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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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(MARK ONE)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-17827
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VIRAGEN (EUROPE) LTD.
(Exact name of registrant as specified in its charter)
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DELAWARE 11-2788282
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
865 SW 78TH AVENUE, SUITE 100,
PLANTATION, FLORIDA 33324
(Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (954) 233-8377
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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 21,
1998 was approximately $19,083,000.
As of September 21 1998, the Company had outstanding 7,116,059 shares of
common stock.
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VIRAGEN (EUROPE) LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1998
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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 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...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 13. Certain Relationships and Related Transactions.............. 21
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 22
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PART I
ITEM 1. BUSINESS
GENERAL
Viragen (Europe) Ltd., a Delaware corporation ("VEL" or the "Company")
operating through its wholly-owned subsidiary, Viragen (Scotland) Ltd., ("VSL"),
a Scottish private company organized in 1995, is engaged in the manufacture and
sale of certain immunological products for commercial application in the
European Union ("EU") and other countries outside of the United States. The
Company is a 70% owned subsidiary of Viragen, Inc. ("Viragen") (NASDAQ NMS
Symbol "VRGN"). Through a license granted by Viragen Technology, Inc. ("VTI"), a
wholly-owned subsidiary of Viragen, in July 1995, VSL secured certain exclusive
rights applicable to the EU and certain non-exclusive rights throughout the
world, but specifically excluding the United States and its territories, to
engage in the manufacture and sale of certain immunological products,
particularly human leukocyte -- derived interferon, ("Natural Interferon")
including Omniferon(TM), Viragen's natural human leukocyte-derived interferon
product (the "Product"), for antiviral and therapeutic applications. Natural
Interferon is a protein substance that inhibits malignant cell growth without
materially interfering with normal cells. Natural Interferon stimulates and
modulates the human immune system and, in addition, impedes the growth and
propagation of various viruses. Omniferon is the trade name for the Product in
injectable form. The Product has not been approved by the EU governmental or
regulatory agencies nor by the United States Food and Drug Administration
("FDA"). Such approvals are expected to require several years of clinical trials
and substantial additional funding with no assurance such approvals will be
obtained. In March 1998, the Company commenced safety and preclinical trials of
Omniferon in Europe and intends to commence clinical trials of the Product in
the first calendar quarter of 1999. Following the completion of clinical trials,
the Company intends to seek regulatory approvals for various uses of Omniferon
within the EU. Viragen has assembled an advisory committee consisting of
scientists, medical researchers and clinicians to assist Viragen and the Company
in successful development, regulatory compliance matters and its applications to
the EU regulatory authorities.
In November 1997, Viragen (Germany) GmbH ("VGG"), a German corporation, was
formed to conduct operations on behalf of the Company in Germany, primarily the
acquisition of buffycoats. In March 1998, VGG entered into an agreement with the
German Red Cross providing it with access to buffycoats, under which agreement,
a limited number have been supplied for testing purposes. Currently, VGG has no
other operations.
BACKGROUND
Viragen (Europe) Ltd., a Delaware corporation, was organized in November
1985, initially to acquire other companies with active operations sufficient to
establish a viable business for the Company. These efforts proved unsuccessful
and by 1995 the Company became essentially dormant. In September, 1995, the
Company (whose corporate name was then "Sector Associates, Ltd.") entered into
an Agreement and Plan of Reorganization to acquire 100% of the outstanding stock
of Viragen (Scotland) Ltd., a Scottish private company organized in 1995, in
exchange for the distribution to Viragen, Inc., owner of 100% of the shares of
VSL, of newly issued shares of Convertible Preferred Stock of the Company. The
shares issued represented approximately 94% of the then issued and outstanding
capital stock interest of the Company. As the previous owners of VSL received
voting control of the Company in this transaction, the stock exchange
represented a reverse acquisition.
Effective May 2, 1996 the Company's name was changed from Sector
Associates, Ltd. to Viragen (Europe) Ltd., the par value of the Common Stock was
reduced from $.10 per share to $.01 per share and the Common Stock was reverse
split one for fourteen (1:14).
OPERATIONS
VSL was organized by Viragen to manufacture and distribute Omniferon and
related products in the EU and other countries outside the United States.
Viragen has transferred patented and related proprietary rights
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associated with the production of its natural human leukocyte-derived interferon
and related technology to VSL for this purpose. The Scottish Government's
National Blood Transfusion Service ("SNBTS") has contracted (the "Scottish
Agreement") to provide source leukocytes, a critical material, personnel and
certain access to capital equipment in sufficient scale to accommodate the EU
clinical trials, and subject to the successful completion of clinical trials,
commercial sales in amounts to be agreed upon by the parties and the European
regulatory authorities.
During fiscal 1998, the Company was notified that due to concerns over the
possible presence of New Variant Creutzfeld-Jacob disease ("nvCJD"), also known
as Mad Cow disease, in the United Kingdom ("UK") blood supply, human leukocytes
collected in Scotland, including those intended to be supplied under the
Scottish Agreement, would not be approved for use in the Company's planned
clinical trials or potential commercial production until the UK and/or EU
authorities are satisfied that the risk of nvCJD contamination had been
minimized. The Company intends to utilize leukocytes produced in Germany under
Viragen's German Red Cross 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.
Capital investments made through a series of private placements completed
in 1996, provided the Company with the capital necessary (i) for the
construction of its manufacturing facilities in Scotland; (ii) for the purchase
of laboratory equipment at the Company's Scottish facilities; and (iii) to
provide working capital. In February 1998, the Company commenced safety and
preclinical trials of the Product, however, the Company will require additional
financing to complete the clinical trials necessary in obtaining EU approvals
for distribution of the Product. Clinical testing toward EU approval is an
expensive process which is expected to take several years to accomplish with no
assurance that such approvals will be obtained.
LICENSING AGREEMENTS
Through a license granted on July 12, 1995, by VTI, VSL secured certain
exclusive rights applicable to the EU countries and non-exclusive rights
throughout the world (excluding the United States and its territories) to engage
in the 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.
On July 20, 1995, VSL entered into a License and Manufacturing Agreement
(the "Scottish Agreement") with the Common Services Agency of Scotland ("the
Agency"), an agency acting on behalf of the SNBTS. The Agency has agreed to
participate in the manufacture and supply of VSL's natural human interferon
product, Omniferon for exclusive distribution within the EU and non-exclusively
worldwide (excluding the United States and its territories) in return for
certain fees and preferential access to the Product for Scottish and UK patients
at a preferential price. The Scottish Agreement provides that the Agency will
provide the Company with the services of skilled technicians, scientists and
regulatory compliance expertise, and the Company will reimburse the Agency for
the cost of these services. In addition, the Agreement further provides that
once in production, the Agency is entitled to their costs plus an additional 25%
for product manufactured for clinical trials, cost plus 40% on product
manufactured for sale prior to the new drug application approval, and cost plus
50% for product manufactured following regulatory approval. It was considered
critical to VSL's operations and to planned clinical trials to secure a
sufficient qualified source of human source leukocytes, a critical component in
the manufacture of the Product. VSL was a newly formed corporation which
commenced operation concurrent with the execution of its agreement with SNBTS.
The term of the Scottish Agreement is for a five-year period with two
additional five-year extension terms exercisable at the option of VSL. The
Scottish Agreement also contains provisions protecting the proprietary rights of
VSL and Viragen and the preclusion of certain competitive activities by SNBTS.
Pursuant to the Scottish Agreement, VSL and VTI will provide SNBTS with
full access to the proprietary technology and related specialized equipment,
provide suitable training to SNBTS's personnel regarding proprietary processes,
defray costs associated with securing permits and regulatory approvals, and
augmenting SNBTS's facilities, as necessary, to manufacture the Product within
EU regulatory guidelines. SNBTS will receive reduced compensation for Product
manufactured for use in clinical trials in the EU, for
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Product manufactured for sale prior to obtaining new drug application approval,
and for sales following such approval, at varying percentages in relation to
manufacturing costs. Product manufactured and utilized for humanitarian purposes
or for medical use by Scottish patients will be preferentially priced under a
specific allocation to be agreed upon. See also "Intellectual Property."
CLINICAL TRIALS
The Company commenced safety and preclinical studies of the Product in
March 1998, however in order to commence clinical trials, the EU regulatory
authorities must approve the Scottish manufacturing facility, method and
techniques of manufacture, as delineated in Standard Operating Procedures
("SOPs") and the parameters of the clinical trials. Viragen, on behalf of the
Company and VSL, has engaged recognized consultants including Inveresk Research,
a recognized international contract research organization and the Regulatory
Affairs department within SNBTS. Both of these organizations have extensive
experience in the EU regulatory approval process. SNBTS will provide its best
efforts, working in conjunction with the Company, to obtain a UK current Good
Manufacturing Practices ("cGMP") manufacturing license and subsequent Product
approval. At such time as a manufacturing license is obtained for the Product,
Viragen may then seek U.S. FDA manufacturing approval of the Scottish
manufacturing facility. There can be no assurance that the EU regulators will
approve the manufacturing facility or permit clinical testing and distribution
of the Product within the EU, or that the FDA will license or approve the
Scottish manufacturing facility or the Product for clinical trials and
subsequent distribution in the United States.
THE PRODUCT
Since its incorporation, Viragen has focused its efforts on the research
and potential commercial application of human leukocyte-derived multi-species
interferon-alpha. Natural interferon is one of the body's natural defensive
responses to foreign substances such as viruses, and is so named because it
"interferes" with viral growth. Interferon consists of protein molecules that
induce antiviral, antitumor and immunomodulatory responses within the body.
Medical studies have indicated that interferons may inhibit malignant cell and
tumor growth without affecting normal cell activity.
There are two basic types of interferon-alpha, differentiated primarily by
their method of manufacture and resultant composition. The first, as produced by
the Company, is natural, human leukocyte-derived multi-species alpha interferon
("Natural Interferon") produced by stimulated human white blood cells. The human
white blood cells are cultivated and stimulated by the introduction of a
harmless agent that induces the cells to produce Natural Interferon which
contains multiple subtypes. The Natural Interferon is then extracted and
purified to produce a highly concentrated product for clinical use. The second,
recombinant alpha interferon, is a genetically-engineered synthetic interferon
produced by recombinant DNA techniques ("Synthetic Interferon") which usually
contains a single subtype.
Clinical studies suggest that there may be significant therapeutic
differences between the use of Natural Interferon and Synthetic Interferon.
Viragen has been advised that studies have found that treatment with Synthetic
Interferon in certain cases may cause an immunological response (the production
by the human immune system of neutralizing and/or binding antibodies) that
reduces the effectiveness of the treatment or which may cause adverse side
effects. The Company believes that the production of neutralizing and/or binding
antibodies will be virtually non-existent in patients treated with Natural
Interferon. This belief is supported by published scientific data and evaluation
of side effect profiles resulting from the Company's limited studies.
Furthermore, primarily due to other differences including dosage requirements
(less of the natural product may be required to treat the subject diseases), the
side effects of treatment with Natural Interferon, in certain instances, may be
less severe.
THE INTERFERON INDUSTRY
Prior to 1985, Natural Interferon was the only type of interferon
commercially available. Research institutions and other biomedical companies
similar to the Company were working to solve the manufacturing problems
associated with commercial scale production of Natural Interferon. In 1985,
Hoffman-LaRoche,
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Inc. and Schering-Plough Corporation, two major pharmaceutical companies,
successfully developed Synthetic Interferon using DNA technology, and
subsequently, received FDA approval to produce and market their recombinant
alpha interferon products for the treatment of hairy cell leukemia, hepatitis B
& C and Kaposi's Sarcoma ("KS"), 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, and most clinical
studies thereafter were based on a synthetic product.
Hoffman-La Roche, Inc., Schering Plough Corporation, Glaxo-Wellcome,
Biogen, Inc., Chiron Corp., Barlex Laboratories and Ares-Serono are producing,
selling and conducting clinical trials with recombinant interferons (alpha and
beta) and other immunological products for a number of indications including
certain cancers, viral infections, multiple sclerosis ("MS"), HIV/AIDS, KS and
hepatitis B and C.
In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of Natural Interferon, received FDA
approval in 1989 to sell, in injectable form, their natural interferon product
for genital warts. They continue to conduct FDA sanctioned clinical trials for
additional indications.
APPLICATIONS OF INTERFERON
Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to certain viral infections. The Company
believes interferons can arrest the progress of certain viral based infections,
reducing symptoms and disease related complications with a minimum of side
effects.
Hepatitis C
The hepatitis C virus (HCV) 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 the Company's scientific
staff and advisors, the Company believes that its 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 ("HBV") 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 HBV 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 FDA approved drug for HBV and has
been found to be an efficacious treatment in some cases. The Company believes
that Omniferon may also prove effective in the treatment of HBV.
Multiple Sclerosis
In 1988, following State of Florida regulatory approval for use of the
Viragen's product by HRS 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. Pursuant to the 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 of 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, the Company's interferon product provided favorable results
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in the treatment of patients afflicted with relapsing/remitting, relapsing
progressive and chronic progressive MS. 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 the Company
titled Natural Alpha Interferon in Multiple Sclerosis: Results of Three
Preliminary Series appearing in the Journal of International Medical Research in
1996.
Chronic Myelogenous Leukemia
Chronic Myelogenous Leukemia ("CML") is one of a group of diseases called
myeloproliferative disorders and is usually recognized by a distinctive
cytogenetic abnormality, the Philadelphia Chromosome. The current treatment for
CML 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 FDA promulgated current Good Manufacturing Practice ("GMP")
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 HRS 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., ("Quantum") which provided to Viragen $330,000 toward to the
cost of the study. Quantum, a subsidiary of Olsten Services Corp., is a national
provider of alternate site therapies and support services for people affected by
chronic disorders, including hemophilia. The study commenced in March 1996,
pursuant to which 35 patients enrolled to receive Alpha Leukoferon for a minimum
of six months in combination with a comprehensive HIV/AIDS treatment program. A
report by a contract research organization detailing the final results of this
study is expected in April 1999.
MANUFACTURE OF INTERFERON
Human source leukocytes ("white blood cells") and a stimulating agent, raw
materials which are readily available to the Company, are needed to produce
human leukocyte-derived interferon. A stimulating agent, harmless to humans, is
introduced into the white blood cell which induces the cell to produce alpha
interferon. The interferon is then separated from other proteins, extracted and
purified.
The Company's Omniferon product is currently being manufactured in its
Scottish facility for use in ongoing animal safety and preclinical studies in
the EU which commenced in March 1998, and for human clinical testing anticipated
to commence in the first 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(TM). Production of Alpha Leukoferon was
discontinued in January 1995.
Production methods developed by Viragen and licensed to the Company, as
well as enhanced methods currently under development (see "Research and
Development", below) could serve to reduce the Company's
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cost of production and, as a result, the eventual market price of the Product.
While production of the natural Product is still believed to be more costly on a
per unit basis than Recombinant Interferon, the Company believes that the
production efficiencies of its technology currently under development and the
possible lower dosage requirements for the Natural Interferon will make the
Product's market price competitive to that of the Synthetic Interferons.
However, there can be no assurances that such new manufacturing technology will
enable the Company to achieve the level of manufacturing proficiency and Product
improvement anticipated by management.
RESEARCH AND DEVELOPMENT
The entire process of research, development and EU regulatory approvals, if
obtained, of a new biopharmaceutical product takes several years and requires
substantial funding. The Company is currently engaged in animal safety and
preclinical studies of Omniferon and anticipates the commencement of clinical
trials during the first calendar quarter of 1999. The Company's present focus is
the continued research and development of Omniferon for the treatment of
hepatitis B and C, Multiple Sclerosis, CML and HIV/AIDS.
Following the receipt of additional funding from the Company's Private
Placements completed in March 1996, the Company's research efforts increased
together with associated costs. Such increases can be expected to continue as
the Company continues its product development and production scale-up efforts.
Research and development costs, excluding the $2,000,000 licensing fee paid and
expensed in 1998, totaled $1,355,592, $314,326 and $56,424 for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively.
INTELLECTUAL PROPERTY
Viragen has recently made substantial advances in its technology and has
recently filed two patents relative to certain production techniques. In July
1995, all of the patented and proprietary technology relating to the Product
owned by Viragen was subsequently transferred to its wholly-owned subsidiary,
VTI, and ultimately licensed to the Company.
Under this License Agreement between the Company and Viragen, the Company
was granted exclusive rights to Viragen's proprietary technologies, including
those technologies covered by patent, including future patents, for all
countries comprising the European Union. In addition, the Agreement granted the
Company the non-exclusive rights to Viragen's technology throughout the world,
excluding the United States and its territories. The Agreement further provides
that the Company will pay Viragen a royalty ranging from 10% to 5% sales, with a
minimum of $2 million per year, subsequently modified to approximately $167,000
per month. The minimum royalty payment has been deferred by Viragen until such
time as the Company has the necessary cash flow to meet this payment. This
Agreement has an initial term of 15 years which automatically renews for two
successive 15 year periods.
United States patents have been issued to others with respect to
genetically engineered and human leukocyte-derived interferon purified to a
certain degree. While the Company believes its licensed technology does not
infringe on existing patents, subject to the extent of such existing patent
claims, Viragen may have to negotiate license agreements with such patent
holders to use such processes and products in the Company's human
leukocyte-derived interferon program. As a result, the Company may be required
to become a party to these license agreements which could have an adverse effect
on the Company's profitability if it is required to pay additional cash
compensation or royalties.
The validity and enforceability of a patent can be challenged by litigation
after its issuances and if the outcome of such litigation is adverse to the
owner of the patent, other parties may be free to use the subject matter covered
by the patent. In addition, the degree of protection afforded by foreign patents
may be different than in the United States. There can be no assurance that
patents now held or any obtained in the future will be of substantial protection
or commercial benefit to the Company. Moreover, because of the progress in
related technology, many of the patents now owned by VTI may be commercially
obsolete.
While Viragen has attempted to protect its proprietary technology, to the
extent that such protections are inadequate, Viragen could lose the benefit of a
part or all of these rights, which, in turn, could have a material
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adverse effect on the Company. Furthermore, to the extent that any of Viragen's
patents or other proprietary technology is challenged or infringed, such
challenges or infringement will likely have an adverse effect on the Company's
License Agreement with VTI and the Company's Scottish Agreement with the Common
Services Agency and SNBTS, as well as on the Company's operations. See
"Licensing Agreements."
REGULATION
The Company commenced preclinical studies of its Omniferon in the EU in
March 1998 and anticipates the commencement of clinical trials in the first
calendar quarter of 1999. The EU regulations specifically provide for the
possibility of more abbreviated preclinical studies for naturally occurring
substances such as the Product than for genetically engineered products.
Accordingly, while there can be no assurance, the Company believes it may
receive a more expeditious review of the various EU processes and clinical
trials prerequisite to market approval.
The Company's activities and the Product and processes resulting from such
activities are subject to substantial government regulation in Scotland, the UK
and within EU member nations. Obtaining regulatory approval for
commercialization of any new pharmaceutical product takes significant time and
capital, involving 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 such as
effectiveness, toxicity, and side effects. Biostatistical analysis of data is
then gathered in such studies, followed by the submission of all information and
data to the regulatory authorities.
In order to secure physical resources, expertise, and a continuing
leukocyte supply for clinical trials and, subject to regulatory approval, the
commercialization of the Product, on July 20, 1995, VSL entered into the
Scottish Agreement with the Common Services Agency in Scotland and the SNBTS.
The SNBTS operates a blood fractionation facility near Edinburgh, Scotland,
located in close proximity to the Company's production facility. SNBTS has the
physical and technical resources to assist in the implementation of the
Company's proprietary technology in the manufacture of Omniferon. The Scottish
Agreement was considered critical for the Company to successfully conduct EU
clinical trials, as well as to provide for expected commercial manufacturing
upon regulatory approval.
During fiscal 1998, the Company received notification that due to concerns
over the possible presence of New Varient Creutzfelt-Jacob disease ("nvCJD"),
also known as Mad Cow Disease, in the UK blood supply, human leukocytes
collected in Scotland, including those intended to be supplied under the
Scottish Agreement, would not be approved for use in the Company's planned
clinical trials or potential commercial production until the European regulatory
authorities are satisfied that the risk of nvCJD contamination of any product
using these leukocytes had been minimized through enhanced testing. The Company
intends to utilize leukocytes produced in Germany under Viragen's 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.
Prior to commencement of clinical trials, the Company's Scottish
manufacturing plant and manufacturing SOPs must be licensed by the EU regulatory
authorities to conduct such trials. The Company has engaged recognized
consulting firms familiar with the EU regulatory process to assist in
submissions prerequisite to EU regulatory approvals. In addition, the SNBTS has
a full time regulatory department that has obtained approval in the EU of
numerous EU blood-derived products. SNBTS will provide its best efforts, working
in conjunction with the Company, to obtain a manufacturing license and
subsequent Product approvals at the conclusion of the EU clinical studies. At
such time as a manufacturing license has been obtained for the Product, Viragen
intends to seek U.S. FDA approval of the Product for clinical trials in the
United States. There can be no assurance that the EU regulatory authorities will
approve the manufacturing facility or permit clinical testing and distribution
of Omniferon in the EU, or that the FDA will license or approve the Scottish
manufacturing facility or the Product for clinical trials and subsequent
distribution in the United States.
Pursuant to the License and Manufacturing Agreement, the Company is
providing SNBTS with full access to proprietary technology and specialized
equipment, providing suitable training as needed to SNBTS
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personnel and defraying all costs associated with securing permits and
regulatory approvals, augmenting the SNBTS's facilities, if necessary, to
participate in the manufacture of Omniferon and securing documentation
substantiating compliance with EU regulatory requirements. SNBTS will receive
compensation for Product manufactured for use in clinical trials in the EU, for
Product manufactured for sales prior to obtaining new drug application approval,
and for sales following such approval, at varying percentages in relation to
costs. 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. The Company has further agreed
to compensate SNBTS for the provision of process documentation for future
production facilities established by the Company.
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 many of which have or plan to expand further 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, viral infections, MS, HIV/AIDS
and hepatitis. Competition is expected to increase in the future based upon the
perceived potential commercial applications for such products. Many of the
Company's competitors have existing programs, more experience in research,
development and clinical testing of pharmaceutical products, and substantially
greater financial, marketing and human resources than the Company. In addition
to the manufacturers of Synthetic Interferons, Interferon Sciences, Inc., a
domestic manufacturer of Natural Interferon received FDA approval in 1989 to
sell, in injectable form, their natural interferon product for genital warts.
They continue to conduct FDA sanctioned clinical trials for additional
indications.
The Company believes 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. The
Company's ability to develop products, complete clinical studies and obtain
governmental approvals in the past had been hampered by a lack of adequate
capital. The Company is not presently a competitive factor in revenue
participation in the biopharmaceutical industry.
EMPLOYEES
As of September 21, 1998, the Company had eight full-time employees,
including Dr. D. Magnus Nicolson, the Managing Director of VSL and Chief
Operating Officer of the Company, an administrative assistant, and six
laboratory personnel. Through the provisions of the Scottish Agreement, the
Company utilizes additional personnel within its own production facility in
Scotland, departments within SNBTS and external consultants as needed. In
addition, the Company has employment agreements with Mr. Gerald Smith, who
serves as the Company's President and Chairman and Mr. Dennis W. Healey, who
serves as the Company's Executive Vice President, Chief Financial Officer,
Treasurer and Secretary. Dr. Jay Sawardeker serves as Chief Executive Officer of
the Company.
ITEM 2. PROPERTIES
Viragen, Inc., the majority stockholder of the Company, currently owns a
mortgage free 14,000 square foot building in Hialeah, Florida, which serves as
Viragen's chief laboratory and research facility in the United States. Viragen
and the Company 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, the Company executed a five year lease with Lothian and
Edinburgh Enterprise Limited ("LEEL") 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 12,000 square feet with
an annual base lease rate of 71,700 UK pounds ($120,000 per year) plus common
area and maintenance charges. The lease further provides for up to four five
year extensions at the option of the Company. As part of the lease agreement,
LEEL provided the Company 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.
The Company considers all of its properties as suitable and adequate to
carry on the Company's business. The Company further believes that it maintains
sufficient insurance coverage on the Company's real and personal property.
ITEM 3. LEGAL PROCEEDINGS
In May 1997, the Company, in the name of Sector Associates, Ltd ("Sector")
was named as a defendant in an action brought in the United States Bankruptcy
Court, Southern District of Florida by the bankruptcy trustee for Florida West
Airlines, Inc. the suit alleged that during the period from December 1993 to May
1994, prior to the Company's reverse acquisition of Sector, Sector received
preferential transfers of approximately $2.1 million. The Company denied that
such transfers were preferential and vigorously defended the claims. This
litigation was settled for $25,000 in July 1998, which the Company believed
represented less than the anticipated costs of further litigation.
In July 1994, an action was filed in the Circuit Court of Dade County,
Florida against the Company (then named Sector Associates, Ltd.) alleging that
Sector Associates, Ltd., prior to the reverse acquisition by Viragen and VSL,
mishandled payment of amounts due to Roy Woods, a secured creditor (ROY WOODS AS
TRUSTEE V. SECTOR ASSOCIATES, LTD.). Specifically, the suit alleges (i) that
Sector collected certain receivables of Drew Communications Group, Inc. in which
the Plaintiff held a security interest, and (ii) 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. The Company has denied the claim and has
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 the Company in this matter and has assumed responsibility for defense
of this lawsuit. Based on the nature of the damages alleged, as well as the
indemnification received from the stockholder defending the lawsuit, management
does not believe that the litigation will result in a material liability to the
Company.
The Company knows of no other material litigation or claims pending,
threatened or contemplated to which the Company is or may become a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's fiscal
year to a vote of security holders through the solicitation of proxies or
otherwise.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is currently traded on the NASDAQ SmallCap
Market under the symbol "VERP." Between April 5, 1996 and December 4, 1996, the
Company's stock traded on the OTC Bulletin Board under the symbol "VERP." The
following table sets forth the high and low bid quotations for the Common Stock
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
1997-1998 PERIOD ---- ---
<S> <C> <C> <C> <C>
First Quarter ended 09/30/97................................ 6 1/4 4
Second Quarter ended 12/31/97............................... 7 3/8 1 7/8
Third Quarter ended 03/31/98................................ 5 5/32 1 15/16
Fourth Quarter ended 06/30/98............................... 4 3
1996-1997 PERIOD
First Quarter ended 09/30/96................................ 25 1/2 14
Second Quarter ended 12/31/96............................... 19 13 1/2
Third Quarter ended 03/31/97................................ 17 1/2 12 1/4
Fourth Quarter ended 06/30/97............................... 13 4 3/8
</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 21, 1998, the approximate number of record holders of the
Company's Common Stock was 110 with an estimated total number of stockholders of
1,200. At that date the closing price of the Common Stock was $2.81 per share.
The Company has not paid any cash dividends on its Common Stock since
incorporation. As the Company is in the development stage, has an accumulated
deficit, and has significant capital requirements in the future and presently
intends to retain future earnings, if any, to finance the expansion of its
business, it is not anticipated that any cash dividends will be paid in the
foreseeable future. Future dividend policy will depend on the Company's
earnings, if any, capital requirements, expansion plans, financial condition and
other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Interest and other income................................. $ 37,474 $ 233,552 $ 73,945
Net loss.................................................. (4,642,126) (859,214) (475,351)
Net loss per average common share outstanding............. (.65) (.12) (.13)
Weighted average shares outstanding and equivalents....... 7,116,059 7,048,967 3,685,705
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Working capital............................................ $ 213,246 $3,197,265 $5,795,786
Total assets............................................... 5,053,272 7,750,737 5,953,949
Long-term debt............................................. 160,043 157,686 --
Stockholders' equity....................................... 1,823,623 6,452,137 5,829,565
</TABLE>
The information in this table has been retroactively restated to reflect a
one-for-fourteen (1:14) reverse stock split in the Company's shares on Common
Stock on May 2, 1996. The weighted average number of
10
<PAGE> 13
shares outstanding includes the assumed conversion of the convertible preferred
shares as of the issuance date, as they were issued with the intention of
granting Viragen control of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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 the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's 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 the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statement. It
is important to note that the Company's actual results could differ materially
from those in such 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 the Company's 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 Form 10-Q, 8-K, 10-K and Annual Reports to the
Stockholders issued by the Company.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect the Company's financial condition and results of operations.
The Company's future success depends in part upon its 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 the
Company or Viragen to protect its intellectual property will be adequate to
prevent misappropriation or that others will not develop competitive
technologies or products. There can be no assurance that any patent owned by the
Company or Viragen, in the future, will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's or Viragen's future
patent applications will be issued with the scope of the claims sought by the
applicant, if at all. Furthermore, there can be no assurance that others will
not develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology or design around possible patents
owned by the Company or Viragen.
LIQUIDITY AND CAPITAL RESOURCES
On December 8, 1995, the Company (then named Sector Associates, Ltd.)
acquired 100% of the stock of Viragen (Scotland) Ltd. ("VSL") for 2,000,000
shares of Series B Convertible Preferred Stock of the Company which, upon
conversion, represented 5,600,000 shares of Common Stock or approximately 94% of
the then issued and outstanding capital stock interest of the Company. As the
stockholders of VSL gained voting control of the Company in this transaction,
they became the acquiring entity and accounting survivor. Accordingly, the
acquisition was accounted for as a reverse acquisition whereby the historical
financial statements reflect those of the accounting acquirer, VSL, not the
financial statements of the legal acquirer, Sector. The historical financial
statements for all periods presented up to December 8, 1995 included herein are
therefore those of the predecessor, or VSL, the accounting survivor of the
reverse acquisition. Moreover, since at the time of the acquisition the legal
acquirer, the Company, was a shell corporation with no operations, stockholders'
equity of the combined entity was recapitalized to reflect the capital structure
of the
11
<PAGE> 14
surviving legal entity and the accumulated deficit of VSL. VSL was organized in
April 1995 by Viragen, Inc. as a Scottish private company to manufacture and
distribute Viragen's Product in the EU and other countries outside the United
States.
Through a license granted by Viragen, VSL's ultimate parent, VSL secured
certain rights to engage in the development, manufacture and distribution of
certain proprietary products and technologies that related to the therapeutic
application of human leukocyte derived multi-species interferon for various
diseases that affect the human immune system. Pursuant to these rights, on July
20, 1995, VSL entered into a License and Manufacturing Agreement with the Common
Services Agency, an agency acting on behalf of the Scottish National Blood
Transfusion Services, ("SNBTS") pursuant to which SNBTS, on behalf of VSL, would
assist in the manufacture of VSL's Product and upon regulatory approval, with
the distribution of the Product in the EU in return for certain fees and
additional rights.
SNBTS has committed to assist in the manufacture of the Product in
sufficient scale to accommodate the EU 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. SNBTS will also cooperate with
the Company in studies relevant to the Product and with eventual production,
clinical trials and distribution. Management considers it critical to the
Company's operations and to planned clinical trials to have secured a sufficient
source of human leukocytes, a critical component in the manufacture of the
Product. VSL was a newly formed company which commenced operations concurrent
with the execution of its agreement with SNBTS.
During fiscal 1998, the Company received notification that due to concerns
over the possible presence of New Varient Creutzfelt-Jacob disease ("nvCJD"),
also known as Mad Cow Disease, in the UK blood supply, human leukocytes
collected in Scotland, including those intended to be supplied under the
Scottish Agreement, would not be approved for use in the Company's planned
clinical trials or potential commercial production until the European regulatory
authorities are satisfied that the risk of nvCJD contamination of any product
using these leukocytes had been minimized. The Company intends to utilize
leukocytes produced in Germany under Viragen's 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.
Pursuant to the provisions of the License Agreement between VSL and
Viragen, a $2,000,000 Initial Prepayment and Deposit was paid to Viragen in June
1997. In September 1997, VSL and Viragen mutually agreed 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 the Agreement, the Initial
Prepayment would have been refunded to VSL. 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 the Company is in the
process of obtaining EU regulatory approval for marketing the licensed
technology. The approval process entails performing preclinical and clinical
research.
The Company initiated a series of Private Placements to accredited
investors to raise capital necessary to complete the planned reverse
acquisition, raise the funding necessary to complete construction of its
Scottish facility and for initial Product testing phases by VSL in Scotland. In
December 1995, the Company completed a Private Placement, raising approximately
$750,000 through the sale of 336,000 units for a purchase price of $2.23 per
Unit. Each Unit consists of 0.71 shares of Common Stock and 2.5 Common Stock
Purchase Warrants having an exercise price of $6.00 per share, representing a
total of 240,000 Shares and 840,000 Warrants. In March 1996, the Company
completed two additional Private Placements, issuing a total of 768,000 shares
of Common Stock and 216,500 Warrants having an exercise price of $12.00 per
share. These offerings yielded net cash proceeds of $5,102,000. The completion
of the Private Placements provided the Company with the initial capital
necessary (i) for the construction of manufacturing facilities in Scotland, (ii)
for the purchase of equipment at the Company's Scottish facilities, (iii) to
provide $2,000,000 minimum royalty to the Company's affiliate, VTI, (iv) to
increase the number of employees of the Company and (v) for general working
capital purposes.
12
<PAGE> 15
The Company commenced safety and preclinical trials of the Product in March
1998, however, the Company will require significant additional financing to
complete clinical trials for the purpose of obtaining EU distribution approval
for the Product. The entire process of research, development and EU regulatory
approvals if obtained, of a new biopharmaceutical product takes several years
and requires substantial funding. The Company's present focus is the continued
development of the Company's Product for the treatment of hepatitis B and C,
Multiple Sclerosis, HIV/AIDS and Herpes.
In November 1996, the Company 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 the Company's 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 the option of the Company. Other
augmenting productive assets located within the SNBTS facility are available to
the Company under the Scottish Agreement.
During fiscal years 1998 and 1997, the Company expended $914,000 and
$3,400,000, respectively, in property, plant and equipment primarily related to
the continued development of its Scottish manufacturing facility. The Company
had also incurred commitments for additional equipment purchases of
approximately $195,000 at June 30, 1998.
The Company anticipates additional future losses at it enters into safety
and preclinical and clinical trials. Accordingly, Viragen has agreed to provide
the Company the working capital necessary to fund operations through June 30,
1999. Advances from parent at June 30, 1998 and 1997 represent cash advanced by
Viragen. The amount is non-interest bearing. At June 30, 1998, Viragen has
agreed to defer repayment of the intercompany advances through June 30, 1999.
Viragen has also agreed to defer the $166,667 minimum monthly payments due under
the Licensing Agreement that begin November 1, 1998 until the Company is able to
fund this obligation. Accordingly, management believes that its working capital
currently on-hand and the additional capital to be provided by Viragen is
adequate to maintain its Product development operations. Significant additional
funding will be required to complete the clinical trials and administrative
filings necessary to apply for final EU regulatory approvals.
RESULTS OF OPERATIONS
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 resulting primarily from the payment of a $2 million Initial
Royalty Prepayment and Deposit to Viragen in June 1997 pursuant to the License
Agreement between VSL and Viragen (see Liquidity and Capital Resources above),
operational losses of $4,642,126 and expenditures associated with the continued
equipping of the Company's laboratory and manufacturing facility in Scotland.
Research and development costs totaled $1,355,592 for the year, an increase
of $1,041,266 over the previous year. This sharp increase is attributable to
significantly expanded development and scale-up projects associated with the
transfer of technology from the Company's parent, Viragen, relating to the
Company's Omniferon product. Components of this increase during fiscal 1998
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 SNBTS under
the Scottish Agreement of $200,100. Research and development costs will continue
to increase over preceding periods as the Company continues its process
development refinements and scale-up projects prior to the planned commencement
of clinical trials of the Product scheduled for the first quarter of calendar
1999.
Licensing expense of $2,000,000 represents the $2 million Initial Licensing
payment and Deposit paid by the Company to Viragen pursuant to the provisions of
the License Agreement between VSL and Viragen. The $2 million was paid in June
1997. The Company will be required to incur a minimum $2 million of licensing
13
<PAGE> 16
expenses annually for the duration of the License Agreement. Viragen, however,
has agreed to defer payment of the minimum monthly licencing fee due commencing
November 1, 1998, until such time as the Company is able to fund this payment.
General and administrative expenses increased sharply during the year
totaling $1,066,825 for the year compared to $757,786 for the preceding year.
This increase between the periods reflects an increase in the administrative
support functions associated with establishment of the Company's 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
the Company's German subsidiary, as well as the settlement of litigation
previously disclosed. 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 the Company's Scottish manufacturing
facility.
The increase in interest expense reflects a full years interest on the
$166,000, 8.68% per annum working capital loan obtained from the Lothian and
Edinburgh Enterprise Limited obtained in November 1997.
The increase in depreciation expense was due primarily to the acquisition
and commencement of utilization of laboratory equipment in the Company's
Scottish laboratory and manufacturing facility during fiscal 1997 and 1998.
Depreciation expense will continue to increase over comparable periods of the
preceding year as the Company continues its process development and scale-up
projects related to its Omniferon product.
1997 Compared to 1996
Income for fiscal 1997 of $233,552 represents interest earned for an entire
year on the investment of Private Placement proceeds (see "Liquidity and Capital
Resources" above) completed during fiscal 1996. Interest income for fiscal 1996
of $73,945 represents the return on similar investments for a portion of that
year.
Research and development costs during the year totaled $314,326, an
increase of $257,902 over the fiscal 1996 total. This increase reflects a full
year of expenditures associated with development projects relating to the
transfer of technology from the Company's parent, Viragen, Inc., begun in fiscal
1996, related to the Company's Omniferon product. Components of the increase
include $103,800 in scientific professional fees paid to SNBTS, up from $32,500
paid the previous year, increases in laboratory supplies expense and laboratory
equipment rentals of $100,700 and $29,600, respectively, and increases in
scientific salaries and travel expenditures associated with the transfer of
technology.
General and administrative expenses increased significantly between the
periods, totaling $757,786 for fiscal 1997, representing a $266,638 (54%)
increases over the previous year. This increase between the periods represents a
full year of administrative support functions, begun in fiscal 1996, associated
with the establishment and construction of the Company's laboratory and
manufacturing facility in Scotland and related technology transfer activities.
Components of this increase include higher administrative salaries and related
payroll taxes between the periods of $231,400, including a full year's salary
for the Company's Managing Director in Scotland, an increase in legal and
accounting fees of approximately $20,000 associated with facility construction
agreements and related mandated reporting requirements, facility rental expenses
with related utilities and services totaling $39,400, and a general increase in
all administrative support functions including travel expenses associated with
the establishment of the Scottish facility. These increases were offset by a
reduction in compensation expense of $243,000 resulting from stock option
issuances in fiscal 1996, not recognized during fiscal 1997.
Interest expense recognized in fiscal 1997 reflects the Company's 100,000
UK pound (US$166,000) working capital loan obtained from Lothian and Edinburgh
Enterprises (see Item 2 "Properties").
The increase in depreciation expense reflects a full year of asset
utilization in fiscal 1997 associated with the Company's Scottish operations
commenced during the prior year.
14
<PAGE> 17
YEAR 2000
The Company 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 the Company is dependent.
The Company relies heavily on computerized laboratory equipment both for its
ongoing research and production scale-up projects as well as computer controlled
commercial scales manufacturing equipment in place in the Company's Scottish
facility. In addition, the Company, through strategic alliance and supply
agreements currently in place, is 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.
The Company will utilize 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 the Company's Year 2000
compliance program began in the fourth fiscal quarter of 1998. Due to the
limited size of the Company's administrative staff, it is expected that most of
this work will be performed by outside contractors retained specifically for
this project. The Company expects to complete its internal Year 2000 project by
March 1999. The total estimated cost to the Company to complete its internal
Year 2000 project is $30,000 to $40,000, including projected hardware
replacements indicated. Funding for the evaluation and correction phases will be
provided from general working capital.
The Company has contacted certain external third parties, including raw
material vendors and scientific equipment manufacturers considered critical to
its ongoing operations to discuss and evaluate their own compliance programs.
After evaluation of third party responses during the quarter ended March 31,
1999, the Company will prepare a contingency plan to mitigate third party Year
2000 issues, if necessary.
The costs and projected completion dates of the Company's Year 2000
compliance program is based on management's best estimates and is dependant in
large part upon compliance programs of external third parties or scientific
equipment and software vendors over whom the Company has no direct control.
Accordingly, the inability of the Company or critical vendors to meet Year 2000
compliance deadlines could have a material adverse impact on the Company's
operations product development, clinical trial or commercial manufacturing
standpoint, negatively affecting its financial condition, results of operations
and cash flows.
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......................... 68 Chairman of the Board 1995
President 1995
Director of Viragen (Scotland) 1995
Limited
Robert H. Zeiger..................... 54 Former Executive Officer 1996
Former Operating Officer 1996
Director of Viragen (Scotland) 1995
Limited
Dr. Jay Sawardeker................... 60 Chief Executive Officer 1998
Director 1997
Dennis W. Healey..................... 50 Executive Vice President 1996
Treasurer, Secretary and Director 1996
Director of Viragen (Scotland) 1995
Limited
Director 1996
Dr. Magnus Nicolson.................. 38 Managing Director of Viragen 1996
(Scotland) Limited
Director 1997
</TABLE>
The Company's directors are collectively elected at the annual meeting of
stockholders and hold office for one year and until their successors are elected
and qualified. The Company's officers are appointed by the Board of Directors
and serve at the pleasure of the Board.
Set forth below is a biographical description of each director and
executive officer of the Company.
GERALD SMITH, in accordance with the provisions of the reorganization by,
between and among the Company, Viragen, Inc., and Viragen (Scotland) Limited,
became the President and Chairman of the Board of Directors of the Company on
December 8, 1995. Mr. Smith has also served as a Director of Viragen (Scotland)
Limited since its inception in April 1995. Since February 5, 1993, Mr. Smith has
served as a Director of Viragen, Inc., the majority stockholder of the Company,
and on May 12, 1993, Mr. Smith became President of Viragen. In June 1994, Mr.
Healey relinquished his position as Chairman of the Board of Directors of
Viragen in favor of Mr. Smith. Since 1982, he was a Principal Stockholder,
President, Chief Executive Officer and Director of Business Development Corp.
("BDC") of Miami, Florida, which has served as a managing entity and consultant
to several high technology ventures including Compupix Technology Joint Venture
of Boca Raton, Florida. In 1988, Mr. Smith was the Founder, President and a
Director of Club-Theatre Network, Inc. of Boca Raton, Florida, an audience
interactive private video theater. Mr. Smith sold his interest in that company
in March 1989. From August 1991 to December 1991, Mr. Smith was the Chief
Executive Officer of Electronic Imagery, Inc. located in Pompano, Florida, a
company engaged in the development of imaging software. Mr. Smith is also the
President, Chief Executive Officer and a Director of Cinescopic Corporation and
International Database Service, Inc. located in Palm Beach Gardens, Florida,
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 BDC's operations in order to devote substantially all of
his time to the Company and Viragen.
ROBERT H. ZEIGER was appointed a Director, Chief Executive Officer and
Chief Operating Officer of the Company in January, 1996, holding these positions
until August 6, 1998 when Dr. Jay Sawardeker was appointed to the position of
Chief Executive Officer and Dr. D. Magnus Nicolson was appointed to the position
of Chief Operating Officer. Mr. Zeiger has also served as a Director of Viragen
(Scotland) Limited, a wholly-owned subsidiary of the Company since April, 1995
and a Director of Viragen, Inc., the majority stockholder of the Company, since
June, 1995. From 1985 to 1994, Mr. Zeiger was employed by Glaxo, Inc., a
pharmaceutical manufacturer serving as Vice President and General Manager of
Glaxo Pharmaceuticals
16
<PAGE> 19
Division (1991 to 1994). He has also served as Vice President and General
Manager of the Allen & Hansbury Division, and Vice President and General Manager
of the Dermatology Division (1985 to 1988). On July 31, 1998, Mr. Zeiger
resigned for health reasons his positions as Chief Executive Officer, Chief
Operating Officer, Director of the Company and Director of VSL, effective
September 30, 1998. He also resigned as Chief Executive Officer of Viragen and
will remain on the Viragen Board of Directors as Vice Chairman, Senior
Pharmaceutical Advisor to the Board and a member of the Executive Committee of
the Board of Directors.
JAY SAWARDEKER, PH.D., was appointed Chief Executive Officer of the Company
in August, 1998. Dr. Sawardeker serves as the Chief Operating Officer of
Viragen, after having joined Viragen in 1996 as Executive Vice
President-Technical Affairs. For over 25 years prior to joining Viragen, Dr.
Sawardeker had served in various pharmaceutical senior technical management
capacities, primarily with the Glaxo Holdings organization. Most recently, he
served as Corporate Vice President -- Worldwide Quality Assurance for Glaxo
Holdings, from 1991 to 1995. Between 1981 and 1990, he served as Corporate Vice
President -- Technical Operations; Vice President -- Manufacturing; and Vice
President -- Quality Assurance of Glaxo, Inc. Dr. Sawardeker also previously
served as Director of QA for the Whitehall Laboratories division of American
Home Products and Group Manager of QA for the Ortho Pharmaceutical division of
Johnson & Johnson prior to joining Glaxo, Inc. in 1981.
DENNIS W. HEALEY is a Certified Public Accountant and was appointed the
Company's Executive Vice President, Chief Financial Officer, Treasurer,
Secretary and a Director of the Company in January, 1996. Mr. Healey has also
served as a Director of Viragen (Scotland) Limited since its inception in April
1995. In April 1993, he was appointed Chairman of the Board and Chief Executive
Officer of Viragen, Inc., the majority stockholder of the Company, and in June
1994, Mr. Healey relinquished that position to Mr. Smith and in July 1994
relinquished the position of Chief Executive Officer. Upon Gerald Smith becoming
President of Viragen on May 12, 1993, Mr. Healey became Executive Vice President
and has served as Chief Financial Officer and Treasurer of Viragen since 1980
and its Secretary since 1994. In July 1996, Mr. Healey, resigned his position as
Chief Financial Officer and Treasurer of Medicore, Inc., a publicly traded
company on the NASDAQ, and as Executive Vice President of its publicly traded
Techdyne affiliate. Mr. Healey joined Medicore in 1976 as its Controller. He
also resigned his position as Treasurer 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 of the
Company in August, 1998, was elected a Director of the Company in 1997 and has
served as the Managing Director of Viragen (Scotland) Limited, since April 1996.
From 1992 to 1995, Dr. Nicolson was employed by Scottish Enterprise, an agency
of the Scottish government responsible for generating economic development in
Scotland. During his time at Scottish Enterprise, he served as Technology
Manager for "Locate in Scotland" (1995), Senior Executive (1993 to 1995), and
Contractor, Healthcare Liaison Office of Dunbartonshire Enterprise (1992 to
1993). From 1990 to 1992, Dr. Nicolson conducted various market research
projects for a variety of public and private enterprises, as an independent
marketing consultant. In 1988, Dr. Nicolson was awarded a Doctorate in
Immunology from the University of Strathclyde, in addition to acquiring Masters
Degrees in both Immunology and Business in 1985 and 1992, respectively. Dr.
Nicolson is a Fellow of the Royal Society of Medicine and a Member of the Royal
Society of Chemistry, as well as a Member of the Chartered Institute of
Marketing.
There is no family relationship between any of the officers and directors.
Inasmuch as the operations of the Company 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 the Company. Viragen's Executive Committee consists of Messrs. Carl
M. Singer (Chairman), Gerald Smith and Robert H. Zeiger, and the Audit, Finance
and Compensation Committee consists of Messrs. Charles J. Simons (Chairman),
Sidney Dworkin, and Dennis W. Healey.
17
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation and
employment agreements of the Chief Executive Officers of the Company and the
four most highly compensated Executive Officers at June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD SARS(#) PAYOUTS SATION
- --------------------------- ---- -------- ----- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith(1)............. 1998 $ 69,615 -- -- -- -- -- --
Chairman of Board and 1997 2,923 -- -- -- -- -- --
President 1996 -- -- -- -- -- -- 60,750
Robert H. Zeiger(2)......... 1998 $ 9,616 -- -- -- -- -- --
Chief Executive Officer 1997 -- -- -- -- -- -- --
and Director 1996 -- -- -- -- -- -- 60,750
Jay Sawardeker.............. 1998 -- -- -- -- -- -- --
Chief Executive Officer 1997 -- -- -- -- -- -- --
and Director 1996 -- -- -- -- -- -- --
Dennis W. Healey(3)......... 1998 $ 53,654 -- -- -- -- -- --
Exec. Vice Pres., Chief
Fin. Officer Secretary, 1997 64,982 -- -- -- -- -- --
Treasurer and Director 1996 -- -- -- -- -- -- 60,750
D. Magnus Nicolson(4)....... 1998 $100,054 -- -- -- 75,000 -- --
Chief Executive Operating 1997 83,080 -- -- -- -- -- --
Officer and Director 1996 18,562 -- -- -- 50,000 -- --
</TABLE>
- ---------------
(1) Mr. Smith became the Chairman of the Board, Chief Executive Officer,
President and a Director of the Company on December 8, 1995, pursuant to the
Company's Agreement and Plan of Reorganization by, between and among the
Company, Viragen, Inc., and Viragen (Scotland) Limited. Mr. Smith entered
into a two-year employment agreement with the Company on March 1, 1997,
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 , Chairman of the Board of Directors
and President. On July 31, 1998, Mr. Zeiger resigned for health reasons his
position as Chief Executive Officer and a Director of the Company, effective
September 30, 1998.
(3) Mr. Healey serves as Executive Vice President, Chief Financial Officer,
Secretary and a Director of the Company. On July 30, 1996 the Company
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.
(4) Dr. D. Magnus Nicolson serves as the Managing Director of Viragen (Scotland)
Ltd., a Director and on August 6, 1998, was appointed Chief Operating
Officer of the Company. 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 the Company at $7.00 per share. On
September 4, 1997,
18
<PAGE> 21
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 of the Company exercisable at $5.72 per share and reimbursement
of automobile and related expenses during the term of the agreement.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1998 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARES) DATE
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Gerald Smith.................................... -- -- -- --
Robert H. Zeiger................................ -- -- -- --
Jay Sawardeker.................................. -- -- -- --
Dennis W. Healey................................ -- -- -- --
D. Magnus Nicolson.............................. 75,000 100 $5.72 09-03-02
</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,
1998 to each person named in the Summary Compensation Table and the unexercised
options held as of the end of the 1998 fiscal year.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1998 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN THE
VALUE REALIZED MONEY OPTION AT FY-END
MARKET PRICE NUMBER OF UNEXERCISED (BASED ON FY-END
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $/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........ -- -- 50,000 75,000 $0 $0
</TABLE>
ADDITIONAL STOCK OPTIONS
On September 4, 1997, Dr. D. Magnus Nicolson, Chief Operating Officer, a
Director of the Company and Managing Director of VSL, amended and extended his
employment agreement ("Amended Employment Agreement") through March 31, 2000.
Provisions of Amended Employment Agreement included the grant of 75,000 options
to purchase Common Stock of the Company, 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 the Company filing a Clinical Trial exemption ("CTX") for the Company's
Product in the EU or UK and (ii) 37,500 options upon the earlier of the second
anniversary of the option grant or upon acceptance of the CTX by EU or UK
regulatory authorities and at least six months had elapsed since the filing of
the CTX.
In November 1995, VSL, a wholly-owned subsidiary of the Company, issued an
aggregate of 7.144 shares of VSL common stock at $56.00 per share to individuals
now serving as officers and directors of the Company and to an employee of
Viragen, all of whom were expected to contribute to the operations of VSL. In
connection with the Agreement and Plan of Reorganization, these shares were
exchangeable into options to
19
<PAGE> 22
purchase 400,000 shares of the Company at $.001 per share. Of these options,
100,000 were granted each to (i) Mr. Gerald Smith, the current President and
Chairman of the Board of Directors of the Company, (ii) Mr. Robert H. Zeiger, a
former Chief Executive Officer, Chief Operating Officer, and Director of the
Company, (iii) Dennis W. Healey, the Company's Treasurer, Chief Financial
Officer, Secretary and a Director of the Company, and (iv) an employee of
Viragen, who provided various services to the Company. All options in VSL were
exercised on December 5, 1995. The Company recognized $243,000 in compensation
expense as a result of the issuance of these shares. See "Principal
Stockholders" and "Certain Relationship and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned at September 21, 1998 (i) by each person who is
known by the Company to own beneficially or exercise voting or dispositive
control over 5% or more of the Company's Common Stock, (ii) by each of the
Company's directors, and (iii) by all officers and directors as a group. A
person is deemed to be a beneficial owner of any securities of which the person
has the right to acquire beneficial ownership within sixty days. At September
21, 1998, there were 7,116,059 shares of Common Stock of the Company
outstanding.
<TABLE>
<CAPTION>
AMOUNT
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------------------------ ------------ ----------
<S> <C> <C>
Viragen, Inc.(3)............................................ 5,000,000 70.3%
Gerald Smith(4)............................................. 100,000 1.4
Jay Sawardeker(5)........................................... -- --
Dennis W. Healey(6)......................................... 100,000 1.4
Dr. Magnus Nicolson(7)...................................... 125,000 1.7
Officers and Directors as a Group (4 persons)............... 325,000 4.6
</TABLE>
- ---------------
(1) Based upon information furnished to the Company by the principal security
holders or obtained from the stock transfer books of the Company. Other than
indicated in the notes, the Company has been informed that such persons have
sole voting and dispositive power with respect to their shares. All of the
individuals listed are officers and/or directors of the Company whose
address is 865 SW 78th Avenue, Suite 100, Plantation, Florida 33324, which
is also the address of Viragen, Inc.
(2) Based on 7,116,059 shares of Common Stock outstanding at September 10, 1998.
(3) Viragen, Inc. is the majority stockholder of the Company.
(4) Mr. Smith is President and Chairman of the Board of Directors of the
Company.
(5) Dr. Sawardeker is Chief Executive Officer and a Director of the Company
(6) Mr. Healey is Executive Vice President, Treasurer, Chief Financial Officer,
Secretary and a Director of the Company.
(7) Dr. Nicolson is the Chief Operating Officer and a Director of the Company.
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 the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended June 30,
20
<PAGE> 23
1998, that all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent (10%) beneficial owners were completed in
a timely manner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 20, 1995, the Company entered into an Agreement and Plan of
Reorganization pursuant to which the Company agreed to acquire 100% of the
issued and outstanding stock of VSL, in exchange for the distribution to
Viragen, of newly-issued shares of Convertible Preferred Stock that upon
conversion represented 5,600,000 shares of Common Stock of the Company or
approximately 94% of the then outstanding capital stock interest of the Company.
On November 7, 1995, the Company, VSL, and Viragen entered into an
Amendment to Agreement and Plan of Reorganization (the "Amendment") to extend
the Closing Date to December 8, 1995. Additionally, the Amendment provided for
an interim loan of $500,000 to VSL to be deemed satisfied at the Closing. The
Amendment also provided for an additional cash capital contribution of $300,000,
payable at closing. Upon the consummation of the transactions contemplated by
the Agreement and the Amendment in December 1995, VSL became a wholly-owned
subsidiary of Viragen.
On July 12, 1995 VSL entered into a License Agreement ("Agreement") with
Viragen and VTI granting VSL rights to certain proprietary technology, including
the right to manufacture and distribute the Company's Omniferon product.
Pursuant to the terms of the Agreement, VSL is obligated to pay an annual
licensing fee equal to the greater of (i) $2,000,000 or (ii) 10% of VSL's gross
revenues until such time as total licensing payments of $18 million has been
paid to VTI. Once the $18 million licensing fee has been paid, VSL is obligated
to pay VTI an amount equal to 8% of VSL's gross revenues until such time as
total licensing fee of $25 million has been paid to VTI. Once the $25 million
licensing fee has been paid, VSL is obligated to pay VTI an amount equal to 5%
of VSL's 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, VTI and VSL mutually agreed to extend the technology
transfer completion dates. Accordingly, the Agreement was modified such 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 VSL. 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 the Company is in the
process of obtaining EU regulatory approval for marketing the licensed
technology. The approval process entails performing preclinical and clinical
research.
Mr. Gerald Smith, the Company's President and Chairman, is also the
Chairman and President of Viragen, the majority stockholder of the Company. Mr.
Robert H. Zeiger served as Chief Executive Officer, Chief Operating Officer and
a Director of the Company from January 8, 1996 until his resignation for health
reasons effective August 6, 1998. Mr. Zeiger will continue 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. Dr. Jay Sawardeker,
assumed the position of Chief Executive Officer upon the resignation of Mr.
Zeiger, is a Director of the Company and also Chief Operating Officer and an
Executive Vice President of Viragen. Mr. Dennis W. Healey, the Company's
Executive Vice President, Chief Financial Officer, Treasurer, Secretary and a
Director also serves in the same capacities for Viragen. 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 the Company's
wholly owned subsidiary VSL. Viragen currently owns 5,000,000 shares of Common
Stock of the Company, representing 70.3% of the Company's outstanding capital
stock interest on September 10, 1998.
21
<PAGE> 24
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
- ------- -----------
<C> <S> <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)
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C> <C>
(ix) Forms of Securities Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1995 ("1995 10-KSB")
(x) Form of Common Stock Purchase Warrant (associated with
Securities Purchase Agreement) (incorporated by reference to
the 1995 10-KSB)
(xi) Subscription Agreement and Investment Letter -- Sector
Associates Ltd., dated November 12, 1993 (incorporated by
reference to the 1993 10-KSB)
(xii) Securities Purchase Agreement dated January 25, 1995
(incorporated by reference to the 1994 10-KSB)
(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.
(vi) Indemnification Agreement between George Levin and the
Company dated October 20, 1995.
(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.
(ix) Amendment to License Agreement between Viragen Technology,
Inc. and Viragen (Scotland) Ltd. dated September 29, 1997.
(x) Cooperation and Supply Agreement between Viragen, Inc.,
Viragen Deutschland GmbH and German Red Cross dated March
19, 1998 (incorporated by reference to Viragen, Inc.'s
Annual Report on Form 10-K/A for the year ended June 30,
1998).
(11) -- Statement re: computation of per share earnings
(21) -- Subsidiaries of the registrant
(27) -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K filed during the fourth quarter.
None.
23
<PAGE> 26
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: April 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
- --------------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and April 5, 1999
President
/s/ DR. JAY SAWARDEKER Chief Executive Officer
- --------------------------------------------------- Director
Dr. Jay Sawardeker April 5, 1999
/s/ DENNIS W. HEALEY Executive Vice President,
- --------------------------------------------------- Treasurer, Principal
Dennis W. Healey Financial Officer and April 5, 1999
Director
Chief Operating Officer
- --------------------------------------------------- Director
Dr. D. Magnus Nicolson April 5, 1999
/s/ JOSE I. ORTEGA Controller and Principal
- --------------------------------------------------- Accounting Officer
Jose I. Ortega April 5, 1999
</TABLE>
24
<PAGE> 27
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-1
Consolidated balance sheets -- June 30, 1998 and 1997....... F-2
Consolidated statements of operations -- Years ended June
30, 1998, 1997 and 1996................................... F-3
Consolidated statements of stockholders' equity -- Years
ended June 30, 1998, 1997 and 1996........................ F-4
Consolidated statements of cash flows -- Years ended June
30, 1998, 1997 and 1996................................... F-5
Notes to consolidated financial statements.................. F-6
</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.
<PAGE> 28
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 18, 1998
F-1
<PAGE> 29
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 656,139 $2,144,271
Prepaid licensing fee..................................... -- 2,000,000
Prepaid expenses and other current assets................. 312,282 193,908
---------- ----------
Total current assets.............................. 968,421 4,338,179
Property, Plant and Equipment
Leasehold improvements.................................... 1,947,310 1,815,409
Equipment and furniture................................... 2,342,273 1,606,406
Construction in progress.................................. 48,655 --
---------- ----------
4,338,238 3,421,815
Less accumulated depreciation............................. (253,387) (9,257)
---------- ----------
4,084,851 3,412,558
---------- ----------
$5,053,272 $7,750,737
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 752,312 $ 679,514
Advances from parent...................................... -- 455,175
Current portion of long-term debt......................... 2,863 6,225
---------- ----------
Total current liabilities......................... 755,175 1,140,914
Long-term debt, less current portion........................ 160,043 157,686
Advances from parent........................................ 2,314,431 --
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 7,116,059 shares
Additional paid-in capital............................. 7,441,447 7,441,447
Retained deficit.......................................... (5,976,065) (1,333,939)
Foreign currency translation adjustment................... 287,081 273,469
---------- ----------
Total stockholders' equity........................ 1,823,623 6,452,137
---------- ----------
$5,053,272 $7,750,737
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 30
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Income Interest and other income.......................... $ 37,474 $ 233,552 $ 73,945
----------- ---------- ---------
37,474 233,552 73,945
Costs and Expenses
Research and development costs.......................... 1,355,592 314,326 56,424
Licensing fee........................................... 2,000,000 -- --
General and administrative expenses..................... 1,066,825 757,786 491,148
Interest expense........................................ 15,485 5,532 --
Depreciation and amortization........................... 241,698 15,122 1,724
----------- ---------- ---------
4,679,600 1,092,766 549,296
----------- ---------- ---------
Net loss.................................................. $(4,642,126) $ (859,214) $(475,351)
=========== ========== =========
Basic and diluted loss per common share................... $ (0.65) $ (0.12) $ (0.13)
=========== ========== =========
Basic and diluted weighted average common shares
outstanding............................................. 7,116,059 7,048,967 3,685,705
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON COMMON PREFERRED ADDITIONAL COMMON RETAINED FOREIGN
STOCK, STOCK, STOCK PAID-IN STOCK EARNINGS CURRENCY
PAR $.01 PAR $1.61 SERIES B CAPITAL SUBSCRIBED (DEFICIT) TRANSLATION
-------- --------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995..... $ -- $ 161 $ -- $ 1,453 $ -- $ 626 $ --
Exercise of VSL Options by
Directors and Affiliate... 12 390
Reverse acquisition of
Sector Associates, Ltd.... 1,198 (173) 20,000 144,160
Issuance of stock To
Directors and Affiliate... 243,000
Private placement (December
1995), net of issuance
costs..................... 2,400 746,880
Private placements (March
1996), net of issuance
costs..................... 5,101,752
Conversion of Series B
preferred Stock........... 56,000 (20,000) (36,000)
Issuance of Common stock
Subscribed................ 9,630 5,092,122 (5,101,752)
Foreign currency Translation
adjustment................ 43,057
Net loss.................... (475,351)
------- ----- -------- ---------- ----------- ----------- --------
Balance at June 30, 1996.... 69,228 -- -- 6,192,005 -- (474,725) 43,057
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
======= ===== ======== ========== =========== =========== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net Loss................................................. $(4,642,126) $ (859,214) $ (475,351)
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of stock to Directors and Affiliate........... -- -- 243,000
Depreciation and amortization.......................... 241,698 15,122 1,724
Increase (decrease) relating to operating activities
from:
Prepaid licensing fee.................................. 2,000,000 (2,000,000) --
Other current assets................................... (118,374) (142,595) 143,687
Other assets........................................... -- 6,166 --
Accounts payable and accrued expenses.................. 72,798 555,130 69,736
----------- ----------- ----------
Net cash used in operating activities.......... (2,446,004) (2,425,391) (17,204)
Investing Activities
Additions to property, plant and equipment, net........ (913,991) (3,400,067) (27,796)
----------- ----------- ----------
Net cash used in investing activities.......... (913,991) (3,400,067) (27,796)
Financing Activities
Proceeds from exercise of warrants..................... -- 1,251,374 --
Proceeds from long-term debt........................... -- 166,000 --
Payments on long-term debt............................. (1,005) (2,089) --
Proceeds from March 1996 private placements, net of
related expenses.................................... -- -- 5,101,752
Cash acquired through reverse acquisition of Sector
Associates, Ltd..................................... -- -- 768,823
Advances to (from) parent.............................. 1,859,256 1,338,135 (933,361)
Contributions from officers............................ -- -- 400
----------- ----------- ----------
Net cash provided by financing activities...... 1,858,251 2,753,420 4,937,614
Effect of exchange rate fluctuations on cash............. 13,612 230,412 43,057
----------- ----------- ----------
(Decrease) increase in cash.............................. (1,488,132) (2,841,626) 4,935,671
Cash and cash equivalents at beginning of period......... 2,144,271 4,985,897 50,226
----------- ----------- ----------
Cash and cash equivalents at end of period............... $ 656,139 $ 2,144,271 $4,985,897
=========== =========== ==========
Supplemental Cash Flow Information
Interest paid.......................................... $ 9,960 $ 2,265 $ --
Income taxes paid...................................... -- 13,840 --
During the years ended June 30, 1998, 1997 and 1996, the Company had the following non-cash
investing and financing activities:
Other receivables acquired through reverse acquisition of
Sector Associates, Ltd................................. $ -- $ -- $ 195,000
Liabilities assumed through reverse acquisition of Sector
Associates, Ltd........................................ -- -- 47,341
Issuance of stock to Directors and Affiliate............. -- -- 243,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation. Viragen (Europe) Ltd. ("VEL") and its
subsidiaries are engaged in the research, development and manufacture of certain
immunological products for commercial application. The consolidated financial
statements include the accounts of Viragen (Europe) Ltd. and its wholly-owned
subsidiaries, Viragen (Scotland) Ltd. ("VSL") and Viragen (Germany) GmbH
("VGG"), collectively known as the Company. VSL is a private Scottish company.
VGG is a private German company. All material intercompany accounts and
transactions have been eliminated in consolidation. Viragen (Europe) Ltd. is a
majority-owned subsidiary of Viragen, Inc. ("Viragen"). See Note B for further
discussion relating to basis of presentation.
During 1998 and 1997, the Company incurred significant research and
development costs resulting in net losses of approximately $4,642,000 and
$859,000, respectively. The Company anticipates additional future losses as it
enters into safety and preclinical and clinical trials. Accordingly, Viragen has
agreed to provide VEL the working capital necessary to fund operations through
June 30, 1999. Advances from parent at June 30, 1998 and 1997 represent cash
advanced by Viragen. The amount is non-interest bearing. At June 30, 1998,
Viragen has agreed to defer repayment of the intercompany advances through June
30, 1999. Viragen has also agreed to defer the $166,667 minimum monthly payments
due under the Licensing Agreement that begin November 1, 1998 until the Company
is able to fund this obligation.
Name Change and Reverse Stock Split. Effective May 2, 1996, the Company's
name was changed from Sector Associates, Ltd. to Viragen (Europe) Ltd. The
common stock was reverse split one share for fourteen (1:14) and the par value
was changed from $.10 per share to $.01 per share. The number of authorized
common shares was reduced from 50 million shares to 20 million shares.
The effect of the reverse split has been reflected in the consolidated
financial statements and accompanying notes for all periods presented.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate their fair values.
Property, Plant and Equipment. Property, plant and equipment is stated at
the lower of cost or net realizable value. Depreciation was computed by using
the straight-line method over the estimated useful life of the assets for
financial reporting purposes.
FAS 121 -- Accounting for the Impairment of Long-Lived Assets, requires
impairment losses to be recorded on long-lived assets when indicators of
impairment are present and the undiscontinued cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The Company
believes no impairment indicators exist at June 30, 1998.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes. Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.
Loss Per Common Share: Loss per common share has been computed based on
the weighted average number of shares outstanding during each period. The
weighted average number of shares outstanding for fiscal 1996 includes the
assumed conversion of the convertible preferred shares as of the issuance date,
as they were issued with the intention of granting Viragen control of the
Company. Common stock subscribed is
F-6
<PAGE> 34
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed outstanding as of the completion of the March 1996 private placements
for purposes of the weighted average shares outstanding calculation. The effect
of warrants and stock options (common stock equivalents) are antidilutive.
Effective during the quarter ended December 31, 1997, the Company adopted
FAS 128 -- Earnings per Common Share. All periods presented reflect the adoption
of FAS 128.
Financial Instruments: The carrying amount of financial instruments,
including cash and cash equivalents and accounts payable approximate fair value
as of June 30, 1998. The Company's long-term debt approximates fair value since
it was recently negotiated. Fair market value of advances from parent is
estimated to be $2,106,000, based on a discount rate of 9%.
Foreign Currency Translation. The financial statements of VSL have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated
using the current exchange rates at the balance sheet date. Income statement
amounts have been translated using the average exchange rate for the reporting
period. The translation adjustments resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in results of operations. These gains and losses result from
exchange rate changes between the time transactions are recorded and settled
and, for unsettled transactions, exchange rate changes between the time
transactions are recorded and the balance sheet date.
Stock Based Compensation. The Company 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 FAS 123 -- Accounting for Stock-Based Compensation.
Recent Pronouncements. In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) which establishes standards for reporting
and displaying comprehensive income. SFAS No. 130 will be adopted in the first
quarter of fiscal 1999.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which is effective for years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements July 1, 1998.
Management believes that the impact of SFAS No. 130 and SFAS No. 131 will
not be significant to the Company.
NOTE B. ACQUISITION -- BASIS OF PRESENTATION
VSL was organized during April 1995 by Viragen to cause or to undertake
clinical trials in the European Union ("EU") and for manufacturing and
distribution of Viragen's natural leukocyte-derived alpha interferon and related
products in the EU and other countries outside the United States.
On September 20, 1995, Sector Associates, Ltd. ("Sector") (now VEL) entered
into an Agreement and Plan of Reorganization (the "Agreement") with Viragen, a
Delaware corporation. Under the terms of the
F-7
<PAGE> 35
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement, Sector was to acquire a 100% interest in VSL, in consideration for
Viragen receiving a 94% interest in Sector.
On November 7, 1995, the Agreement was amended to provide for an interim
loan of $500,000 by Sector to VSL, the filing of certain financial reports by
Sector prior to closing, a capital contribution of $300,000 into Sector within
thirty days, and the modification of a related investment banking agreement. The
$500,000 loan was funded November 9, 1995, bearing interest at 4% per annum,
secured by a 3.77% equity interest in VSL, and was guaranteed by Viragen, Inc.
Upon closing of the Agreement on December 8, 1995, the principal amount of the
note was deemed contributed capital to Sector.
On December 8, 1995, Sector finalized the Agreement and acquired 100% of
the stock of VSL in exchange for 2,000,000 voting shares of Series B Convertible
Preferred Stock , convertible into 5,600,000 shares of common stock or
approximately 94% of the then issued and outstanding shares, as well as 94% of
the voting privileges, of Sector. Viragen retained an 84% ownership interest in
Sector, as 71,429 of the preferred shares (convertible into 200,000 common
shares) were disbursed as finders' fees, and 142,857 of the preferred shares
(convertible into 400,000 common shares) were issued to the Directors and an
affiliate, in exchange for their common shares of VSL. The Company recognized
$243,000 in compensation expense related to the disbursement of stock to the
Directors and affiliate. As the Parent Company of VSL gained voting control of
Sector in this transaction, VSL became the acquiring entity and accounting
survivor. Accordingly, the transaction was accounted for as a reverse
acquisition whereby the historical financial statements contained herein reflect
those of the accounting acquirer, VSL, not the financial statements of the legal
acquirer, VEL (formerly Sector). The historical financial statements for all
periods presented up to December 8, 1995 included herein are, therefore, those
of the predecessor, or VSL, the accounting survivor of the reverse acquisition.
Moreover, since at the time of the acquisition the legal acquirer, VEL, was a
shell corporation with no operations, the stockholder's equity of the conformed
entity was recapitalized to reflect the capital structure of the surviving legal
entity and the accumulated deficit of VSL.
NOTE C. CAPITAL STOCK
Common Stock. The Company initiated a series of Private Placement
Offerings to raise the agreed upon capital necessary to complete the planned
reverse acquisition of Sector (see Note B) and to raise the capital necessary to
complete the construction of a plant in Edinburgh, Scotland, fund initial
product testing phases by VSL in Scotland, and provide working capital.
In December 1995, the Company completed a Private Placement Offering,
raising approximately $750,000 through the sale of 336,000 units for a purchase
price of $2.23 per unit. Each unit consisted of approximately 0.71 share of
Common Stock and 2.5 Common Stock Purchase Warrants. This offering resulted in
the issuance of 240,000 shares of Common Stock, and 840,000 Common Stock
Purchase Warrants having an exercise price of $6.00 per share, exercisable
through December 8, 1998.
In March 1996, the Company completed two additional Private Placement
Offerings, issuing a total of 768,000 shares of Common Stock and 216,500 Common
Stock Purchase Warrants having an exercise price of $12.00 per share,
exercisable through March 15, 1999. These two Offerings yielded net cash
proceeds of approximately $5,102,000 after related expenses of $601,400, of
which $229,900 was paid through the issuance of 195,000 shares of Common Stock
and 450,000 Common Stock Purchase Warrants having an exercise price of $8.00 per
share, exercisable through March 18, 1999.
Viragen's ownership interest in the Company was reduced to 72%, upon
completion of the March 1996 private placements. At June 30, 1998, Viragen's
ownership interest is 70% of the Company.
F-8
<PAGE> 36
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares of the Company's common stock reserved at June 30, 1998 for possible
future issuance are as follows:
<TABLE>
<CAPTION>
EXERCISE
PRICE 1998
---------- ---------
<S> <C> <C>
December 1995 Private Placement Warrants.................... $ 6.00 680,771
Employee options............................................ 5.72-7.00 125,000
March 1996 Private Placement Warrants....................... 8.00 422,000
March 1996 Private Placement Warrants....................... 12.00 210,500
Class F Warrant (exercisable through November 1, 1998)...... 105.00 44,196
---------
1,482,467
=========
</TABLE>
Options and Warrants. During fiscal 1996, three officers and one employee
were each granted options to purchase 100,000 shares at $.001 per share. These
options vested upon issuance and all of these options were exercised shortly
after issuance. In addition, on April 1, 1996, the Company granted Dr. Magnus
Nicolson, Managing Director of VSL, 50,000 options to purchase common stock in
VEL, as part of his Employment Agreement. One half of the options vested on
April 1, 1996, and the balance vested on April 1, 1997. The options are
exercisable at $7.00 per share for a period of five years from the vesting
dates. Under APB 25, VEL recognized compensation expense of $243,000 for the
400,000 options in 1996 as the exercise price of a portion of the Company's
employee stock options was less than the market price of the underlying stock on
the date of grant.
The Company'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 the Company's common stock of which 525,000 remain available
at June 30, 1998.
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 the Company's filing of a Clinical
Trial Exemption ("CTX") in the EU; and 37,500 shares the earlier of two years
from the date of grant or acceptance of the Company's CTX application by EU
regulatory authorities and at least six months had elapsed since the filing of
the CTX.
Stock Based Compensation. The Company 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 FAS
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 FAS 123, and has been determined as if the Company 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 and 6.00% for 1996; volatility factor of the expected
market price of the Company's common stock of .723 for 1998 and .600 for 1996;
and a weighted-average expected life of the option of 3 years. The weighted
average fair value of each option granted in fiscal 1998 and 1996 was $2.97 and
$1.13 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
F-9
<PAGE> 37
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss................................. $(4,779,490) $(904,588) $(695,977)
Pro forma basic and diluted loss per share......... (.67) (.13) (.19)
</TABLE>
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION AVERAGE
SHARES PRICE EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Options Outstanding at July 1, 1995................. -- -- --
Granted at less than market price................. 400,000 $ .001 $ .001
Granted above market price........................ 50,000 7.00 7.00
Exercised......................................... (400,000) .001 .001
Canceled.......................................... -- -- --
--------
Options Outstanding at June 30, 1996................ 50,000 $ 7.00 $ 7.00
Granted........................................... -- -- --
Exercised......................................... -- -- --
Canceled.......................................... -- -- --
--------
Options Outstanding at June 30, 1997................ 50,000 $ 7.00 $ 7.00
Granted at market price........................... 75,000 5.72 5.72
Exercised......................................... -- -- --
Canceled.......................................... -- -- --
--------
Options Outstanding at June 30, 1998................ 125,000 $ 5.72-7.00 $ 6.23
========
Exercisable at June 30, 1998........................ 50,000
========
Exercisable at June 30, 1997........................ 50,000
========
</TABLE>
The weighted average remaining contractual life of options outstanding as
of June 30, 1998 is five years.
NOTE D. TRANSACTIONS WITH PARENT
Through a fifteen-year License Agreement (the "License") granted by
Viragen, VSL's ultimate Parent, VSL secured certain rights to engage in the
development, and manufacture of certain proprietary products and technologies
that related to the therapeutic application of human leukocyte interferon (the
"Product") for various diseases that affect the human immune system. Pursuant to
these rights, on July 20, 1995, VSL entered into a License and Manufacturing
Agreement ("Scottish Agreement") with the Common Services Agency of Scotland
("Agency"), an agency acting on behalf of the Scottish National Blood
Transfusion Service ("SNBTS") pursuant to which SNBTS, on behalf of VSL, will
participate in the manufacture and supply of VSL's Product to VSL for exclusive
distribution in the EU in return for certain fees. The term of the Scottish
Agreement is five years with two additional five-year extention terms
exercisable at the option of VSL.
Pursuant to the terms of the License, VSL was to prepay $2 million to
Viragen within six months of the Effective Date (July 12, 1995). Commencing one
year from the Effective Date, VSL is to pay to Viragen fees, as follows: the
greater of $2 million annually or 10% of gross revenues until the sum of $18
million has been
F-10
<PAGE> 38
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 VSL. Viragen had substantially transferred the processes and
technology to VSL by the end of May 1997. Viragen required the initial licensing
payment be made. Completion of the technology transfer occurred on 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 the Company is in the
process of obtaining EU regulatory approval for marketing the licensed
technology. The approval process entails performing preclinical and clinical
research.
Viragen provides certain administrative services to the Company 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 the
opinion of management, this method of allocation is reasonable. The amount of
expenses allocated by Viragen totaled approximately $27,000 and $99,800 for the
years ended June 30, 1998 and 1997.
NOTE E. INCOME TAXES
As discussed in Notes B and C, the percentage of ownership in VEL held by
its Parent Company, Viragen, exceeded 80% only during the period December 8,
1995 through March 15, 1996. As a result, VEL was included in the Parent
Company's consolidated federal and state income tax return only for that period.
VSL files separate income tax returns in the United Kingdom. VGG files
separate income tax returns in Germany. Net operating losses of VSL totaling
approximately $5,280,000 are being carried forward to future periods at June 30,
1998.
As of June 30, 1998, the Company has net operating loss carryforwards
("NOL's") for U.S. income tax purposes of approximately $2.3 million, including
$1.2 million 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 2013 and a capital loss
carryforward of approximately $0.8 million that expires in 2000.
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
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Accrued liabilities(U.S.)................................. $ 12,000 $ 2,000
Net operating loss carryforwards(U.S.).................... 857,700 738,700
Capital loss carryforwards(U.S.).......................... 295,000 295,000
----------- -----------
Total deferred tax assets......................... 1,164,700 1,035,700
Valuation allowance for deferred tax assets............... (1,164,700) (1,035,700)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The change in the valuation allowance was a net increase of $129,000 for
the year ended June 30, 1998.
F-11
<PAGE> 39
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, loss before income taxes include the
following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Pre-tax loss:
U.S. ..................................................... $ (401,130) $ (276,271)
Foreign................................................... (4,240,996) (582,943)
----------- -----------
$(4,642,126) $ (859,214)
=========== ===========
</TABLE>
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,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Tax at U.S. statutory rate.................................. (34.00)% (34.00)%
State taxes, net of federal................................. (3.64) (3.63)
benefit Non-deductible items................................ 0.04 0.81
Change in valuation allowance............................... 32.20 42.46
Other....................................................... 5.40 (5.64)
------- -------
--% --%
======= =======
</TABLE>
NOTE F. LONG-TERM DEBT
Long-term debt at June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loan from Scotland Regional Development authority. Payable
quarterly over 20 years with an effective interest rate of
8.68%. Note matures on August 28, 2017.................... $162,906 $163,911
-------- --------
162,906 163,911
Less current portion........................................ (2,863) (6,225)
-------- --------
$160,043 $157,686
======== ========
</TABLE>
Scheduled maturity of long-term debt at June 30, 1998 is: 1999 -- $2,863;
2000 -- $1,738; 2001 -- $1,894; 2002 -- $2,064; and 2003 and
thereafter -- $154,347.
NOTE G. 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, 1998 and 1997, the Company recognized
$202,000 and $29,000 in rent expense and related charges arising from the
property lease. Future minimum lease payments on the facilities are: 1999 --
$119,700; 2000 -- $119,700; 2001 -- $119,700; and 2002 -- $29,900.
The Company has entered into Employment Agreements with three officers of
the Company. These agreements represent a commitment by the Company to pay an
aggregate amount of approximately $248,000 per year in salaries to these
individuals.
F-12
<PAGE> 40
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year, the Company entered into a purchase commitment for plant
equipment totalling $243,000. Through June 30, 1998, the Company had made
payments totalling $49,000 towards the purchase of the equipment. The remaining
balance will become due during fiscal 1999.
NOTE H. CONTINGENCIES
In May 1997, the Company in 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 the Company's reverse
acquisition (as described in Note B), Sector received preferential transfers of
approximately $2.1 million. The suit was settled on July 8, 1998 for a total of
$25,000. The loss arising from settlement of the suit has been accrued at June
30, 1998.
An action is pending in the Circuit Court for Broward County, Florida
against the Company (then named Sector Associates, Ltd.) alleging that Sector
Associates, Ltd., prior to the reverse acquisition by Viragen and VSL,
mishandled payment of amounts due to Roy Woods, a secured creditor (ROY WOODS AS
TRUSTEE V. SECTOR ASSOCIATES, LTD.). The Company has denied the claim and has
filed a counterclaim. In addition, a former stockholder of Sector Associates,
Ltd., is obligated and has agreed to indemnify the Company in this matter and
has assumed responsibility for defense of this lawsuit. 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 I. GEOGRAPHIC INFORMATION
In 1997, the Company completed a manufacturing facility in Edinburgh,
Scotland. Identifiable assets in Scotland totaled $4,745,000 and $7,178,000 at
June 30, 1998 and 1997, respectively. Identifiable assets represent those assets
used in the operations of the geographic area.
NOTE J. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The pro forma financial data included herein reflects the results of
operations, as if the reverse acquisition of VEL had been completed at the
beginning of the 1996 fiscal year. The pro forma financial data was calculated
by pro rating the results of operations of VEL (formerly Sector) for the
applicable period.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Net Loss.................................................... $ (558,403)
==========
Loss per common share....................................... $ (.09)
==========
Weighted average common shares outstanding.................. 6,240,705
==========
</TABLE>
F-13
<PAGE> 1
Exhibit 10-(v)
ADDENDUM TO EMPLOYMENT AGREEMENT
BETWEEN VIRAGEN (EUROPE) LTD. (EMPLOYER)
AND DENNIS W. HEALEY (EMPLOYEE)
It is agreed by Employer and Employee that the Employment Agreement between
Employer and Employee dated March 1, 1997 be amended such that the below
referenced paragraph be replaced in its entirety by the following:
5. COMPENSATION
Employee shall receive an annual salary during the Employment Term as
follows: $95,000 per annum, prorated monthly for the period March 1,
1997 through June 30, 1997; $52,000 for the period July 1, 1997 through
June 30, 1998, and $57,000 per annum, prorated monthly for the period
July 1, 1998 through February 28, 1999. Employee's salary shall be
payable in accordance with the Company's normal payroll process,
currently bi-weekly. Additional consideration payable to Employee
hereunder consists of (a) subject to authorization of the Company's
Board of Directors, the grant to Employee of options to acquire common
stock of Employer (as further described herein), and (b) fringe
benefits, if any, that shall be made available to Employee further
described herein.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on
July 3, 1997.
Viragen (Europe) Ltd.
/s/ GERALD SMITH
----------------------------------
Gerald Smith
President
Employee
/s/ DENNIS W. HEALEY
----------------------------------
Dennis W. Healey
<PAGE> 1
EXHIBIT 10.(vi)
INDEMNIFICATION AGREEMENT
-------------------------
For good and valuable consideration, the receipt of which is hereby
acknowledged, including the willingness and commitment of the indemnitee
identified below to enter into and consummate that certain Agreement and Plan of
Reorganization dated as of September 20, 1995 between Viragen (Scotland)
Limited, Sector Associates Ltd. and Viragen, Inc., George Levin, and any
affiliated company contemplated by that Subscription Agreement and Investment
Letter dated November 12, 1993 ("Indemnitor"), hereby indemnifies and hold
harmless Sector Associates Ltd., Inc., Viragen (Scotland) Limited and Viragen,
Inc. (collectively, the "Indemnitees") from and against any and all claims,
actions, causes of actions, judgments, liabilities, loss, damages, costs or
expenses of whatever kind or nature which may be made, asserted, assessed or
entered against any of the Indemnitees resulting from that certain litigation
pending in the Circuit Court of the Eleventh Judicial Circuit in Dade County,
Florida styled ROY G. WOODS, JR. AS TRUSTEE OF THE ROY G. WOODS, JR. TRUST
U/T/A/ 10/1/85 V. SECTOR ASSOCIATES LTD., INC. (Case No. 94-10389).
The Indemnification provided hereby is not intended to limit in any
way, the indemnification previously provided to Sector Associates Ltd., Inc.
pursuant to any prior agreement, commitment or arrangement, but is provided in
consideration for the consummation of the aforementioned Agreement and Plan of
Reorganization by Viragen (Scotland) Limited and Viragen, Inc. The indemnitor
represents that he has a new worth of in excess of $2,500,000.
Any further notices required to be provided to Sector Associates, Ltd. relating
to the aforementioned litigation shall be provided c/o Viragen, Inc., 2343 West
76th Street, Hialeah, Florida 33016, Attention: President.
IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement this 20th day of October, 1995.
/s/ George Levin
- -----------------------------
GEORGE LEVIN
SECTOR ASSOCIATES, LTD., INC. VIRAGEN (SCOTLAND) LIMITED
By: /s/ Cecile Coady By: /s/ Dennis W. Healey
- ----------------------------- -------------------------
Secretary/Treasurer/Director
<PAGE> 1
EXHIBIT 10.(viii)
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement') is made and entered into this
12th day of July, 1995 and is effective as of the 12th day of July, 1995 (the
"Effective Date") by and between VIRAGEN TECHNOLOGY, INC., a Florida
corporation (the "Licensor') and VIRAGEN (SCOTLAND) LTD., a Scottish Private
Limited Company, No. 1557106 (the "Licensee").
RECITALS
A. The Licensor has the exclusive rights, by assignment or by
license, to sublicense, throughout the world, the "Proprietary Rights," as
hereinafter defined, relating to the "Licensed Property," as hereinafter
defined, which includes the "Licensed Patent Rights," as hereinafter defined,
the "Licensed Processes," as hereinafter defined, and "Licensed Technology," as
hereinafter defined, (which Licensed Technology shall specifically include the
"Confidential Information," as hereinafter defined) and which Licensed Property
is used to manufacture natural alpha interferon derived from human leukocytes.
B. The Licensee has represented and warranted to the Licensor
that the Licensee has the ability and the capacity to perform the Licensee's
obligations set forth in this Agreement and but for these representations and
warranties by the Licensee to the Licensor, the Licensor would not have entered
into this Agreement.
C. The Licensee desires to obtain an exclusive license to the
Proprietary Rights related to the Licensed Property within the "Exclusive
Territory," as hereinafter defined, and the Licensor is willing to grant such
exclusive license to the Licensee, pursuant to the terms and conditions set
forth in this Agreement.
D. The Licensee desires to obtain a non-exclusive license to the
Proprietary Rights related to the Licensed Property within the "Non-exclusive
Territory," as hereinafter defined, and the Licensor is willing to grant such
non-exclusive license to the Licensee, pursuant to the terms and conditions set
forth in this Agreement.
E. The Licensor has established a valuable reputation and
goodwill in its "Business," as hereinafter defined, and the Licensee, by virtue
of the grant of the license which is the subject matter of this Agreement,
shall become familiar with and possessed in connection with the Licensed
Property and specifically including the Confidential Information, pertaining to
the Licensor's Business which is the subject matter of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Licensor and the Licensee do hereby agree as follows:
1. Recitals. The above recitals are true, complete and correct
and are herein incorporated by reference.
2. Definitions. When used in this Agreement, the following terms
shall have the meanings set forth in this Section 2 or as otherwise set forth
in this Agreement.
<PAGE> 2
(a) "Affiliate" means any parent, subsidiary, brother or
sister company, employee, independent contractor, agent, partner, shareholder,
consultant, controlling person, co-venturer, officer, or director of a party
and shall specifically include when used with reference to a specified Person,
(i) any Person that directly or indirectly controls or is controlled by or is
under common control with the specified Person, (ii) any Person that is a
responsible employee of, an officer of, partners in or trustee of, or serves in
a similar capacity with respect to, the specified Person or of which the
specified Person is a responsible employee, officer, partner or trustee, or
with respect to which the specified Person serves in a similar capacity, and
(iii) any Person that, directly or indirectly, is the beneficial owner of 10%
or more of any class of equity interests or equity securities of the specified
Person or of which the specified Person is directly or indirectly the owner of
10% or more of any class of equity interests or equity securities. The above
definition notwithstanding, for purposes of this Agreement, the term
"Affiliate" specifically does not include the Licensor.
(b) "Agreement" means this License Agreement, as
amended, modified, or supplemented from time to time in writing.
(c) "Business" or "Business Activities" means any
activities of the Licensor now or during the effective period of this
Agreement, and specifically including the manufacture of the Licensed Products.
(d) "Confidential information" means trade secrets,
private or secret processes, methods and ideas, as they exist from time to
time, customer lists and information concerning the Licensor's products,
services, business records and plans, inventions, product design information,
price structure, discounts, costs, computer programs and listings, source codes
and/or object codes, copyrights, trademarks, proprietary information, formulae,
protocols, standard operating procedures, forms, "Documents," as hereinafter
defined, procedures, training methods, technical information, databases, data,
algorithms, marketing activities and procedures, method for operating of the
Licensor's Business, credit and financial data concerning the Licensor and the
Licensor's Clients and Client Lists (the "Client Lists"), which Client Lists
shall not only mean one or more of the names and addresses of the Clients of
the Licensor but it shall also encompass any and all information whatsoever
regarding them, including their needs, and marketing and advertising practices
and plans and information which is embodied in written or otherwise recorded
form, but it shall also include information which is mental, not physical.
(e) "Documents" means all original written, recorded, or
graphic matters whatsoever, and any and all copies thereof, including, but not
limited to: papers, books, records, tangible things, computer disks, computer
files, lab books, correspondence, telex messages, facsimiles, memoranda,
work-papers, reports, statements, summaries, analyses, evaluations, client
records and information, agreements, agendas, advertisements, manuals,
brochures, publications, directories, industry lists, schedules, price lists,
client lists, statistical records, training manuals, computer printouts, books
of account, records and invoices reflecting business operations, all things
similar to any of the foregoing however denominated. In all cases where
originals are not available, the term "Documents" shall also mean identical
copies of original documents or non-identical copies thereof.
<PAGE> 3
(f) "European Union" (the European Common Market) means
those countries which are members of the European Union, a group of countries
which include the United Kingdom, France, Belgium, Italy, Germany, Portugal,
Spain, Norway, Sweden and Denmark or which may become members in the future.
(g) "Exclusive Territory" means for all countries
comprising the European Union; provided however that to the extent (i) that any
country other than those countries currently defined as member nations of the
EU shall subsequently become a member nation, and (ii) such country shall have
previously entered into an agreement with the Licensor, then the Licensee shall
only be entitled to a license (be it exclusive or non-exclusive) within that
country that is not contrary to the agreement between that country and the
Licensor.
(h) "Interferon" means natural alpha interferon derived
from human leukocytes.
(i) "Licensed Patent Rights" means all patents
throughout the World (including patents of importation, improvement patents,
patents and certificates of addition and utility models, composition of matter
patents, as well as divisions, reissues, continuations, renewals and extensions
of the foregoing), applications therefor, and patents which may be issued upon
such applications,
i) as to which patents or applications the
Licensor has at any time during the term of this Agreement, the right
to grant licenses of or within the scope of licenses granted in this
Agreement, and
ii) which cover inventions or designs
applicable to Licensed Processes all as set forth more fully on
Exhibit A, attached hereto and incorporated herein (and as may be
amended from time to time) to this Agreement,
(j) "Licensed Processes" means the process or processes
to manufacture the Licensed Products and specifically including
i) the standard operating procedures ("SOPs");
ii) master batch records; and
iii) protocols (including the processing prior
to purification which is commonly referred to as the 'upstream
processing' and the processing subsequent to purification which is
commonly referred to as the 'downstream processing' (collectively the
"Protocols")
to manufacture the Licensed Products which is the subject of this Agreement.
(k) "Licensed Products" means Interferon.
(l) "Licensed Property" means the Licensed Patent
Rights, the Licensed Processes and the Licensed Technology.
<PAGE> 4
(m) "Licensed Technology" means all of the trade
secrets, know-how, show-how, inventions, patents including U.S. Patent(s) and
U.S. Patent(s) applications as set forth more fully on Exhibit B attached
hereto and incorporated herein, lab books, formulae, processes, computer
systems, methods, discoveries, business methods, Confidential Information,
expertise, copyrights, trademarks, service marks, plans, drawings, sketches,
prototypes, tooling and information of any nature whatsoever which relates to
the design, manufacture, assembly and sale of the Licensed Processes,
developed, possessed, conceived, or used by the Licensor relating to the
Licensed Processes, including any modifications, derivatives and translations
thereof.
(n) "Non-Exclusive Territory" means throughout the
World, except within the United States and its territories.
(o) "Person" means any individual, partnership,
corporation, trust or other entity.
(p) "Proprietary Rights" means any and all rights and
privileges provided under the patent, trademark, copyright, trade secret and
other laws of the United States, the individual states thereof and
jurisdictions foreign thereto throughout the World, and the goodwill associated
therewith.
3. Grant of Exclusive License.
(a) Subject to the provisions of Section 8(b) of this
Agreement, the Licensor grants to the Licensee, within the Exclusive Territory,
an exclusive license, with the right to sublicense to third parties, subject to
the prior written approval of the Licensor, which approval shall not be
unreasonably withheld, upon terms and conditions consistent with this
Agreement, for the lives of such Licensed Property, as applicable, to utilizing
the Proprietary Rights and the Licensed Property in connection with the
manufacture and distribution of the Licensed Products. This exclusive right and
license herein granted shall apply to all Proprietary Rights and Licensed
Property which the Licensor now owns or controls, or hereafter may own or
control and which relate to the Licensed Property, and to all information and
Documents, and specifically Confidential Information, which the Licensor now
owns or controls or hereafter may own or control and which relate to the
Licensed Property.
(b) The Licensee's rights, duties and obligations shall
be in accordance with and governed by that certain Manufacturing and License
Agreement (the "Scottish Agreement") between the Licensee and the Scottish
National Blood Transfusion Service (the "Manufacturer"). A copy of the Scottish
Agreement is attached hereto as Exhibit C and incorporated herein; provided,
however, that the terms and conditions of this Agreement shall not, in any
manner, be affected in the event of a termination of the Scottish Agreement for
whatever reason.
(c) The manufacture and/or distribution of the Licensed
Products shall be in accordance with all laws, rules and regulations
promulgated by the respective regulatory and/or governmental agencies and/or
authorities including, without limitation, those of the EU and the United
kingdom.
<PAGE> 5
4. Grant of Non-Exclusive License.
(a) Subject to the provisions of Section 5(b) of this
Agreement, the Licensor grants to the Licensee, within the Non-Exclusive
Territory, a non-exclusive, personal, non-assignable license, but with the
right to sub-license to third parties, subject to the prior written approval of
the Licensor, which approval shall not be unreasonably withheld, upon terms and
conditions consistent with this Agreement, for the lives of such Licensed
Property, as applicable, to utilizing the Proprietary Rights and the Licensed
Property in connection with the manufacture and distribution. of the Licensed
Products. This non-exclusive right and license herein granted shall apply to
all Proprietary Rights and Licensed Property which the Licensor now owns or
controls, or hereafter may own or control and which relate to the Licensed
Property, and to all information and Documents, and specifically Confidential
Information, which the Licensor now owns or controls or hereafter may own or
control and which relate to the Licensed Property.
(b) The manufacture and/or distribution of the Licensed
Products shall be in accordance with all laws, rules and regulations
promulgated by the respective regulatory and/or governmental agencies and/or
authorities including, without limitation, those of the EU and the United
Kingdom.
(c) Except as set forth in Section 8(b)(i), the Licensee
shall have the non-exclusive right to sell the Licensed Products worldwide.
5. Sale and Distribution of the Licensed Products. The Licensor
and the Licensee specifically agree that all Licensed Products produced or
manufactured by the Manufacturer shall be distributed and/or sold exclusively
by or through the Licensee.
6. Obligations of the Licensee.
(a) The obligations to be performed by the Licensee in
connection with the grant of the license contemplated by this Agreement is to
manufacture and distribute or supervise the manufacture and distribution of the
Licensed Products utilizing the Licensed Property, and in accordance with all
applicable laws, rules, and regulations promulgated by the appropriate
regulatory agencies which govern the Licensed Property and the Licensed
Products and specifically in accordance with the current Good Manufacturing
Practices, as may be determined by the EU and/or United kingdom regulatory
agencies; regulatory agencies; SOPs, Protocols or other procedures promulgated
by the EU, the United kingdom, or other countries, as applicable, and each of
their respective regulatory or governing agencies, as applicable (collectively
the "Procedures").
(b) At all times relevant hereto, the Licensor shall use
the Licensed Property in accordance with all Procedures, as set forth more
fully in Section 6(a) of this Agreement.
(c) The Licensee shall use its best efforts to comply
with ISO9000 standards as promulgated by the appropriate country where the
Licensed Products are being manufactured or distributed.
<PAGE> 6
(d) The Licensee shall only use the Licensed Property in
the manner contemplated by this Agreement, unless otherwise agreed to in
writing by the Licensor, which approval by the Licensor shall not constitute a
waiver of the Licensor's rights or the duties under any provision of this
Agreement.
(e) The Licensee shall at all times cause to appear, in
connection with any of the Licensed Property on or within all advertising,
instructional, informational, promotional or display material either bearing or
incorporating the Licensed Property, all required legal notices as required
pursuant to all Federal and international copyright, trademark and patent laws
and as required by the Licensor.
(f) To preserve Licensors identification with the
Licensed Property and to avoid confusion by the public, the Licensee agrees not
to associate other Persons or entities or personalities with the Licensed
Property hereunder in connection with the services or the advertising or
display thereof on which the Licensed Property is used.
(g) The Licensee shall cooperate fully and in good faith
with the Licensor for the purpose of securing and preserving the Licensee's (or
any grantor of Licensee's) rights in and to the Licensed Property and
Proprietary Rights in connection with the Licensed Property. In the event there
has been no previous registration of the Licensed Property and/or any
Proprietary Rights related thereto, the Licensee shall, at Licensor's request
and expense, register such as a patent, copyright, trademark and/or service
mark in the appropriate class, in the name of the Licensee. The Licensee
further agrees to use its best efforts to obtain signatures of inventors
associated with or employed by the Licensee in order to secure any and all
patent rights, as may be reasonably required.
7. Obligations of the Licensor. Subject to the provisions set
forth in this Agreement, at the Licensee's cost and expense, the Licensor shall
provide the Licensee with the Licensed Property which shall specifically
include the know-how and show-how as to the Licensed Patent Rights, the
Licensed Processes, and the Confidential Information, and which shall include
all knowledge and information relating to any equipment unique to the Licensed
Property and a sufficient amount of personnel to train the Licensee in the
Licensed Property.
8. Royalties.
(a) Royalties to be Paid by the Licensee to the
Licensor.
i) Initial Royalty Prepayment and Deposit. The
Licensee shall prepay and deposit with the Licensor, within six (6)
months from the Effective Date, a royalty payment of Two Million
Dollars (US$2,000,000).
ii) Continuing Royalty.
a) Subject to the prepayment of
royalty payments described in Section 8(a)(i) above,
commencing one year from the Effective Date, the Licensee
shall pay to the Licensor the greater of (i) Two Million
Dollars (US$2,000,000)
<PAGE> 7
annually or (ii) Ten Percent (10%) of the Licensee's gross
revenues (as determined pursuant to US General Accepted
Accounting Principles) of the Licensee, until such time as
the sum of Eighteen Million Dollars (US$18,000,000) in
royalty payments have been received by the Licensor from the
Licensee; at which time
b) the Licensee shall pay to the
Licensor royalty payments equal to Eight Percent (8%) of its
gross revenues (as determined pursuant to US Generally
Accepted Accounting Principles) of the Licensee until such
time as the sum of Twenty-Five Million Dollars
(US$25,000,000) in royalty payments have been received by the
Licensor from the Licensee; at which time
c) the Licensee shall pay to the
Licensor royalty payments equal to Five Percent (5%) of its
gross revenues (as determined pursuant to US Generally
Accepted Accounting Principles) of the Licensee thereafter.
(b) Royalties to be Paid by the Licensor to the Licensee.
i) During the term of this Agreement, in the
event that the Licensor grants an exclusive license to one or more
entities to distribute and/or manufacture the Licensed Products
outside the Licensee's Exclusive Territory (except the United States
and its territories), then the Licensee shall receive a royalty
payment equal to Five Percent (5%) of the gross revenues (as
determined pursuant to US Generally Accepted Accounting Principles)
generated by such exclusively licensed licensee(s) pursuant to such
exclusive license granted by the Licensor; and provided further that
the Licensee shall not distribute or sell any the Licensed Products
within such exclusively licensed territory.
ii) During the term of this Agreement, in the
event that the Licensor grants a non-exclusive license to one or more
entities to distribute and/or manufacture the Licensed Products
outside of the EU (except the United States and its territories), then
the Licensee shall receive a royalty payment equal to Two Percent (2%)
of the gross revenues (as determined pursuant to US Generally Accepted
Accounting Principles) generated by such non-exclusive licensee(s)
pursuant to such non-exclusive license granted by the Licensor.
iii) During the term of this Agreement, in the
event that the Licensor (A) manufactures or distributes the Licensed
Products within the United States or any of its territories or (B)
grants a license or licenses to one or more entities to manufacture or
distribute the Licensed Products within the United States or any of
its territories, then the Licensee shall receive a royalty payment
from the Licensor equal to Two Percent (2%) of the gross revenues (as
determined pursuant to US Generally Accepted Accounting Principles)
generated by such non-exclusive licensee(s) pursuant to such
agreements.
(c) Other Products Resulting from Scottish Agreement. In
the event that other biopharmaceutical products are developed and are
manufactured by, through or as a result of the Scottish Agreement, then all
revenues generated as a result of any licensing, distribution, sale and/or
otherwise of such products shall be divided between the Licensor and the
Licensee on a
<PAGE> 8
50%/50% basis; provided, however, that any and all costs and/or expenses
incurred in connection with such licensing, distribution, sale or otherwise of
such products shall be borne equally between the Licensor and the Licensee,
subject to the prior consent of both parties.
(d) Commencement of Payments. Except as to the initial
royalty payment and deposit in the aggregate amount of Two Million Dollars
(US$2,000,000) described in Section 8(a)(i) of this Agreement, all royalty
payments to be paid pursuant to this Section 8 shall accrue until such time as
the Licensed Products have been approved for distribution and sale by the
respective regulative or governing authority at which time all royalty payments
shall be paid as described on Exhibit D attached hereto and incorporated
herein.
9. Accounting.
(a) Within thirty (30) days following each calendar
quarter and within thirty (30) days from the date of termination of this
Agreement, the appropriate party shall furnish the other party with an
accounting (prepaid in accordance with Generally Accepted Accounting
Principles) of all amounts due pursuant to Section 8 of this Agreement.
(b) Concurrent with the furnishing of each accounting,
Licensee shall pay to Licensor the amounts due to the Licensor for that quarter
pursuant to Section 8 of this Agreement.
(c) For purposes of this Agreement, payments shall
accrue at the time when Licensed Products are shipped from the Licensee's
warehouse or from the warehouse of an agent of the Licensee, whichever is
earlier.
(d) The appropriate party shall keep accurate books of
account and shall permit independent auditors appointed by the other party, at
reasonable intervals during ordinary business hours, to inspect such books of
account to the extent reasonably necessary to ascertain the accuracy of the
accounting hereunder, such inspection being at the inspecting party's expense.
(e) It is agreed that nothing contained in this
Agreement shall be construed as an assignment or grant of any right, title or
interest in or to the Licensed Property, it being understood that all rights
relating thereto are reserved by the Licensor, except for the license hereunder
to the Licensee of the right to use and utilize the Licensed Property only as
specifically and expressly provided in this Agreement.
(f) The Licensor shall retain title to the Licensed
Property and to any derivative works, modifications, improvements, translations
and new discoveries pertaining to it, whether or not patented, copyrighted or
trademarked, as applicable, by the Licensor. The Licensee's use of the Licensed
Property shall inure to the benefit of the Licensor and the Licensee shall not
at any time acquire any rights in any of the Licensed Property by virtue of any
use the Licensee may make of such Licensed Property, and which shall
specifically include any proprietary rights originated, conceived, created or
developed by the Licensee or with the assistance of others, as a result of the
Licensed Property.
<PAGE> 9
(g) All rights created by or arising from the use of the
Licensed Property by the Licensee shall be and remain the sole and exclusive
property of the Licensor except in connection with the Licensed Property.
(h) The Licensee shall execute the document or documents
necessary to evidence such ownership interest of the Licensor in any rights or
title set forth in this Section 9.
10. Representations and Warranties of the Licensor. The Licensee
represents and warrants:
(a) The Licensor is a Florida corporation, duly
organized and validly existing and in good standing under the laws of the State
of Florida and has full corporate power to own, lease and operate its
properties and assets and to carry on its business as and where it is now being
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
(b) The officers of the Licensor have taken all action
required by law to authorize the execution and delivery of this Agreement and
the transactions contemplated hereby. The execution, delivery and performance
of this Agreement constitutes the valid and binding Agreement of the Licensor
enforceable in accordance with its terms. Neither the execution and delivery of
this Agreement, the consummation of the transaction contemplated hereby, nor
the fulfillment of or compliance with the terms and provisions of this
Agreement conflict with or result in a breach of any of the terms, conditions
or provisions of any corporate restriction to which the Licensor is a party or
by which it is bound.
(c) No representation and warranty by the Licensor in
this Agreement and no statement in this Agreement or any document or
certificate furnished or to be furnished to the Licensee pursuant hereto
contains or will contain any material untrue statement, or omits or will omit
to state a material fact necessary in order to make the statements contained
therein not misleading.
(d) The Licensor represents and warrants that with
respect to the Licensed Property, it has the legal power to extend the rights
granted to the Licensee pursuant to this Agreement and that it has not made any
commitments to others inconsistent with or in derogation of such rights.
11. Representations and Warranties of the Licensee. The Licensee
represents and warrants:
(a) The Licensee is a Scottish Private Limited Company,
No. 1557106, duly organized, validly existing and in good standing under the
laws of the Country of Scotland, and has full corporate power to own, lease and
operate its properties and assets and to carry on its business as and where it
is now being conducted, to enter into this Agreement and to consummate the
transactions contemplated hereby.
(b) The officers of the Licensee have taken all action
required by law to authorize the execution and delivery of this Agreement and
the transactions contemplated hereby.
<PAGE> 10
The execution, delivery and performance of this Agreement constitutes the valid
and binding Agreement of the Licensee enforceable in accordance with its terms.
Neither the execution and delivery of this Agreement, the consummation of the
transaction contemplated hereby, nor the fulfillment of or compliance with the
terms and provisions of this Agreement, conflict with or result in a breach of
any of the terms, conditions or provisions of any corporate restriction to
which the Licensee is a party or by which it is bound.
(c) No representation and warranty by the Licensee in
this Agreement and no statement in this Agreement or any document or
certificate furnished or to be furnished to the Licensor pursuant hereto
contains or will contain any untrue statement, or omits or will omit to state a
fact necessary in order to make the statements contained therein not
misleading.
(d) The Licensee represents and warrants that it has the
capacity to manufacture the Licensed Products in accordance with the terms and
conditions set forth and contemplated in and by this Agreement and that it has
not made any commitments to others inconsistent with or in derogation of such
rights.
12. Notification of Potential or Actual Infringement. The
Licensee shall notify the Licensor, in writing, of any possible infringements
or imitations by others of the Licensed Property, or properties similar to
those covered in this Agreement which may come to the Licensee's attention and
provide the Licensor with all information which it has relating to such claim
at the time of sending such notice. The Licensor shall endeavor to investigate
unauthorized uses by others of their respective licensed property brought to
its attention by the Licensee. The Licensor shall have the sole right to
determine whether or not any action shall be taken on account of any such
infringements or imitations.
13. Cooperation by Licensee. In the event there may be possible
infringements or imitations, the Licensee agrees to cooperate fully and in good
faith with the Licensor Partner at the Licensors request, to the extent
necessary in the procurement of any protection or to protect any of the
Licensor's rights with regard to that Licensor's Licensed Property and/or
Proprietary Rights in the Licensed Property.
14. Indemnification.
(a) By the Licensor. The Licensor shall indemnify and
hold the Licensee harmless from and against any and all losses, claims, damages
and liabilities, jointly or severally, to which the Licensee may become subject
under any applicable Federal or state law, or otherwise related to or arising
out of any provision or obligation contemplated by this Agreement and the
performance by the Licensor of the services contemplated by this Agreement, and
shall reimburse the Licensee for all reasonable expenses (including reasonable
counsel fees and expenses) as they are incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding arising therefrom, whether or not the Licensee is a
party thereto. In the event that the foregoing indemnity is unavailable or
insufficient to hold the Licensee harmless, then the Licensor shall contribute
to amounts paid or payable by the Licensee in respect of such losses, claims,
damages and liabilities in such proportion as appropriately reflects
<PAGE> 11
the relative benefits received by, in fault of, the Licensee in connection with
the matters as to which such losses, claims, damages and liabilities relate and
other equitable considerations.
(b) By the Licensee. The Licensee shall indemnify and
hold the Licensor harmless from and against any and all losses, claims, damages
and liabilities, jointly or severally, to which the Licensor may become subject
under any applicable Federal or state law, or otherwise related to or arising
out of any provision or obligation contemplated by this Agreement and the
performance by the Licensee of the services contemplated by this Agreement, and
shall reimburse the Licensor for all reasonable expenses (including reasonable
counsel fees and expenses) as they are incurred in connection with the
investigation ot preparation for or defense of any pending or threatened claim
or any action or proceeding arising therefrom, whether or not the Licensor is a
party thereto. In the event that the foregoing indemnity is unavailable or
insufficient to hold the Licensor harmless, then the Licensee shall contribute
to amounts paid or payable by the Licensor in respect of such losses, claims,
damages and liabilities in such proportion as appropriately reflects the
relative benefits received by, in fault of, the Licensor in connection with the
matters as to which such losses, claims, damages and liabilities relate and
other equitable considerations.
15. Non-Disclosure of Confidential Information.
(a) The Licensee acknowledges that the Licensor's
Confidential Information are valuable, special and unique assets of the
Licensor, access to and knowledge of which are essential to the performance of
the Licensee hereunder. In light of the highly competitive nature of the
industry in which the Licensor's Business is conducted, the Licensee agrees
that all Confidential Information, heretofore or in the future obtained by the
Licensee as a result of the Licensee's association with the Licensor shall be
considered confidential.
(b) Excluded from the Confidential Information, and
therefore not subject to the provisions of this Agreement, shall be any
information which:
i) At the time of disclosure, is in the public
domain as evidenced by printed publications;
ii) After the disclosure, enters the public
domain by way of printed publication through no fault of the Licensee
Contractor or those in privity with it;
iii) The Licensee can show by written
documentation was in its possession at the time of disclosure and
which was not acquired directly or indirectly from the Licensor; or
iv) The Licensee can show by written
documentation was acquired, after disclosure, from a third party who
did not receive it from the Licensor, and who had the right to
disclose the information without any obligation to hold such
information confidential.
v) The Licensee acknowledges that, as between
the Licensor and the Licensee, the Confidential Information and any
and all rights and privileges provided under
<PAGE> 12
the trademark, copyright, patent, trade secret and other laws of the
United States, the individual states thereof, and jurisdictions
foreign thereto, and the goodwill associated therewith, are and at all
times will be the property of the Licensor.
vi) The Licensee agrees that it shall:
a) Hold in confidence and not disclose
or make available to any third party any such Confidential
Information unless so authorized in writing by the Licensor;
b) Exercise all reasonable efforts to
prevent third parties from gaining access to the
Confidential Information;
c) Not use, directly or indirectly,
the Confidential Information in any respect of its business,
except as necessary to evaluate the information;
d) Restrict the disclosure or
availability of the Confidential Information to those of the
Licensee's Affiliates and/or sublicensees who have a need to
know the information in order to achieve the purposes of this
Agreement;
e) Not copy or modify any
Confidential Information without prior written consent of the
Licensor.
f) Take such other protective
measures as may be reasonably necessary to preserve the
confidentiality of the Confidential Information; and
g) Relinquish and require all of its
Affiliates and/or sublicensees to relinquish all rights it
and its Affiliates and/or sublicensee may have in any
matter, such as drawings, documents, models, samples,
photographs, patterns, templates, molds, tools or
prototypes, which may contain, embody or make use of the
Confidential Information; promptly deliver to the Licensor
any such matter as the Licensor may direct at any time; and
not retain any copies or other reproductions thereof.
vii) The Licensee further agrees:
a) That it shall promptly disclose in
writing to the Licensor all ideas, inventions, improvements
and discoveries which may be conceived, made or acquired by
the Licensee or its sublicenses and/or Affiliates as the
direct or indirect result of the disclosure by the Licensor
of the Confidential Information to the Licensee;
b) That all such ideas, inventions,
improvements and discoveries conceived, made or acquired by
the Licensee, alone or with the assistance of others,
relating to the Confidential Information, shall be the
property of the Licensor and shall be treated as Confidential
Information in accordance with the provisions hereof
<PAGE> 13
and that Licensee shall not acquire any intellectual property
rights under this Agreement except the limited right to use
set forth in this Agreement.
c) That Licensee and its sublicensees
and/or Affiliates shall assist in the preparation and
execution of all applications, assignments and other
documents which the Licensor may deem necessary to obtain
patents, copyrights and the like in the United States and in
jurisdictions foreign thereto, and to otherwise protect the
Licensor.
(c) Upon written request of the Licensor, the Licensee
shall return to the Licensor all written materials containing the Confidential
Information. The Licensee shall also deliver to the Licensor written statements
signed by the Licensee certifying all materials have been returned within five
days of receipt of the request.
16. Covenants as Essential Elements of this Agreement. It is
understood by and between the parties hereto that the foregoing covenants by
the Licensee contained in Section 15 of this Agreement shall be construed to be
agreements independent of any other element of the Licensee's services to the
Licensor. The existence of any other claim or cause of action, whether
predicated on any other provision in this Agreement, or otherwise, as a result
of the relationship between the parties shall not constitute a defense to the
enforcement of the covenants in this Agreement against the Licensee.
17. Remedies.
(a) The Licensee acknowledges and agrees that the
Licensor's remedy at law for a breach or threatened breach of any of the
provisions of Section 15 herein would be inadequate and the breach shall be per
se deemed as causing irreparable harm to the Licensor. In recognition of this
fact, in the event of a breach by the Licensee of any of the provisions of
Section, the Licensee agrees that, in addition to any remedy at law available
to the Licensor, including, but not limited to monetary damages, the Licensor,
without posting any bond, shall be entitled to obtain, and the Licensee agrees
not to oppose the Licensor's request for equitable relief in the form of
specific performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available to the
Licensor.
(b) The Licensee acknowledges that the granting of a
temporary injunction, temporary restraining order or permanent injunction
merely prohibiting the use of Confidential Information would not be an adequate
remedy upon breach or threatened breach of Section 15 and consequently agrees,
upon proof of any such breach, to the granting of injunctive relief prohibiting
any form of competition with the Licensor. Nothing herein contained shall be
construed as prohibiting the Licensor from pursuing any other remedies
available to it for such breach or threatened breach.
(c) In the event that the Licensee shall be in violation
of the any of the provisions of Section 15, then the time limitation during
which breach or breaches should occur, and in the event the Licensor should be
required to seek relief from such breach in any court or
<PAGE> 14
other tribunal, then the covenant shall be extended for a period of time equal
to the pendency of such proceedings, including appeal.
(d) The Licensee specifically acknowledges that to the
extent there is a violation of Section 15, the Licensee and the Person
violating Section 15 shall be jointly and severally liable to the Licensor for
any damages to the Licensor.
18. Attorneys' Fees. The Licensee agrees that in the event that
the Licensor is required to engage an attorney to enforce the terms of the
covenants in Sections 15 of this Agreement, the Licensee shall pay all costs
and expenses of that attorney or firm, whether or not a complaint or suit is
filed with any court of competent jurisdiction.
19. Term. The term of this Agreement shall begin as of the
Effective Date and shall continue for a period of fifteen (15) years, which
term shall be automatically renewed for two successive fifteen (15) year
periods.
20. Termination.
(a) Immediate Termination. This Agreement may be
terminated immediately by the Licensor upon the occurrence of any of the
following events:
i) The willful engagement in misconduct that
is materially injurious to the Licensor, monetarily or otherwise;
ii) An act or acts (a) constituting a felony,
under the laws of the United States or any state thereof or (b)
causing the Licensee to lose any of the Licensee's professional
licenses necessary to the performance of the Licensee's obligations
set forth in this Agreement.
iii) Insolvency, liquidation or bankruptcy of
Licensee, whether voluntary or involuntary or equivalent;
iv) Appointment of a trustee or receiver for
Licensee (or equivalent).
(b) The waiver of any default under this Agreement by
Licensor shall not constitute a waiver of the right to terminate and/or cancel
this Agreement for any subsequent or like default, and the exercise of the
right of termination/cancellation shall not impose any liability by reason of
termination/cancellation nor have the effect of waiving any damages to which
Licensor might otherwise be entitled.
21. Effect on Prior Agreements. This Agreement supersedes any and
all prior or written agreements in their entirety between the Licensor and the
Licensee, which shall be void and of no further force and effect after the date
of this Agreement.
22. Notices. Any and all notices, designations, consents, offers,
acceptances or other communication provided for herein shall be given in
writing and delivered in person or by
<PAGE> 15
registered or certified mail, return receipt requested, directed to the address
shown below, unless notice of a change of address is furnished:
If to the Licensor:
VIRAGEN TECHNOLOGY, INC.
2343 West 76th Street
Hialeah, Florida 33016
Attn: Gerald Smith, President
With a copy to:
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
New River Center, Suite 1900
200 E. Las Olas Boulevard
Fort Lauderdale, FL 33301
Attn: James Schneider, Esq.
If to the Licensee:
VIRAGEN (SCOTLAND) LTD.
2343 West 76th Street
Hialeah, Florida 33016
Attn: Dennis W. Healey, Managing Director
With a copy to:
DORMAN JEFFREY & CO. SOLICITORS
Madeleine Smith House
6/7 Blythswood Square
Glasgow, Scotland G2 4AD
Attn: David Gibson, Esq.
23. Waiver. Unless agreed in writing, the failure of either
party, at any time, to require performance by the other of any provisions
hereunder shall not affect its right thereafter to enforce the same, nor shall
a waiver by either party of any breach of any provision hereof be taken or held
to be a waiver of any other preceding or succeeding breach of any term or
provision of this Agreement. No extension of time for the performance of any
obligation or act shall be deemed to be an extension of time for the
performance of any other obligation or act hereunder.
24. Complete Agreement. This Agreement contains the entire
agreement between the parties hereto with respect to the contents hereof and
supersedes all prior agreements and understandings between the parties with
respect to such matters, whether written or oral. Neither this Agreement nor
any term or provision hereof may be changed, waived, discharged or amended in
any manner other than by an instrument in writing, signed by the party against
which the enforcement of the change, waiver, discharge or amendment is sought.
25. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one Agreement.
<PAGE> 16
26. Binding Effect/Assignment. This Agreement shall be binding
upon the parties hereto, their heirs, legal representatives, successors and
assigns. This Agreement shall not be assignable by the Licensee but shall be
assignable by the Licensor (i) to any successor in interest of the Licensor; or
(ii) in connection with the sale, transfer or other disposition of its business
or to any of the Licensor's Affiliates controlled by or under common control
with the Licensor.
27. Governing Law. This Agreement shall become valid when
executed and accepted by the Licensor and, shall be construed pursuant to the
laws of the United States and more particularly pursuant to the laws of the
State of Florida, without giving effect to any conflict of laws principles.
28. Headings. The headings of the sections are for convenience
only and shall not control or affect the meaning or construction or limit the
scope or intent of any of the provisions of this Agreement.
29. Survival. Any termination of this Agreement shall not,
however, affect the ongoing provisions of this Agreement which shall survive
such termination in accordance with their terms.
30. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
31. Enforcement. Should it become necessary for any party to
institute legal action to enforce the terms and conditions of this Agreement,
the successful party will be awarded reasonable attorneys' fees at all trial
and appellate levels, expenses and costs.
32. Construction. This Agreement shall be construed within the
fair meaning of each of its terms and not against the party drafting the
Agreement and related Exhibits and documents.
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written in Dade County, Florida, U.S.A.
WITNESS: THE LICENSOR:
VIRAGEN TECHNOLOGY, INC.
/s/ Patricia Zambrano
- --------------------------------
By: /s/ Gerald Smith
------------------------------------
Gerald Smith, President
THE LICENSEE:
VIRAGEN (SCOTLAND) LTD.
/s/ Steven Sanders
- --------------------------------
By: /s/ Dennis W. Healey
------------------------------------
Dennis W. Healey, Managing Director
<PAGE> 18
EXHIBIT A
INVENTIONS OR DESIGNS APPLICABLE TO LICENSED PROCESSES
<PAGE> 19
EXHIBIT B
PATENT RIGHTS
<PAGE> 20
EXHIBIT C
MANUFACTURING AND LICENSE AGREEMENT
BETWEEN
VIRAGEN (SCOTLAND) LTD.
AND THE
SCOTTISH NATIONAL BLOOD TRANSFUSION SERVICE
<PAGE> 21
EXHIBIT D
SCHEDULE OF PAYMENTS
<PAGE> 1
EXHIBIT 10.(ix)
VIRAGEN TECHNOLOGY, INC.
865 SW 78TH AVENUE, SUITE 100
PLANTATION, FL 33324
PHONE: (954) 233-8746 FAX: (954) 233-1412
September 29, 1997
Viragen (Scotland) Ltd.
2343 West 76th Street
Hialeah, FL 33016
RE: LICENSING AGREEMENT DATED JULY 12, 1995
Gentlemen:
Reference is made to that Licensing Agreement dated July 12, 1995 (the
"Agreement"). We hereby amend paragraph 8(a)(i) and 8(a)(ii) such that the
$2,000,000 initial royalty previously paid by you will fulfill the obligation
of Viragen (Scotland) Ltd. through October 31, 1998 and no further royalty
payment will be due prior to November 1, 1998.
In addition, the parties agree that if the remaining technology is not
transferred to Viragen (Scotland) Ltd., no additional royalty payment will be
due to us, and Viragen Technology, Inc. will refund the aforementioned
$2,000,000 payment.
Very truly yours,
VIRAGEN TECHNOLOGY, INC.
By: /s/ Gerald Smith
---------------------------------
President
ACCEPTED AND AGREED
VIRAGEN (SCOTLAND) LTD.
By: /s/ Dennis W. Healey
----------------------------------
Director
<PAGE> 1
EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Basic and diluted weighted average shares outstanding ................. 7,116,059 7,048,967 3,685,705
============= =========== ===========
Net loss .............................................................. $ (4,642,126) $ (859,214) $ (475,351)
============= =========== ===========
Basic and diluted net loss per common share ........................... $ (0.65) $ (0.12) $ (0.13)
============= =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage
Jurisdiction of Owned by
Incorporation 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.
