to meet all AGC's
7
<PAGE> 8
supply obligations in existence at the time of termination which amounts
shall be documented and shall meet VERP's humanitarian and patient use
criteria.
22.3 Upon termination of this AGREEMENT for any reason, VERP shall,
subject to Section 22.2, have the right to repurchase, and AGC agrees to
sell to VERP, any or all remaining stock of the products which is no longer
required to meet all of AGC's supply obligations in existence at the time
of termination. VERP may only purchase products which at such time still
comply with the SPECIFICATIONS, have a remaining shelf life of at least 12
months, and which remain unsold by AGC as of the effective date of said
termination. The repurchase price shall be the same price at which AGC
originally purchased said Product. VERP shall exercise its repurchase right
by indicating its intent to do so in writing to be given no later than 30
days after the effective date of termination and shall have the right to
inspection of Product and data.
22.4 During the TERM and for a period of two (2) years after the date
of termination of this AGREEMENT, AGC and its affiliates will not engage
in, or PARTICIPATE IN any other business or organization which engages in
the manufacture, sale, or distribution of interferon products (other than
the products during the TERM); provided that this Section 12.4 shall not be
applicable if AGC shall rightfully terminate this AGREEMENT pursuant to
Section 22.4. AGC agrees that the provisions of this Section 22.4 are
necessary and reasonable to protect VERP and that if any restriction
contained in this Section 22.4 shall be deemed to be invalid, illegal, or
unenforceable by reason of the extent, duration, or geographical scope
thereof, or otherwise, then the arbitrator or court making such
determination shall have the right to reduce such extent, duration,
geographical scope or other provisions hereof, and in its reduced form such
restriction shall then be enforceable in the manner contemplated hereby.
22.5 The failure of either PARTY at any time to enforce any of the
terms or provisions or conditions of this AGREEMENT or exercise any right
hereunder shall not constitute a waiver of the same or affect that PARTY's
right to enforce or exercise any right hereunder shall not constitute a
waiver of the same or affect that PARTY's right to enforce or exercise the
same.
23. Notices and Communications --
23.1 All notices in connection with this AGREEMENT shall be in writing
and be in the English language, as shall all other written communications
and correspondence, and may be given by personal delivery, prepaid
registered airmail letter, telecopier, or telegram addressed to the PARTY
required or entitled to receive the same at its address or telefax number
set out below, or to such other address or telefax number as such PARTY
shall have designated by like notice to the other PARTY. Notice of
termination of this AGREEMENT if given by telecopier or telegram shall be
deemed the first business day in the city of destination following the
dispatch and if given by prepaid registered airmail letter only, it shall
be deemed served seven (7) days after the date of posting.
23.2 Notices to VERP shall be to:
Viragen (Europe) Ltd., 865 SW 78th Avenue, Suite 100,
Plantation, FL 33324-3212.
Notices to AGC shall be to:
AGC, Adamjee House, 1.1 Chundrigar Road, Karachi, Pakistan.
24. Amendments --
24.1 No modification or amendments to this AGREEMENT shall be binding
upon either PARTY unless in writing signed by the duly authorized
representatives of both PARTIES hereto.
25. Assignment --
25.1 Neither PARTY shall assign this AGREEMENT or any of its rights,
nor delegate any of its duties or obligations, except to an AFFILIATE,
without the prior written consent of the other. It is understood and agreed
by both Parties that AGC has the right to form a new corporation and
transfer its rights under this Agreement to the newly formed corporation.
Any assignment or delegation in violation of this provision shall be deemed
null and void.
8
<PAGE> 9
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JUN-30-1999
[PERIOD-START] JUL-01-1998
[PERIOD-END] JUN-30-1999
[CASH] 124,335
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 380,795
[PP&E] 4,698,360
[DEPRECIATION] 559,878
[TOTAL-ASSETS] 4,909,596
[CURRENT-LIABILITIES] 963,790
[BONDS] 131,973
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 160,672
[OTHER-SE] 2,319,828
[TOTAL-LIABILITY-AND-EQUITY] 4,909,596
[SALES] 0
[TOTAL-REVENUES] 49,762
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 4,956,249
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 23,966
[INCOME-PRETAX] (4,930,453)
[INCOME-TAX] 0
[INCOME-CONTINUING] (4,930,453)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (4,930,453)
[EPS-BASIC] (0.46)
[EPS-DILUTED] (0.46)
</TABLE>
<PAGE> 10
26. Arbitration --
26.1 All disputes arising out of or in connection with this AGREEMENT
shall be finally settled under the Rules of Arbitration then in effect with
hearing to be held in London, England. The arbitration shall be conducted
in the English language. Judgement upon the award rendered by the
arbitrators may be entered with, issued, and enforced by any court having
competent jurisdiction including the U.S. and/or the U.K.
27. Clinical Studies --
27.1 The parties shall enter into a separate Memorandum of Cooperation
within 120 days from the date of execution hereof which shall set forth the
duties, responsibilities and obligations of the respective Parties
regarding clinical trials to be conducted within the Territory.
28. Different Size Products --
28.1 As soon as reasonably practicable, VERP will seek FDA and/or U.K.
or E.U. approval to manufacture and export the Product to AGC. If VERP
obtains such approval, the PARTIES agree to negotiate in good faith an
amendment to this AGREEMENT with respect to the Products. Such amendment
would likely, among other things, change the definitions of AVERAGE NET
SELLING PRICE.
29. Language --
29.1 The PARTIES have requested that this AGREEMENT and all related
documents be in English.
30. New Products --
AGC shall have the first right of refusal to enter into a Manufacture
and/or Distribution Agreement for any New Product(s) produced and/or
distributed by VERP. AGC shall have ninety (90) days from the date of
Notice of "Availability" of Manufacture or Distribution of new Product(s)
License to negotiate the terms and conditions of said manufacture for
Distribution Agreement which shall conform to VERP's Standard Product
Manufacturing and Distribution License for other licensed territories.
31. This Agreement shall be subject to the approval of the Board of
Directors of Viragen (Europe) Ltd. (VERP).
EXECUTED by the PARTIES as follows:
<TABLE>
<S> <C>
ADAMJEE GROUP OF COMPANIES VIRAGEN (EUROPE) LTD.
("AGC") ("VERP")
By: /s/ A. GAFFAR ADAMJEE By: /s/ GERALD SMITH
------------------------------------------------- -------------------------------------------------
Name: A. GAFFAR ADAMJEE Name: GERALD SMITH
---------------------------------------------- ----------------------------------------------
Title: Chairman Title: President
----------------------------------------------- -----------------------------------------------
Date: 19th Nov. 1998 Date: 11/16/98
----------------------------------------------- -----------------------------------------------
</TABLE>
9
<PAGE> 1
EXHIBIT 10(xii)
LETTER OF INTENT
This Letter of Intent is an addendum to the Supply and Distribution
Agreement (SDA) signed on the 2nd of July 1999 between Viragen (Europe) Ltd., a
Delaware corporation, having its offices at 865 SW 78th Avenue, Plantation,
Florida 33324-3212 ("VERP") and the DROGSAN Healthcare, a company incorporated
under the laws of Turkey having its offices at Oguzlar Mah, 56 Sok, No. 7/B
Balgat 06520, Ankara, Turkey ("DSH").
DSH agrees to enter into this Letter of Intent with VERP under the terms of
the attached SDA. It is understood that at this time both parties will
incorporate those areas of the SDA that require additional data and information
as soon as possible by mutual agreement.
Both parties agree that in the event the remaining areas of the SDA are not
agreed upon by both parties and finalized by June 30, 2000, then this Letter of
Intent will require mutual agreement to extension. If an extension is not agreed
upon prior to June 30, 2000, the terms of paragraph 20 of the SDA relating to
confidentiality shall survive.
Executed by the parties as follows:
<TABLE>
<S> <C>
DROGSAN Healthcare (DSH) Viragen (Europe) LTD. (VERP)
By /s/ N.M. EMRITTE By /s/ GERALD SMITH
-------------------------------------------------- --------------------------------------------------
Name NIZAM M. EMRITTE Name GERALD SMITH
---------------------------------------------- ----------------------------------------------
Title Business Development Manager Title President
------------------------------------------------ -----------------------------------------------
Date 2nd July, 1999 Date 7/9/99
------------------------------------------------ ------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE OWNED
INCORPORATION BY REGISTRANT
--------------- ----------------
<S> <C> <C>
Viragen (Scotland) Ltd.(1).................................. Scotland (UK) 100%
Viragen (Germany) GmbH(2)................................... Germany 100%
</TABLE>
- ---------------
(1) Incorporated January 17, 1995.
(2) Acquired November 14, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 124,335
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 380,795
<PP&E> 4,698,360
<DEPRECIATION> 559,878
<TOTAL-ASSETS> 4,909,596
<CURRENT-LIABILITIES> 963,790
<BONDS> 131,973
0
0
<COMMON> 160,672
<OTHER-SE> 2,319,828
<TOTAL-LIABILITY-AND-EQUITY> 4,909,596
<SALES> 0
<TOTAL-REVENUES> 49,762
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,956,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,966
<INCOME-PRETAX> (4,930,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,930,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,930,453)
<EPS-BASIC> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
