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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-17827
VIRAGEN (EUROPE) LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 11-2788282
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
865 SW 78TH AVENUE, SUITE 100, 33324
PLANTATION, FLORIDA (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (954) 233-8377
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the common stock on September 15,
2000 was approximately $2,577,000.
As of September 15, 2000, Viragen (Europe) Ltd. had outstanding 19,662,100
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Risk Factors included in Post-Effective Amendment on Form S-3, File No.
333-7303, dated April 15, 1997, incorporated by reference into Part II Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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VIRAGEN (EUROPE) LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2000
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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 15
Item 8. Consolidated Financial Statements and Supplementary Data.... 16
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 17
Item 11. Executive Compensation and Employment Agreements............ 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 23
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Viragen (Europe) Ltd. is a Delaware corporation. We are an 89% owned
subsidiary of Viragen, Inc., our parent company (AMEX symbol "VRA"). We operate
extensively through our wholly owned subsidiary Viragen (Scotland) Ltd., a
Scottish private company organized in 1995. Viragen (Scotland), which houses our
manufacturing and laboratory facilities, is located in Edinburgh, Scotland.
Through a license granted by our parent company in 1995, we secured certain
exclusive rights in the European Union and certain non-exclusive rights
throughout the rest of the world, excluding the United States and its
territories. The license provides for us to engage in the manufacture and
distribution of certain immunological products, particularly human leukocyte
derived interferon. The license encompasses Viragen, Inc.'s Omniferon(TM)
product.
We are in the business of researching, developing and manufacturing
products, which help the human immune system resist viral infections, and
related technologies. Our primary product is a natural interferon product named
Omniferon(TM). We produce Omniferon from human white blood cells. Natural
interferon stimulates and controls the human immune system. In addition,
interferon may stem the growth of various viruses including those involved with
diseases like hepatitis, cancer, multiple sclerosis, and HIV/AIDS.
Neither the United States Food and Drug Administration nor the European
Union regulatory authorities have approved Omniferon for sale to the public. We
are currently seeking European Union regulatory authority approval for our
Omniferon product and intend to seek U.S. Food and Drug Administration approval
in the future. These approvals require several years of clinical trials and
substantial additional funds.
We are concentrating our efforts on the clinical trials necessary to obtain
approvals for Omniferon, currently within the European Union, and later in the
United States. We began our preclinical studies with Omniferon in March 1998 and
obtained approval of our Clinical Trial Exemption Application in July 1999. We
began our clinical trials of Omniferon in Europe, initially for the treatment of
hepatitis C, during the fourth calendar quarter of 1999.
RECENT DEVELOPMENTS
In December 1999, through Viragen (Scotland) Ltd., we entered into a
collaborative agreement with Memorial Sloan-Kettering Cancer Center in New York
City. The agreement is for the development of a human monoclonal antibody, to be
used in conjunction with our Omniferon product for the treatment of melanoma, a
potentially fatal skin cancer. This technology could also prove useful in the
treatment of certain other cancers.
In July 2000, we entered into an agreement with the United Kingdom's Cancer
Research Campaign Technology and the University of Nottingham to develop a new
cancer vaccine therapy for the treatment of several indications including
breast, ovarian and colorectal cancers. The development work will take place
primarily at the Cancer Research Campaign's Department of Clinical Oncology at
the University of Nottingham in England.
Under the Cancer Research Campaign Agreement, we were granted an exclusive
worldwide commercial license by the Cancer Research Campaign to develop,
manufacture and sell their patent pending technology based on a tumor-associated
antigen. The licensed technology covers the tumor-associated antigen, the method
of its isolation and its potential medical uses, including cancer vaccines.
OPERATIONS
In July 1999, Viragen (Scotland) received regulatory approval of its
Clinical Trial Exemption Application, to begin Phase I/II human clinical trials
of its Omniferon product, initially for the treatment of hepatitis C. We began
our clinical trials in the fourth calendar quarter of 1999.
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We will require significant additional financing to continue conducting and
complete clinical trials for the purpose of obtaining European Union and/or U.S.
Food and Drug Administration approvals for Omniferon. Clinical testing toward
European Union and/or Food and Drug Administration approval is an expensive
process. This is expected to take several years to accomplish with no assurance
that regulatory approvals will eventually be obtained.
In November 1998, we signed an exclusive supply and distribution agreement
with AGC, a Pakistan-based, multinational conglomerate. This agreement provides
for the purchase and distribution of Omniferon. Under this agreement, AGC's
designated territories include:
- India,
- Pakistan,
- Saudi Arabia,
- Kuwait,
- Yemen,
- Oman,
- UAE,
- Brunei, and
- other Middle Eastern countries.
AGC must purchase a minimum of $20 million of Omniferon over five years. The
purchase minimums become binding on AGC if and when:
- AGC receives the required regulatory approvals for product
commercialization in all of the above territories, and
- we receive the regulatory approvals to export Omniferon from our
commercial manufacturing facility in Edinburgh, Scotland.
AGC has agreed to provide Viragen (Europe) with its projected annual
requirements to be updated quarterly. Projected requirements in excess of agreed
purchase minimums are binding on AGC. The purchase minimums, if contractually
triggered, will be secured by a $1 million irrevocable revolving letter of
credit. AGC, Viragen (Europe) and Viragen have agreed that if and when we obtain
regulatory approval for commercialization of Omniferon in the United States
and/or Europe, all parties will negotiate in good faith an amendment to the
agreement which could modify the purchase minimums and selling price.
The AGC agreement has been approved by the boards of directors of AGC,
Viragen (Europe) and Viragen.
Under the AGC agreement, AGC is responsible for clinical and regulatory
costs to obtain approvals for commercialization of Omniferon in their designated
territories. AGC is also responsible for all subsequent sales, marketing and
distribution activities. AGC is required to build, own and operate, at their
expense, a pharmaceutical distribution facility in a mutually agreeable location
within the territories. AGC has informed us that they initially intend to focus
on distribution for hepatitis B and C. These diseases are at epidemic
proportions in the designated territories.
In July 1999, Viragen (Europe) entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and distribution agreement between Viragen and Drogsan for
natural interferon. These terms are similar to the AGC agreement. The final
agreement has not yet been completed.
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THE PRODUCT
We derive our Omniferon from human white cells also known as leukocytes.
Natural interferon is one of the body's natural defensive responses to foreign
substances like viruses. It is so named because it "interferes" with viral
growth. Natural interferon consists of protein molecules that induce antiviral,
antitumor and immunomodulatory responses within the body. Medical studies
indicate that interferons may inhibit malignant cell and tumor growth without
affecting normal cell activity.
There are two sources of interferon for medical use. They are
differentiated primarily by their method of manufacture and resulting
composition. The first is a multi-species natural, human leukocyte-derived alpha
interferon. This is produced by cultivated human white blood cells. The
introduction of a harmless agent induces the cells to produce natural
interferon. Natural interferon is then separated from other natural proteins and
purified to produce a highly concentrated product for clinical use. This is the
type of interferon that we produce. The second type of interferon is recombinant
or synthetic interferon (alpha or beta). This is a genetically engineered
interferon. Generally, it is produced from a single human gene in bacterial
cells by recombinant DNA techniques.
Clinical studies indicate that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon may cause an immunological
response through the production by the human immune system of neutralizing
and/or binding antibodies. These antibodies reduce the effectiveness of the
treatment or may cause adverse side effects. We believe that the production of
neutralizing and/or binding antibodies may be essentially non-existent in
patients treated with natural interferon. Furthermore, primarily due to
biological differences, the side effects of treatment with natural interferon
may be milder than with a recombinant or synthetic interferon.
THE INTERFERON INDUSTRY
Prior to 1985, natural interferon was the only type of interferon
available. Research institutions and other biomedical companies were working to
solve the problem of the high cost related to the industrial-scale production of
natural interferon. In 1985, Hoffman-LaRoche, Inc. and Schering-Plough
Corporation, two major pharmaceutical companies, successfully developed
synthetic interferon using recombinant DNA technology. They subsequently
received Food and Drug Administration approval to produce and market their
recombinant alpha interferon products for the treatment of hairy-cell leukemia,
hepatitis and Kaposi's Sarcoma, an AIDS-related skin cancer.
After the emergence of recombinant or synthetic alpha interferon, the
medical community's interest in natural interferon diminished. This was due
primarily to the limited availability and its higher cost of production. Most
clinical studies thereafter utilized a synthetic product.
Hoffman-LaRoche, Inc. and Schering-Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their synthetic
interferon products. In 1993, Chiron Corp. received Food and Drug Administration
approval of BetaSeron(TM), its recombinant beta interferon, for the treatment of
relapsing/remitting multiple sclerosis. In 1996, Biogen, Inc. received Food and
Drug Administration approval for Avonex(TM), its recombinant beta interferon,
for relapsing/remitting multiple sclerosis. In 1997, Teva Pharmaceuticals
received Food and Drug Administration approval of its peptide chemical compound,
Copaxone(TM), for relapsing/remitting multiple sclerosis. In addition to the
manufacturers of synthetic interferons, Interferon Sciences, Inc. received Food
and Drug Administration approval in 1989 to sell, in injectable form,
Alferon(TM), a natural interferon product, for genital warts.
APPLICATIONS OF INTERFERON
Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to viral infections. We believe interferons
can arrest the progress of viral based infections, reducing symptoms and disease
related complications with a minimum of side effects.
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Hepatitis C
The hepatitis C virus is a major worldwide cause of acute and chronic
hepatitis. Hepatitis C, previously known as "non-A, non-B hepatitis", affects an
estimated 4 million Americans. Approximately 30,000 new cases are diagnosed each
year. It is responsible for an estimated 8,000 deaths annually. Hepatitis C is
currently a leading cause of liver transplantation in the United States. Based
on a review of published literature and evaluation by our scientific staff and
advisors, we believe that our Omniferon product may prove effective in the
treatment of this indication. Currently, the Food and Drug Administration has
approved interferons for the treatment of hepatitis C including:
- Hoffman-LaRoche's Roferon(TM),
- Schering-Plough's Intron A(TM), and
- Amgen's Infergen(TM).
We are currently conducting Phase II clinical trials in the European Union
for the treatment of hepatitis C.
Hepatitis B
Approximately 45% of the world population live in areas with a high
prevalence of hepatitis B infection. In these areas, the lifetime risk of
infection can exceed 60%. Most infections in these areas are acquired at birth
or during early childhood, when the risk of developing chronic infection is
highest. The United States is not in a high prevalence area. Here approximately
300,000 cases of acute hepatitis B are diagnosed annually. Between 2% and 10% of
these patients develop chronic infections. These infections put the patients at
risk of progressive liver disease possibly leading to cirrhosis and/or
hepatocellar carcinoma.
Synthetic interferon alpha is the only U.S. Food and Drug Administration
approved drug for hepatitis B. It has proven to be effective in the treatment of
some cases. We believe that Omniferon may also prove effective in the treatment
of hepatitis B.
Melanoma
Melanoma is a type of cancer which originates in the melanocytes, the cells
containing skin color. Approximately 32,000 cases per year are diagnosed in the
United States alone. Melanoma has one of the fastest growing cancer occurrence
rates, increasing at a rate of approximately 4.3% per year. An American's
lifetime risk of developing melanoma is currently approximately one in 75 and it
is the most commonly occurring cancer in women between the ages of 25 and 29.
Melanoma is second only to breast cancer in women ages 30 to 34.
Through a collaboration agreement with Memorial Sloan-Kettering Cancer
Center, we are developing a monoclonal antibody to be used in conjunction with
our Omniferon product in the treatment of this type of cancer.
Chronic Myelogenous Leukemia
Chronic myelogenous leukemia is one of a group of diseases called
myeloproliferative disorders. It is usually recognized by a distinctive
cytogenetic abnormality, known as the Philadelphia chromosome. The current
treatment for chronic myelogenous leukemia is high dose chemotherapy with bone
marrow transplantation. Interferon therapy has emerged as a possible effective
initial treatment in this disease. This kind of therapy affects both the
presence of leukemia cells as well as the number of bone marrow cells having the
Philadelphia chromosome.
Multiple Sclerosis
In 1988, under Florida's Investigational Drug Program, we conducted a
patient funded, multi-phase clinical trial for the treatment of multiple
sclerosis with Alpha Leukoferon, our first-generation natural
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interferon product. We conducted this study on a double-blind basis. Certain
patients received different dosage levels of that product and other patients
received a placebo. The study terminated in mid-1992. Published information on
these trials indicates that, in many cases, our Alpha Leukoferon product
provided favorable results in the treatment of patients afflicted with
relapsing/remitting, relapsing progressive and chronic progressive multiple
sclerosis.
The principal investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of our Alpha Leukoferon product in the treatment of various types of
multiple sclerosis. In 1994, the abstract, titled "Stabilization of
Relapsing -- Remitting and Progressive Multiple Sclerosis with Natural
Interferon Alpha: A Preliminary Trial," was published in the Annals of
Neurology. This is the official journal of the American Neurological
Association. The investigators and Viragen published an additional article,
titled "Natural Alpha Interferon in Multiple Sclerosis: Results of Three
Preliminary Series." It appeared in the Journal of International Medical
Research in 1996.
HIV/AIDS
In March 1996, Viragen, in collaboration with Biodoron, a Hollywood,
Florida based clinic, received approval from Health and Rehabilitative Services
under Florida's Investigational Drug Program to conduct an investigational study
in Florida of our Alpha Leukoferon product. This approval was for the treatment
of HIV/AIDS in hemophiliacs. Viragen entered into an agreement with Quantum
Health Resources, Inc., which contributed $330,000 toward to the cost of the
study. Quantum, a subsidiary of Olsten Services Corp., is a national provider of
alternate site therapies and support services for people affected by chronic
disorders, including hemophilia. The study began in March 1996. A total of 35
patients enrolled to receive Alpha Leukoferon for a minimum of six months in
combination with a comprehensive HIV/AIDS treatment program. While the study
suggested that Alpha Leukoferon was safe or well tolerated, the overall study
results proved to be inconclusive due to the smaller than anticipated number of
patients that finished the study.
MANUFACTURE OF INTERFERON
Human white blood cells, also known as leukocytes, and a stimulating agent
are needed to produce human interferon. These raw materials are readily
available to us. A stimulating agent, which is harmless to humans, is introduced
into the white blood cell, which induces the cell to produce interferon. The
interferon is then separated from other proteins, extracted and purified. Our
Omniferon product is currently being manufactured in our Scottish facility for
use in the human clinical trials, which began in the fourth quarter of calendar
1999.
Production methods that we have developed, as well as enhanced methods
currently under development, we believe will reduce our costs of production and,
ultimately, the market price of Omniferon to patients. However, we cannot assure
you that this new manufacturing technology will achieve the level of
manufacturing proficiency and product improvement hoped for.
RESEARCH AND DEVELOPMENT
The entire process of research, development and European Union and/or Food
and Drug Administration approvals of a new bio-pharmaceutical drug takes several
years. It also requires substantial funding. In July 1999, we received approval
of our European Clinical Trial Exemption Application to begin clinical trials of
Omniferon. Our present focus is the continued research and development of
Omniferon for the treatment of hepatitis B and C, melanoma, multiple sclerosis,
chronic myelogenous leukemia, herpes and HIV/AIDS.
We have spent a substantial amount of time and resources on the research
and development of improved cell stimulation and purification techniques for our
Omniferon product. We believe improving these processes will improve the purity
of the product while increasing production yields. We believe that focusing
research efforts on increased production yields, if successful, will
significantly lower costs of production. Lower production costs, if successful,
will result in a lower more competitive sales price of Omniferon.
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Research and development costs totaled $3,511,805, $2,742,154 and
$1,585,837 for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
INTELLECTUAL PROPERTY
We believe our production techniques are unique and are capable of yielding
a superior quality product. We believe that our production techniques will allow
us to offer Omniferon at a price competitive with the recombinant interferons.
Viragen has filed three patent applications covering Omniferon production
techniques. They have also submitted several foreign patent applications
relating to natural interferon for topical use. Several of these patents have
been granted. During fiscal 1999, their patent issued in Japan for the topical
use of interferon was challenged by a Japanese company. They successfully
defended their patent position.
Under a license agreement between Viragen and Viragen (Europe) dated July
12, 1995, we have exclusive rights to Viragen's technologies. These include
technologies covered by patent, for all countries in the European Union. In
addition, we were granted the non-exclusive rights to Viragen's technology
throughout the world, excluding the United States and its territories. We have
contracted to pay Viragen a licensing fee ranging from 10% to 5% of sales, with
a minimum of $2 million per year, subsequently modified to $167,000 per month.
Viragen deferred the minimum licensing payment until we have the necessary cash
flow to meet this payment. The initial term of this agreement is 15 years and
automatically renews for two successive 15-year periods.
In August 2000, the World Intellectual Property Organization published
Viragen's international patent application related to methods of isolating
highly purified natural type 1 interferons.
United States and European Union patents have been issued to others for
genetically engineered and human-derived interferon. In the event of valid
claims, Viragen may have to negotiate license agreements with patent holders to
use some processes and products. We believe that we do not infringe upon any
current patent. Also, no one has alleged patent infringement by Viragen or
Viragen (Europe).
Someone can challenge the validity and enforceability of a patent by
litigation after its issuance. If the outcome is against the owner of the
patent, other parties may be free to use the subject matter of the patent.
Protection provided by foreign patents may be different than in the United
States. We cannot assure you that any future patents will offer substantial
protection or commercial benefit to us.
REGULATION
United States and European Union
Our activities, products and processes are subject to substantial
government regulation in the United States and within the European Union. The
European Union, Food and Drug Administration, state and local agencies regulate
the manufacturing, advertising and sale of biologic substances and
pharmaceutical products. Regulatory authorities have stringent mandatory
procedures and standards, which apply to the clinical testing, marketing and
manufacture of any biologic product, including ours. European Union and/or Food
and Drug Administration approvals for commercialization of any new product can
take significant time and capital, since it involves extensive testing
procedures and lengthy clinical trials. These trials involve the measurement of
product safety and efficacy under specific protocols. The process of obtaining
European Union and/or Food and Drug Administration approvals requires extensive
animal testing to demonstrate product safety. Human tests are then performed to
show and to document findings as to safety, and effectiveness. Data is then
gathered and evaluated, followed by the submission of all information and data
to the regulatory authorities.
We have completed the preclinical studies of our Omniferon product in the
European Union. In July 1999, we received approval of our UK Clinical Trial
Exemption application to begin clinical trials on humans. We began the clinical
trials during the fourth calendar quarter of 1999. Eventually, we expect to
submit an Investigative New Drug Application to the Food and Drug Administration
for use of Omniferon in the U.S. To help us during the approval process, we
assembled a clinical advisory committee. The committee consists
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of scientists, medical researchers and clinicians. They are acting in an
advisory capacity to assist us in developing the medical, scientific and
clinical aspects in support of our clinical trials, initially within the
European Union and eventually in the United States.
In Europe and the United States, human clinical trial programs generally
involve a three phase process. Typically, Phase I trials are conducted in
healthy volunteers to determine any early side effects and the pattern of drug
distribution and metabolism. Phase II trials are conducted in groups of patients
afflicted with the target disease to provide sufficient data for the statistical
proof of effectiveness and safety required by regulatory agencies. If Phase II
evaluations indicate potential effectiveness with an acceptable safety profile,
Phase III trials are performed. Phase III is performed to conclusively
demonstrate clinical effectiveness and safety within an expanded patient
population from multiple clinical study sites. Regulatory authorities may also
require Phase IV studies to track patients after a product is approved for
commercial sale.
American pharmaceutical manufacturers who sell outside of the United States
are also subject to Food and Drug Administration jurisdiction. Semi-finished
drugs may be shipped, under controlled circumstances, for further processing,
packaging, labeling and distribution to third parties in approved foreign
countries. This controlled distribution is subject to the laws that apply in
those countries. For Viragen (Europe) to conduct this type of sale, we must
first comply with all Food and Drug Administration rules and regulations.
License and Manufacturing Agreement
In July 1995, Viragen (Scotland) entered into a license and manufacturing
agreement with the Common Services Agency of Scotland to secure a sufficient
source of needed raw materials. We also wanted their expertise in the area of
blood-derived products and the regulatory approval process. The agency is an
adjunct of the Scottish Government which acts on behalf of the National Health
Service in Scotland and the Scottish National Blood Transfusion Service. The
agency owns and operates a blood fractionation facility in Edinburgh, Scotland.
It has the physical and technical capacity to supply leukocytes and manufacture
alpha interferon from human leukocytes using our processes. We believe that
securing a sufficient qualified long-term source of blood-derived raw materials
within the European Union is critical for us to conduct European Union clinical
trials as well as providing a sufficient source of raw materials for future
subsequent commercial manufacturing.
During fiscal 1998, we were notified that, due to concerns over the
possible presence of Mad Cow disease in the UK blood supply, human leukocytes
collected in Scotland would not be approved for use in our clinical trials or
potential commercial production. This prohibition will remain until the European
regulatory authorities are satisfied that the risk of contamination has been
minimized. Due to this situation, we have been utilizing leukocytes collected in
Germany under our German Red Cross contractual arrangements, as well as other
approved sources.
Under the terms of the agreement with the German Red Cross, our subsidiary,
Viragen (Germany) GmbH, has the right to receive, on a preferential basis,
leukocytes produced by the German Red Cross. Viragen (Germany) has a right to
receive 1,000,000 leukocytes per year with deliveries to be ordered on a
quarterly basis. During the initial two-year period of the agreement, Viragen
(Germany) may determine its annual order quantity up to 1,000,000 leukocytes.
After the initial two-year period, the annual order quantity will be 1,000,000
leukocytes plus or minus 15%. Under this agreement, we will pay the German Red
Cross a percentage of sales of Omniferon attributable to Viragen (Germany)
leukocytes. The German Red Cross will also be entitled to receive priority
distributions of Omniferon from German sourced leukocytes. Leukocytes provided
by the German Red Cross have been approved for use in our Scottish facility.
We engaged professionally recognized consultants and appointed board of
director members familiar with the European Union regulatory process to assist
in the manufacturing and product approval submissions. In addition, the Scottish
Blood Transfusion Service has a full-time regulatory department that has
obtained approval in the European Union of numerous European Union blood-derived
products. The Scottish Blood Transfusion Service will also work with us to
obtain a manufacturing license and later product approvals at the conclusion of
the European Union clinical studies. After obtaining a manufacturing license for
Omniferon, we intend to seek Food and Drug Administration manufacturing approval
of our Scottish manufacturing facility.
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However, we can give you no assurances that the Food and Drug Administration
will license or approve the Scottish manufacturing facility or Omniferon for
clinical trials and distribution in the United States.
Viragen (Scotland) was organized to manufacture and distribute Omniferon
and related products in the European Union and other countries outside the
United States. Viragen has transferred patent and proprietary rights to Viragen
(Scotland) under a grant of license. Viragen (Scotland) has provided the
Transfusion Service with an exclusive license to use the proprietary rights
covered by the license and manufacturing agreement for the manufacture and
distribution of Omniferon within the European Union. The Transfusion Service has
committed to participate with us in the manufacture of Omniferon in sufficient
scale to accommodate the European Union clinical trials. They also agreed to
conduct studies relevant to our product and cooperate with us in complying with
the laws and regulations of the European Union.
We are providing the Transfusion Service with full access to our
proprietary technology and specialized equipment under the license and
manufacturing agreement. We are also absorbing all costs of securing permits and
regulatory approvals, and expanding the Transfusion Service facilities, if
necessary, to participate in the manufacture of Omniferon. In addition, we are
bearing the costs of obtaining documentation showing compliance with European
Union regulatory requirements.
We have agreed to pay the Transfusion Service for product manufactured:
- for use in clinical trials in the European Union,
- for sales prior to obtaining new drug application approval, and
- for sales following regulatory approval.
Under this arrangement, payments will be made at varying percentages in
relation to costs, as follows:
- for products manufactured for clinical trials, they are entitled to cost
plus 25%,
- for sales prior to obtaining new drug application approval, cost plus
40%, and
- for sales following approval, cost plus 50%.
Products manufactured and used for humanitarian purposes or for medical use by
patients of the Scottish National Health Services or the United Kingdom National
Health Services will involve either no payments to the agency or payments at
substantially discounted prices.
We also have agreed to pay the Transfusion Service for providing process
documentation for any additional manufacturing facilities we might establish.
The term of the license and manufacturing agreement was for a five-year
period. There are also two additional five-year extension terms at our option.
The agreement also contains provisions protecting our proprietary rights and
limits various competitive activities by the Transfusion Service.
We are currently negotiating the terms of the first five year renewal under
an extension of the initial contract. The extension period expires in November
2000.
COMPETITION
Competition in the research, development and production of interferon and
other immunological products is intense. It involves major, well-established and
well-financed pharmaceutical and commercial entities, as well as major
educational and scientific institutions. Many researchers, some of whom have
substantial private and government funding, are involved with interferon
production, including production of interferon through synthetic DNA technology.
A number of large companies, including Hoffman-LaRoche, Inc., Schering-Plough
Corporation, Biogen, Inc., Chiron Corp., Berlex Laboratories and Ares-Serono are
producing, selling and conducting clinical trials with these recombinant
interferons (alpha and beta) and other immunological products. Their products
target the treatment of cancer and viral infections, including hepatitis C, our
first targeted use of Omniferon.
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In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of natural interferon, received Food and
Drug Administration approval in 1989 to sell, in injectable form, their natural
interferon product for genital warts.
We believe that competition is also based on production ability,
technological superiority and administrative and regulatory expertise in
obtaining governmental approvals for testing, manufacturing and marketing of the
product.
The timing of the entry of a new pharmaceutical product into the market is
an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share.
Our ability to develop products, complete clinical studies and obtain
governmental approvals in the past had been hampered by a lack of adequate
capital. As we do not have an approved product which can be distributed at this
time, we are not presently a competitive factor in the biopharmaceutical
industry.
EMPLOYEES
As of September 15, 2000, Viragen (Europe) has 31 full-time employees. Of
these, 6 are administrative personnel. The remaining 25 employees are research
and development, manufacturing and quality assurance/quality control personnel.
ITEM 2. PROPERTIES
Viragen and Viragen (Europe) maintain administrative offices in a 15,000
square foot facility, located at 865 S.W. 78th Avenue, Suite 100, Plantation, FL
33324, phone: (954) 233-8377.
In November 1996, Viragen (Scotland) executed a five year lease,
subsequently modified for additional space, 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 13,000 square
feet with an annual base lease rate of 88,000 UK pounds (approximately
US$134,000) per year plus common area and maintenance charges. The lease further
provides for up to four five year extensions at our option.
We consider all of our properties as suitable and adequate to carry on our
business. We also believe that we maintain sufficient insurance coverage on all
of our real and personal property.
ITEM 3. LEGAL PROCEEDINGS
In July 1994, an action was filed in the Circuit Court of Dade County,
Florida against Viragen (Europe), then named Sector Associates, Ltd., alleging
that Sector Associates, Ltd., prior to the reverse acquisition by Viragen and
Viragen (Scotland), mishandled payment of amounts due to Roy Woods, a secured
creditor (ROY WOODS AS TRUSTEE V. SECTOR ASSOCIATES, LTD.). Specifically, the
suit alleges (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. We
denied the claim and filed a counterclaim. In addition, Mr. George Levin of
Miami, FL, a former principal stockholder of Sector Associates, Ltd., is
obligated and has agreed to indemnify us in this matter. He 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.
In August 2000, we were informed that Mr. George Levin, the individual who
has agreed to indemnify us, and the plaintiff had reached a settlement in this
matter, rendering a trial unnecessary. The parties are currently in the process
of finalizing the documents and a stipulation of dismissal. Under the terms of
the indemnification agreement, the amount of the settlement will be paid by Mr.
Levin with no liability to us.
We know of no other material litigation or claims pending, threatened or
contemplated to which we are or may become a party.
9
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Viragen (Europe) Ltd.'s common stock was traded on the NASDAQ SmallCap
Market until March 23, 1999, under the symbol "VERP." Our stock commenced
trading on the over-the-counter bulletin board on March 24, 1999. The stock
symbol continues to be "VERP." The following table sets forth the high and low
closing quotations for our common stock since July 1, 1998.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999-2000 PERIOD
First Quarter ended 9/30/99................................. $ .88 $ .38
Second Quarter ended 12/31/99............................... 1.81 .31
Third Quarter ended 3/31/00................................. 3.38 .94
Fourth Quarter ended 6/30/00................................ 1.72 .66
1998-1999 PERIOD
First Quarter ended 09/30/98................................ $3.44 $1.94
Second Quarter ended 12/31/98............................... 2.31 .75
Third Quarter ended 03/31/99................................ .88 .25
Fourth Quarter ended 06/30/99............................... 1.00 .25
</TABLE>
The above quotations reflect prices between dealers, do not include retail
mark-ups, markdowns or commissions. These quotations may not necessarily
represent actual transactions.
As of September 15, 2000, we had approximately 120 shareholders of record.
On that date, the closing price of our common stock was $1.34 per share.
We have never paid any dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future because:
- we have experienced losses since inception,
- we have significant capital requirements in the future, and
- we presently intend to retain earnings, if any, to finance the expansion
of our business.
Future dividend policy will depend on:
- our earnings, if any,
- capital requirements,
- expansion plans,
- financial condition, and
- other relevant factors.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest and other income......... $ 16,752 $ 49,762 $ 37,474 $ 233,552 $ 73,945
Net loss.......................... (6,373,273) (4,930,453) (4,642,126) (859,214) (475,351)
Net loss per average common share
outstanding..................... (0.37) (0.46) (0.65) (0.12) (0.13)
Weighted average common shares
outstanding..................... 17,046,066 10,607,393 7,116,059 7,048,967 3,685,705
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............ $4,354,559 $ (582,995) $ 213,246 $3,197,265 $5,795,786
Total assets......................... 9,192,873 4,909,596 5,053,272 7,750,737 5,953,949
Long-term debt....................... -- 131,973 160,043 157,686 --
Stockholders' equity................. 619,965 2,480,500 1,823,623 6,452,137 5,829,565
</TABLE>
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding our expectations, hopes, intentions,
beliefs, or strategies regarding the future. Forward looking statements include
our statements regarding liquidity, anticipated cash needs and availability, and
anticipated expense levels in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including expected product clinical trial
commencement dates, product introductions, expected research and development
expenditures and related anticipated costs. All forward looking statements
included in this document are based on information available to us on this date
and we assume no obligation to update any of our forward looking statements. It
is important to note that our actual results could differ materially from those
contained in our forward looking statements.
Among the factors that could cause actual results to differ materially are
the factors detailed below and the risks discussed in the "Risk Factors" section
included in our registration statement on 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. These
"Risk Factors" are incorporated by reference from the Post-Effective Amendment
on Form S-3 (No. 333-7303). You should also consult updated risk factors, which
will be listed from time to time in future reports on Forms 10-Q, 8-K, 10-K and
annual reports to the stockholders.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect our financial condition and results of operations.
Our future success depends greatly on our ability to obtain additional
financing capital. We can not assure you that we will be able to obtain the
capital necessary to continue with our operations. Our future success also
depends in part upon our intellectual property, including future patents, trade
secrets, know-how and continuing technology innovation. While Viragen has filed
three patent applications related to Omniferon, there can be no assurance that
the steps taken by us or Viragen to protect its intellectual property will be
adequate to prevent misappropriation or that others will not develop competitive
technologies or products. We cannot assure you that any patent owned by us or
Viragen, in the future, will not be invalidated, circumvented or challenged, or
that the rights granted thereunder will provide competitive advantages us. Also,
we cannot be sure that any of our or Viragen's future patent applications will
be issued with the scope of the claims sought, if at all. Furthermore, we can
not assure you that others will not develop technologies that are similar or
superior to our technology, duplicate our technology or design around possible
patents owned by us or Viragen.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital totaled approximately $4,355,000 on June 30, 2000. This
is an increase in working capital of approximately $4,938,000 from the previous
year end balance. This increase was due to operating capital transferred to us
by Viragen, Inc., our parent company.
As we do not have regulatory approvals to distribute Omniferon or any other
product, we are currently dependent upon advances or capital contributions by
Viragen to fund our operations.
During fiscal years 2000 and 1999, Viragen contributed intercompany
balances of $4,785,000 and $5,828,000, respectively, to capital. As a result of
these contributions, we issued Viragen 3,593,347 shares in fiscal 2000 and
8,951,094 shares in fiscal 1999.
Viragen's capital contributions have been made at the then-current market
price of our common stock. Market prices have ranged between $0.38 and $1.50 per
share. Viragen has made these capital contributions in order to alleviate the
burden of Viragen (Europe) having to repay approximately $10,613,000 in
intercompany balances. Viragen has additionally agreed to defer the $166,667
minimum monthly payments due under the
13
<PAGE> 16
licensing agreement that began November 1, 1998 until we are able to fund this
obligation. Through June 30, 2000, we have accrued $3,333,333 in licensing fees
payable to Viragen.
In December 1999, Viragen retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid Viragen in raising up to $60 million in additional
investment capital, on a best efforts basis. On March 21, 2000, the Securities
and Exchange Commission declared Viragen's related shelf registration on Form
S-3 (File No. 333-32306) effective. Through September 15, 2000, Viragen has
raised approximately $10,195,000 in additional capital, net of fees, under this
agreement. Included in this total was a $1,000,000 investment by Active
Investors Ltd. II, an investment fund controlled by Fundamental Management
Corporation. Carl N. Singer, a director of both Viragen and Viragen (Europe)
serves as chairman of Fundamental Management Corporation.
Our present focus is the continued development of Omniferon, initially for
the treatment of hepatitis C, and the development of a monoclonal antibody to be
used with Omniferon in the treatment of certain cancers. The entire process of
research, development and European Union regulatory approvals, if obtained, of a
new biopharmaceutical product takes several years and requires substantial
funding.
We believe that our Omniferon product, which is currently under
development, can be manufactured in sufficient quantity and be priced at a level
to offer patients an attractive alternative treatment to the synthetic
interferons currently being marketed. However, we can not assure you of approval
of these projects. Required regulatory approvals are subject to the successful
completion of lengthy and costly clinical trials. The completion of the project
also depends on our ability to raise significant additional investment capital.
In July 1999, our Clinical Trial Exemption Application to commence human
clinical trials was approved by the European regulatory authorities. We
commenced our clinical trials in the fourth calendar quarter of 1999.
We will need additional funding to complete the clinical trials and
administrative filings necessary to apply for final European Union regulatory
approvals. Our management believes that additional funding may be more readily
available as we complete various phases of our clinical trials. Management
estimates that our funding requirements related to the approval of Omniferon for
hepatitis C, the first approval we are seeking in the European Union, include:
Phase I/II trials -- $3.2 million, and Phase III studies -- $9.1 million. We
will also use future funding, if any, for continued product development and
general working capital purposes, including administrative support functions.
RESULTS OF OPERATIONS
We have recognized no sales revenue or related costs for the fiscal years
ended June 30, 2000, 1999 or 1998, respectively. We have limited potential for
sales prior to receiving the necessary regulatory approvals from the European
regulatory authorities. We could commence generating sales revenue through
export sales of Omniferon, prior to receiving EU regulatory approvals for
marketing, under an agreement with the AGC group of companies. These sales,
however, are contingent upon AGC's receipt of the required regulatory approvals
for product commercialization in the designated territories, and our receipt of
the requisite regulatory approvals to export the product.
2000 Compared to 1999
Income for the year ended June 30, 2000 represents interest earned on cash
investments. The decline in interest income compared to the previous year
reflects the reduction in principal invested due to continuing operational
losses.
Research and development costs for fiscal 2000 totaled $3,511,805, an
increase of approximately $770,000 (28%) over the same period of the preceding
year. This increase reflects increased costs incurred with development and
scale-up projects associated with the transfer of technology from our parent,
Viragen, relating to our Omniferon product. Also, the increase in research costs
reflects additional costs associated with our clinical trials for hepatitis C,
which began during fiscal 2000. Components of this increase include an
14
<PAGE> 17
increase of $647,000 in scientific salaries and support fees, as well as an
increase in laboratory supplies expense of $171,000.
The increase in licensing fee expense of $667,000 between the years
reflects the modification of the terms of our license agreement with Viragen. On
November 1, 1998, we began recognizing the $2,000,000 per year minimum licensing
fee on a monthly basis. During the prior fiscal year, before the licensing
agreement was modified, the entire $2,000,000 minimum licensing fee was
recognized on November 1, 1997, the day the technology transfer was deemed
complete.
General and administrative expenses totaled approximately $856,000 and
$881,000 for fiscal 2000 and 1999, respectively. There were no significant
changes in the cost components of general and administrative expenses during the
period.
We anticipate that operational losses will continue increasing.
Specifically, research and development costs will continue increasing, as we
conduct our clinical trials of Omniferon. Our ability to successfully conclude
our clinical trials, a prerequisite to eventual commercialization of the
product, is dependent upon Viragen's continued funding of operations and our
ability to raise significant additional investment capital.
During fiscal 2000, we spent approximately $30,000 on Year 2000 computer
related projects. During that period and subsequent to our year end, we have not
experienced any significant Year 2000 related disruptions. However, we are
continuing to monitor our computer dependent scientific and administrative
systems.
1999 Compared to 1998
Research and development costs for fiscal 1999 totaled $2,742,154, an
increase of approximately $1,156,000 (73%) over the preceding year. This
increase reflects increased costs associated with development and scale-up
projects associated with the transfer of technology from our parent, Viragen,
relating to Omniferon. Components of this increase include an increase of
$640,755 in scientific salaries and support fees, increases in laboratory
supplies expense of $146,288 and increases in repairs and maintenance expenses
associated with plant equipment totaling $115,762.
General and administrative expenses totaled $880,762 for the year ended
June 30, 1999 compared with $1,078,278 for the preceding year. This decrease of
$198,000 (18%) was attributable primarily to a decrease in legal fees of $64,302
from the prior year. This decrease was due to the settlement of litigation
during the prior year. Also included in the reduction was a negotiated reduction
in real property taxes of $133,350 payable on our Scottish facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
Securities Act Release No. 7386. This release requires that we disclose our
policies used to account for derivatives and quantitative and qualitative
information about market risk exposures. Market risk generally represents the
risk of loss that may result from the potential change in value of a financial
instrument as a result of fluctuations in interest rates and market prices.
We have not traded or otherwise transacted in derivatives nor do we expect
to do so in the future. We have established polities and internal processes
related to the management of market risks which we use in the normal course of
our business operations.
Interest Rate Risk
The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 2000, a change in
interest rates would not have a material impact on our future operating results
or cash flows.
15
<PAGE> 18
Foreign Currency Exchange Risk
We believe our foreign currency risk is not material. At the present time,
we do not have sales revenues or related receivables. Also, we do not purchase
foreign currencies on a regular basis. Transfers of funds to our foreign
subsidiary in Scotland are infrequent and are transferred at the then current
exchange rate.
We were not impacted by the European Union's adoption of the "Euro"
currency. Our foreign operations are located in Scotland, and the United Kingdom
did not participate in the adoption of the Euro. The United Kingdom does not
have a scheduled date for the eventual adoption of the Euro.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS
OFFICER AND/OR
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- --------------
<S> <C> <C> <C>
Gerald Smith......................... 69 Chairman of the Board 1995
President 1995
Director 1995
Dennis W. Healey..................... 52 Executive Vice President 1996
Treasurer, Secretary and Director 1996
Dr. Magnus Nicolson.................. 40 Chief Operating Officer 1999
Director 1997
Carl N. Singer....................... 84 Director 2000
Peter Cooper Ph.D.................... 56 Director 2000
Peng Lee Yap, Ph.D................... 51 Director 2000
William H. Stimson, Ph.D............. 55 Director 2000
Melvin Rothberg...................... 53 Director 2000
</TABLE>
Our directors are collectively elected at stockholders meetings and hold
office for one year and until their successors are elected and qualified. As
Viragen, Inc. holds a majority of the issued and outstanding shares, they elect
all board members. 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 Viragen (Europe).
Gerald Smith became the president and chairman of the board of directors on
December 8, 1995. Mr. Smith has also served as a director of Viragen (Scotland)
Ltd. since its inception in April 1995. Since February 5, 1993, Mr. Smith has
served as a director of Viragen, Inc., the majority stockholder, and on May 12,
1993, Mr. Smith became president of Viragen. In June 1994, Mr. Smith became
chairman of the board of directors of Viragen. Since 1982, he was a principal
stockholder, president, chief executive officer and director of Business
Development Corp. of Miami, Florida, which has served as a managing entity and
consultant to several high technology ventures including Compupix Technology
Joint Venture of Boca Raton, Florida. 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 was also the president, chief executive officer and a director of
Cinescopic Corporation and International Database Service, Inc. located in Palm
Beach Gardens, Florida.
Dennis W. Healey is a certified public accountant. Mr. Healey was appointed
the company's executive vice president, chief financial officer, treasurer,
secretary and a director in January, 1996 and has served as a director of
Viragen (Scotland) Ltd. since its inception in April 1995. Mr. Healey became
executive vice president in 1993, and has served as chief financial officer and
treasurer of Viragen since 1980 and its secretary since 1994.
D. Magnus Nicolson, Ph.D. was appointed Chief Operating Officer in August,
1999. Dr. Nicolson was elected a director in 1997 and has served as the managing
director of Viragen (Scotland) Ltd., since April 1996. From 1992 to 1995, Dr.
Nicolson was employed by Scottish Enterprise, an agency of the Scottish
government responsible for generating economic development in Scotland. During
his time at Scottish Enterprise, he served as technology manager for "Locate in
Scotland" (1995), senior executive (1993 to 1995), and contractor, healthcare
liaison office of Dunbartonshire Enterprise (1992 to 1993). From 1990 to 1992,
Dr. Nicolson conducted various market research projects for a variety of public
and private enterprises, as an 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
17
<PAGE> 20
1985 and 1992, respectively. Dr. Nicolson is a Fellow of the Royal Society of
Medicine, a Member of the Royal Society of Chemistry, and a Member of the
Chartered Institute of Marketing.
Carl N. Singer was appointed a director in July 2000. He currently serves
as a director of Viragen and chairman of Viragen's executive committee of the
board of directors. Since 1981, Mr. Singer has served as chairman of Fundamental
Management Corporation, a Florida-based institutional investment fund which
manages the Active Investors II fund. During fiscal 2000, Active Investors II
invested $2,000,000 in Viragen, through two transactions, receiving 1,800,016
shares of their common stock. Mr. Singer has also served as a director,
president and CEO of Sealy, Inc., Scripto, Inc. and the BVD Company.
Peter Cooper, Ph.D. was appointed to the board of directors February 2000.
Dr. Cooper is the former Director of Regulatory Affairs for Schering-Plough Ltd.
and also served as the Director of European Regulatory Affairs for Amgen, Ltd.
and the Director of International regulatory Affairs for Medeva, PLC. Dr. Cooper
was a Member of the Education Committee of the British Institute of Regulatory
Affairs and a Member of the Industrial Pharmacists Group Committee of the Royal
Pharmaceutical Society of Great Britain. In addition to his extensive experience
in international regulatory affairs, Dr. Cooper played an active part in the
development and commercialization of more than 60 drug products including
recombinant alpha interferon and a hepatitis B vaccine. Dr. Cooper also serves
as a consultant to Viragen.
Peng Lee Yap, Ph.D. was appointed to the board of directors in February
2000. Dr. Yap is an internationally renowned expert in the use and safety of
human blood-derived products. Dr. Yap serves as the Senior Clinician for the
Scottish National Blood Transfusion Service. Dr. Yap is also an internationally
recognized expert on the hepatitis C virus (HCV) and a nationally recognized
expert in the United Kingdom on various transfusion transmitted viruses. Dr. Yap
is the author of over 200 scientific publications including many key
publications related to HCV and IV IgG and is the holder of two patents in
relation to the diagnosis of HCV. Dr. Yap has served as the Joint Head of
Scottish National Blood Transfusion Service/University of Edinburgh Molecular
Virology Laboratory, Member of the External Advisory Panel of the United Kingdom
Regulatory Authority, Expert Advisor to the European Commission on Blood Donor
Testing and has been engaged as an external consultant and medical adviser to
several multinational corporations. Dr. Yap also serves as a consultant to
Viragen.
William H. Stimson, Ph.D. was appointed to the board of directors in
February 2000. Dr. Stimson is an internationally recognized expert in the field
of molecular recognition of antibodies. Dr. Stimson was the Head of the
Immunology Department and holds the Chair of Immunology at the University of
Strathclyde, Scotland. Dr. Stimson has published over 180 scientific papers and
has been issued eight patents. In addition to his university duties, Dr. Stimson
serves on the Advisory Management Committee of the Scottish Antibody Production
Unit and the Editorial Boards of several important medical and scientific
publications. Dr. Stimson has been intimately involved in the formation of
several university spinout companies and has served as a consultant to many
multinational pharmaceutical companies. Dr. Stimson also serves as a consultant
to Viragen.
Melvin Rothberg was appointed a director in July 2000. In April 1999, Mr.
Rothberg assumed the position of executive vice president of Viragen. Prior to
joining Viragen, Mr. Rothberg served as a vice president of Althin Medical,
Inc., a U.S. subsidiary of a Swedish medical company, from 1990 to 1998. Mr.
Rothberg served as a director and manager of a number of divisions of C.D.
Medical, a division of the Dow Chemical Company, from 1983 to 1990.
There is no family relationship between any of the officers and directors.
As the operations of Viragen (Europe) and its parent, Viragen, remain
parallel at this time, Viragen's executive committee, audit and finance
committee and compensation committee, while operating on behalf of Viragen,
provide a comparable function for Viragen (Europe). Viragen's executive
committee consists of Messrs. Carl N. Singer (chairperson), Gerald Smith and
Robert H. Zeiger, and the audit and finance committee, and compensation
committee consist of Messrs. Charles J. Simons (chairperson), Sidney Dworkin and
Robert C. Salisbury.
18
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth information concerning the compensation and
employment agreements of the chief executive officers and the four most highly
compensated executive officers at June 30, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------
AWARDS PAYOUTS
----------------------- ----------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
----------------------------------------- STOCK OPTIONS/
NAME AND OTHER ANNUAL AWARDS SARS
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) ($) (#) LTIP PAYOUTS ($)
------------------ ---- ---------- --------- ---------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith.......... 2000 $ 82,000 $-- $-- $-- -- $--
Chairman of the 1999 82,000 -- -- -- -- --
Board, CEO and 1998 69,615 -- -- -- -- --
President
Dennis W. Healey...... 2000 57,000 -- -- -- -- --
Exec. V.P., 1999 57,000 -- -- -- -- --
Treasurer, CFO 1998 53,000 -- -- -- -- --
and Director
D. Magnus Nicolson.... 2000 170,000 -- -- -- -- --
COO and Director 1999 115,000 -- -- -- -- --
1998 100,054 -- -- -- 75,000 --
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION ($)
------------------ ----------------
<S> <C>
Gerald Smith.......... $--
Chairman of the --
Board, CEO and --
President
Dennis W. Healey...... --
Exec. V.P., --
Treasurer, CFO --
and Director
D. Magnus Nicolson.... --
COO and Director --
--
</TABLE>
Employment Agreements
Mr. Smith became the chairman of the board, chief executive officer,
president and a director of Viragen (Europe) on December 8, 1995. Mr. Smith
entered into a two-year employment agreement on March 1, 1997, providing 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, 1999 and $82,000 for the
period from July 1, 1999 through February 28, 1999. On March 1, 1999, upon the
expiration of Mr. Smith's employment agreements with Viragen and Viragen
(Europe), Mr. Smith entered into a single two year employment agreement with
Viragen. This agreement provides for an annual salary of $282,000. Of this
amount, $82,000 was allocated to Viragen (Europe).
Mr. Healey serves as executive vice president, chief financial officer,
secretary and a director. 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, 1999 and $57,000 per annum for the eight month
period ending February 28, 1999. On March 1, 1999 upon the expiration of Mr.
Healey's employment agreements with Viragen and Viragen (Europe), Mr. Healey
entered into a single two year employment agreement with Viragen. This agreement
provides for an annual salary of $252,000. Of this amount, $57,000 was allocated
to Viragen (Europe).
Dr. D. Magnus Nicolson serves as the managing director of Viragen
(Scotland) Ltd. On August 6, 1999, Dr. Nicolson was appointed chief operating
officer of Viragen (Europe). On April 6, 1996 Dr. Nicolson entered into a
two-year employment agreement. This agreement provided for a salary of $74,250
per annum prorated over the first six month period of the agreement and an
annualized increase of $8,250 to be prorated during each of the three following
six month periods. In addition, Dr. Nicolson received an option to acquire
50,000 shares of common stock of Viragen (Europe) at $7.00 per share. On
September 4, 1997, Dr. Nicolson's employment agreement was amended and extended
through March 31, 2000, providing for an annual salary of $107,000 and $115,000
for the first and second years, respectively. This agreement also provided for
options to acquire 75,000 shares of common stock exercisable at $5.72 per share
and reimbursement of automobile and related expenses. On July 1, 1999, Dr.
Nicolson entered into a two year
19
<PAGE> 22
employment agreement with Viragen. This agreement supercedes all previous
agreements. The agreement provided for:
- an annual salary of $170,000,
- the grant of an option to acquire 200,000 shares of Viragen, Inc. common
stock at $.625, vesting one-third on the date of grant, one-third on the
first anniversary of the grant date and one-third on the second
anniversary,
- similar employee benefits generally available to executive officers,
- use of an automobile, and
- reimbursement of business related expenses.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended June 30,
2000 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
------------------------------------------------------ OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS/SARS FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
---- ------------ ------------ ----------- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith........................ -- -- $ -- -- -- --
Dennis W. Healey.................... -- -- -- -- -- --
D. Magnus Nicolson.................. -- -- -- -- -- --
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information as to the exercise of options to
purchase shares of common stock during the fiscal year ended June 30, 2000 by
each person named in the summary compensation table and the unexercised options
held as of the end of the 2000 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY END (#) OPTIONS AT FY END ($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith............... -- $ -- -- -- $ -- $ --
Dennis W. Healey........... -- -- -- -- -- --
D. Magnus Nicolson......... -- -- 125,000 -- -- --
</TABLE>
1997 STOCK OPTION PLAN
On February 27, 1997, the board of directors adopted the 1997 Stock Option
Plan. The plan made available 600,000 common stock purchase options for our
employees, officers, directors and consultants.
Options issued under the plan may qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended.
As of September 15, 2000 we have issued 289,500 options under the 1997
Stock Option Plan.
20
<PAGE> 23
ADDITIONAL STOCK OPTIONS
On February 1, 2000, newly appointed directors Dr. Peng Lee Yap, Prof.
William H. Stimson, Ph.D. and Dr. Peter Cooper each were granted options to
purchase 22,500 shares of common stock. The options:
- have an exercise price of $1.19 per share,
- were fully vested on the grant date,
- are exercisable for a period of 5 years unless terminated,
- may be terminated:
- 90 days after they cease to be a director,
- 12 months following permanent disability, or
- 12 months following the death of the director.
In December 1999, we granted options to purchase 149,000 shares of common
stock to 18 employees of Viragen and Viragen (Europe). These options were
granted as incentive stock options under the 1997 Stock Option Plan. The
options:
- have an exercise price of $.84 per share,
- are exercised for a period of 5 years unless terminated,
- vest over a two year period,
- may be terminated:
- 90 days after employment ceases,
- 12 months following permanent disability,
- 12 months following the employees death.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding Viragen
(Europe)'s common stock beneficially owned at September 15, 2000 by:
- each person who is known by us to own beneficially or exercise voting or
dispositive control over 5% or more of Viragen (Europe)'s common stock,
- each of Viragen (Europe)'s directors, and
- all officers and directors as a group.
A person is considered a beneficial owner of any securities that the person
has the right to acquire beneficial ownership of within 60 days. At September
15, 2000, there were 19,662,100 shares of common stock outstanding.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED
---------------------------
BENEFICIAL ACQUIRABLE
NAME OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS CURRENTLY WITHIN 60 DAYS
------------------------ ---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Viragen, Inc............................... 17,544,441 89.2% 17,544,441 --
Gerald Smith............................... 100,000 0.5 100,000 --
Dennis W. Healey........................... 100,000 0.5 100,000 --
D. Magnus Nicolson......................... 125,000 0.6 -- 125,000
Carl N. Singer............................. -- -- -- --
Peter Cooper............................... 22,500 0.1 -- 22,500
Peng Lee Yap............................... 22,500 0.1 -- 22,500
William H. Stimson......................... 22,500 0.1 -- 22,500
Melvin Rothberg............................ 35,000 0.2 -- 12,000
Officers and Directors (as a group of 9
persons)................................. 452,500 2.3 200,000 213,500
</TABLE>
21
<PAGE> 24
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of our equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in their ownership of common
stock and other equity securities of Viragen (Europe). Officers, directors and
greater than ten percent (10%) stockholders are required by regulation to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended June 30, 2000, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
(10%) beneficial owners were completed and timely filed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 12, 1995 Viragen (Scotland) entered into a license agreement with
Viragen granting Viragen (Scotland) rights to certain proprietary technology,
including the right to manufacture and distribute Omniferon. Under the terms of
this agreement, Viragen (Scotland) is obligated to pay an annual licensing fee
equal to the greater of (i) $2,000,000 or (ii) 10% of Viragen (Scotland)'s gross
revenues until total licensing payments of $18 million has been paid to Viragen.
Once the $18 million licensing fee has been paid, Viragen (Scotland) is
obligated to pay Viragen an amount equal to 8% of Viragen (Scotland)'s gross
revenues until such time as total licensing fee of $25 million has been paid to
Viragen. Once the $25 million licensing fee has been paid, Viragen (Scotland) is
obligated to pay Viragen an amount equal to 5% of Viragen (Scotland)'s gross
revenues thereafter. The initial term of the license agreement is for fifteen
years and automatically renews for two successive fifteen years periods. In
September 1997, Viragen and Viragen (Scotland) mutually agreed to extend the
technology transfer completion dates. Accordingly, the agreement was modified
providing that the $2,000,000 initial prepayment paid to Viragen in June 1997
would represent the contractual payment for the one year period commencing
November 1, 1997. The agreement was further modified to provide that in the
event the proprietary technology was not transferred pursuant to the provisions
of the agreement, the initial prepayment would have been refunded to Viragen
(Scotland). The technology transfer was completed on November 1, 1997, and the
prepaid licensing fee was fully expensed at that time. This accounting treatment
is consistent with SFAS No. 2 -- "Accounting for Research and Development
Costs," as we are in the process of obtaining EU regulatory approval for
marketing the licensed technology. The approval process entails performing
extensive preclinical and clinical research.
During November 1998, Viragen and Viragen (Scotland) modified the license
agreement. Under the modified terms, the minimum $2 million annual licensing fee
is payable monthly at the rate of $167,000 per month. Viragen has deferred
payment of the fee until we have the necessary cash flow to meet this payment.
At June 30, 2000, we have accrued approximately $3.3 million in licensing fees
payable to Viragen.
During fiscal years 2000 and 1999, Viragen contributed intercompany
balances of $4,785,000 and $5,828,000, respectively, to capital. As a result of
these contributions, Viragen's ownership interest has increased to 89% at June
30, 2000.
Mr. Gerald Smith, president and chairman of Viragen (Europe), is also the
chairman and president of Viragen, our majority stockholder. Mr. Dennis W.
Healey, executive vice president, chief financial officer, treasurer, secretary
and a director also serves in the same capacities for Viragen. Dr. D. Magnus
Nicolson assumed the position of chief operating officer on July 1, 1999, is a
director and also serves as managing director of Viragen (Scotland). On July 1,
1999, Dr. Nicolson also assumed the position of chief operating officer of
Viragen. Mr. Carl N. Singer is a director of both Viragen and Viragen (Europe).
Viragen currently owns 17,544,441 shares of common stock, representing 89.2% of
our outstanding capital stock interest on September 15, 2000.
Drs. Cooper, Yap and Stimson, directors of Viragen (Europe), also serve
from time-to-time as compensated consultants.
22
<PAGE> 25
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> <C> <S>
(1) -- All financial statements -- See Index to Consolidated
Financial Statements
(2) -- Financial statements schedules -- See Index to Consolidated
Financial Statements
(3) -- Exhibits
3.1 -- Certificate of Incorporation dated November 4,
1985.(incorporated by reference to the Company's initial
Registration Statement, File No. 33-1952-NY)
3.2 -- Amended Certificate of Incorporation dated April 14, 1987
(incorporated by reference to the Company's Registration
Statement, File No. 33-1952-NY)
3.3 -- 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")
3.4 -- Amended Certificate of Incorporation dated November 18,
1987. (incorporated by reference to the 1994 10-KSB)
3.5 -- Amended Certificate of Incorporation dated December 9, 1987.
(incorporated by reference to the 1994 10-KSB)
3.6 -- 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")
3.7 -- Amended Certificate of Incorporation dated January 17, 1989.
(incorporated by reference to the 1994 10-KSB)
3.8 -- 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")
3.9 -- 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
4.1 -- Amended Certificate of Incorporation dated December 13,
1993. (incorporated by reference to the 1993 10-KSB)
4.2 -- By laws of the Company (incorporated by reference to
Post-Effective Amendment No. 3)
4.3 -- Form of Common Stock Certificate (incorporated by reference
to Form 8-A dated June 14, 1989)
(10) -- Material Contracts
10.1 -- License Agreement between Viragen Technology, Inc. and
Viragen (Scotland) Ltd. dated July 12, 1995 (incorporated by
reference to the 1998 10-K/A).
10.2 -- 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))
10.3 -- Indemnification Agreement between George Levin and the
Company dated October 20, 1995 (incorporated by reference to
the 1998 10-K/A)
10.4 -- Addendum to Employment Agreement between the company and
Gerald Smith dated July 3, 1997 (incorporated by reference
to the 1998 10-K)
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <C> <S>
10.5 -- Addendum to the Employment Agreement between the Company and
Dennis W. Healey dated July 3, 1997 (incorporated by
reference to the 1998 10-K/A).
10.6 -- 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)
10.7 -- Amendment to License Agreement between Viragen Technology,
Inc. and Viragen (Scotland) Ltd. dated September 29, 1997
(incorporated by reference to the 1998 10-K/A).
10.8 -- 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,
1999)
10.9 -- Supply and Distribution Agreement between the Company and
the Adomjee Group of Companies dated November 16, 1998
(incorporated by reference to the 1999 Form 10-K).
10.10 -- Letter of Intent between the Company and Dragson Healthcare
dated July 2, 1999 (incorporated by reference to the 1999
Form 10-K).
(11) -- Statement re: computation of per share earnings*
(21) -- Subsidiaries of the registrant*
(23) -- Consent of Independent Certified Public Accountants*
(27) -- Financial Data Schedule (for SEC use only).*
</TABLE>
(b) Reports on Form 8-K filed during the fourth quarter.
None.
----------------
* Filed herewith
24
<PAGE> 27
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/ GERALD SMITH
------------------------------------
Gerald Smith
Chairman of the Board of Directors,
President and Principal Executive
Officer
Dated: September 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD SMITH Chairman of the Board of September 26, 2000
--------------------------------------------------- Directors, President and
Gerald Smith Principal Executive Officer
/s/ DENNIS W. HEALEY Executive Vice President, September 26, 2000
--------------------------------------------------- Treasurer, Principal
Dennis W. Healey Financial Officer, and
Director
/s/ D. MAGNUS NICOLSON, PH.D. Chief Operating Officer and September 26, 2000
--------------------------------------------------- Director
D. Magnus Nicolson, Ph.D.
/s/ CARL N. SINGER Director September 26, 2000
---------------------------------------------------
Carl N. Singer
/s/ PETER COOPER, PH.D. Director September 26, 2000
---------------------------------------------------
Peter Cooper, Ph.D.
/s/ PENG LEE YAP, PH.D. Director September 26, 2000
---------------------------------------------------
Peng Lee Yap, Ph.D.
/s/ WILLIAM H. STIMSON, PH.D. Director September 26, 2000
---------------------------------------------------
William H. Stimson, Ph.D.
/s/ MELVIN ROTHBERG Director September 26, 2000
---------------------------------------------------
Melvin Rothberg
/s/ JOSE I. ORTEGA Controller and Principal September 26, 2000
--------------------------------------------------- Accounting Officer
Jose I. Ortega
</TABLE>
25
<PAGE> 28
FORM 10-K -- ITEM 8
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen (Europe) Ltd.
and subsidiaries are included:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated balance sheets -- June 30, 2000 and 1999....... F-3
Consolidated statements of operations -- Years ended June
30, 2000, 1999 and 1998................................... F-4
Consolidated statements of stockholders' equity -- Years
ended June 30, 2000, 1999 and 1998........................ F-5
Consolidated statements of cash flows -- Years ended June
30, 2000, 1999 and 1998................................... F-6
Notes to consolidated financial statements.................. F-7
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 29
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
(/s/ ERNST & YOUNG LLP)
Miami, Florida
September 8, 2000
F-2
<PAGE> 30
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 4,945,063 $ 124,335
Prepaid expenses and other current assets................. 256,712 256,460
------------ ------------
Total current assets.............................. 5,201,775 380,795
Property, Plant and Equipment
Leasehold improvements.................................... 1,898,470 1,893,992
Equipment and furniture................................... 2,930,019 2,512,216
Construction in progress.................................. 59,026 292,152
------------ ------------
4,887,515 4,698,360
Less accumulated depreciation............................. (896,417) (559,878)
------------ ------------
3,991,098 4,138,482
Due from parent............................................. -- 390,319
------------ ------------
$ 9,192,873 $ 4,909,596
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 837,722 $ 955,911
Current portion of long-term debt......................... 9,494 7,879
------------ ------------
Total current liabilities......................... 847,216 963,790
Licensing fee payable....................................... 3,333,333 1,333,333
Long-term debt, less current portion........................ -- 131,973
Advances from parent........................................ 4,392,359 --
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 19,662,100 and
16,067,153 shares at June 30, 2000 and 1999,
respectively........................................... 196,621 160,672
Additional paid-in capital................................ 17,934,349 13,179,595
Accumulated deficit....................................... (17,279,792) (10,906,519)
Other comprehensive (loss) income......................... (231,213) 46,752
------------ ------------
Total stockholders' equity........................ 619,965 2,480,500
------------ ------------
$ 9,192,873 $ 4,909,596
============ ============
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-3
<PAGE> 31
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income
Interest and other income............................. $ 16,752 $ 49,762 $ 37,474
----------- ----------- -----------
16,752 49,762 37,474
Costs and Expenses
Research and development costs........................ 3,511,805 2,742,154 1,585,837
Licensing fee......................................... 2,000,000 1,333,333 2,000,000
General and administrative expenses................... 855,729 880,762 1,078,278
Interest expense...................................... 22,491 23,966 15,485
----------- ----------- -----------
6,390,025 4,980,215 4,679,600
----------- ----------- -----------
NET LOSS................................................ $(6,373,273) $(4,930,453) $(4,642,126)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE................. $ (0.37) $ (0.46) $ (0.65)
=========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES........ 17,046,066 10,607,393 7,116,059
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-4
<PAGE> 32
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN ACCUMULATED (LOSS)
STOCK CAPITAL DEFICIT INCOME
-------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at July 1, 1997.................... $ 71,160 $ 7,441,447 $ (1,333,940) $ 273,469
Foreign currency translation adjustment.... -- -- -- 13,612
Net loss................................... -- -- (4,642,126) --
-------- ----------- ------------ ---------
Balance at June 30, 1998................... 71,160 7,441,447 (5,976,066) 287,081
Capital contribution by Viragen, Inc....... 40,112 3,469,590 -- --
Capital contribution by Viragen, Inc....... 12,164 443,974 -- --
Capital contribution by Viragen, Inc....... 37,236 1,824,584 -- --
Foreign currency translation adjustment.... -- -- -- (240,329)
Net loss................................... -- -- (4,930,453) --
-------- ----------- ------------ ---------
Balance at June 30, 1999................... 160,672 13,179,595 (10,906,519) 46,752
Capital contribution by Viragen, Inc....... 11,586 1,147,009 -- --
Capital contribution by Viragen, Inc....... 15,795 2,353,545 -- --
Capital contribution by Viragen, Inc....... 8,552 1,248,580 -- --
Exercise of common stock options........... 16 1,328 -- --
Compensation expense on common stock
options.................................. -- 4,292 -- --
Foreign currency translation adjustment.... -- -- -- (277,965)
Net loss................................... -- -- (6,373,273) --
-------- ----------- ------------ ---------
Balance at June 30, 2000................... $196,621 $17,934,349 $(17,279,792) $(231,213)
======== =========== ============ =========
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-5
<PAGE> 33
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss................................................ $(6,373,273) $(4,930,453) $(4,642,126)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 373,331 336,135 241,698
Compensation expense on common stock options.......... 4,292 -- --
Increase (decrease) relating to operating activities
from:
Prepaid licensing fee................................. -- -- 2,000,000
Other current assets.................................. (252) 55,821 (118,374)
Accounts payable and accrued expenses................. (118,188) 203,599 72,798
Licensing fee payable................................. 2,000,000 1,333,333 --
----------- ----------- -----------
Net cash used in operating activities......... (4,114,090) (3,001,565) (2,446,004)
Investing Activities:
Additions to property, plant and equipment, net....... (225,947) (389,766) (913,991)
----------- ----------- -----------
Net cash used in investing activities......... (225,947) (389,766) (913,991)
Financing Activities:
Proceeds from exercise of common stock options........ 1,344 -- --
Payments on long-term debt............................ (133,163) (14,440) (1,005)
Advances from parent.................................. 9,567,745 3,122,910 1,859,256
----------- ----------- -----------
Net cash provided by financing activities..... 9,435,926 3,108,470 1,858,251
Effect of exchange rate fluctuations on cash............ (275,161) (248,943) 13,612
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........ 4,820,728 (531,804) (1,488,132)
Cash and cash equivalents at beginning of period........ 124,335 656,139 2,144,271
----------- ----------- -----------
Cash and cash equivalents at end of period.............. $ 4,945,063 $ 124,335 $ 656,139
=========== =========== ===========
Supplemental Cash Flow Information:
Interest paid......................................... $ 9,548 $ 14,473 $ 9,960
Income taxes paid..................................... -- -- --
</TABLE>
During the years ended June 30, 2000, 1999 and 1998, Viragen (Europe) had
the following non-cash financing activity:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Contribution to capital of intercompany balances by
Viragen, Inc.......................................... $ 4,785,067 $ 5,827,660 $ --
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
F-6
<PAGE> 34
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation: Viragen (Europe) Ltd. and its
subsidiaries are engaged in the research, development and manufacture of certain
immunological products for commercial application. The consolidated financial
statements include the parent company and all subsidiaries, including those
operating outside the U.S. All significant transactions between our businesses
have been eliminated. We made certain reclassifications to the 1999 and 1998
financial statements to conform to the 2000 presentation. Viragen (Europe) Ltd.
is a majority-owned subsidiary of Viragen, Inc.
In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, and asset valuation
allowances. We are also subject to risks and uncertainties that may cause actual
results to differ from estimated results including changes in the health care
environment, competition, foreign exchange and legislation.
During 2000, 1999 and 1998, Viragen (Europe) incurred significant losses of
approximately $6,373,000, $4,930,000 and $4,642,000, respectively. Management
anticipates additional future losses as it conducts its clinical trials.
Accordingly, Viragen has agreed to provide Viragen (Europe) the working capital
necessary to fund operations through June 30, 2001. Advances from parent were
contributed to capital during fiscal years 2000 and 1999. Viragen has also
agreed to defer the $166,667 minimum monthly payments due under the licensing
agreement that began November 1, 1998, until Viragen (Europe) is able to fund
this obligation.
Cash and Cash Equivalents: Cash equivalents include items almost as liquid
as cash. These items include demand deposits, certificates of deposit and time
deposits with maturity periods of three months or less when purchased.
Financial Instruments: The carrying amount of financial instruments,
including cash and cash equivalents, accounts payable, and accrued expenses
approximate fair value as of June 30, 2000, due to their short-term nature.
Property, Plant and Equipment: Property, plant and equipment is stated at
the lower of cost or net realizable value. Depreciation was computed by using
the straight-line method over the estimated useful life of the assets for
financial reporting purposes and using accelerated methods for income tax
purposes. The estimated useful lives used for financial reporting purposes are:
<TABLE>
<S> <C>
Building and improvements................................... 25 years
Equipment and furniture..................................... 5 - 10 years
</TABLE>
Management believes no impairment indicators exist at June 30, 2000, as
defined by SFAS 121 -- "Accounting for the Impairment of Long-Lived Assets."
Foreign Currency Translation: For foreign operations, local currencies are
considered their functional currencies. We translate assets and liabilities to
their U.S. dollar equivalents at rates in effect at the balance sheet date and
record translation adjustments in stockholders' equity. We translate statement
of operations accounts at average rates for the period. Transaction adjustments,
which are not material, are recorded in results of operations.
Research and Development Costs: Viragen (Europe) accounts for research and
development costs in accordance with SFAS No. 2 -- "Accounting for Research and
Development Costs." Accordingly, all research and development costs are expensed
as incurred.
Stock Based Compensation: Viragen (Europe) accounts for its stock-based
compensation plans under the provisions of APB 25 -- "Accounting for Stock
Issued to Employees," and accordingly, recognizes no
F-7
<PAGE> 35
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation expense for stock option grants where the exercise price equals or
exceeds fair market value at date of grant. The Company provides supplemental
disclosures as required by the provisions of SFAS 123 -- "Accounting for
Stock-Based Compensation."
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.
Loss Per Common Share: Loss per common share has been computed based on
the weighted average number of shares outstanding during each period, in
accordance with SFAS 128 -- "Earnings per Common Share." The effect of warrants
and options are antidilutive. As a result, diluted loss per share data does not
include the assumed conversion of these instruments and has been presented
jointly with basic loss per share.
Comprehensive Loss: SFAS No. 130 -- "Reporting Comprehensive Income"
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Viragen (Europe)'s comprehensive loss for
fiscal years 2000, 1999 and 1998 totaled $6,651,238, $5,170,782 and $4,628,514,
respectively.
Recent Pronouncements: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging
Activities" which is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement amends SFAS
No. 52 -- "Foreign Currency Translation," and supersedes SFAS No.
80 -- "Accounting for Future Contracts," SFAS No. 105 -- "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentration of Credit Risk," SFAS No.
107 -- "Disclosures about Fair Value of Financial Instruments," and SFAS No.
119 -- "Disclosure about Derivative Financial Instruments." The Financial
Accounting Standards Board delayed the effective date of this pronouncement
until fiscal years beginning after June 15, 2000. We plan to adopt SFAS No. 133
in fiscal 2001.
Management believes that the impact of SFAS No. 133 will not be significant
to Viragen (Europe).
NOTE B. CAPITAL STOCK
Common Stock
During fiscal 1999, Viragen, Inc. contributed to capital a total of
$5,827,659 in intercompany balances. The capital contributions occurred on
December 31, 1998, February 28, 1999 and March 17, 1999, at stock prices ranging
between $0.375 and $0.875 per common share. Viragen received 8,951,094 common
shares, as a result of the capital contributions. Accordingly, Viragen's
ownership interest increased from 70% on June 30, 1998 to 87% by June 30, 1999.
During fiscal 2000, Viragen, Inc. contributed to capital an additional
$4,785,067 in intercompany balances. The capital contributions occurred on
December 31, 1999, March 31, 2000 and June 30, 2000, at stock prices ranging
between $1.00 and $1.50 per common share. Viragen received 3,593,347 common
shares, as a result of the capital contributions. Viragen's ownership interest
increased from 87% on June 30, 1999 to 89% on June 30, 2000.
On July 27, 2000, the board of directors approved a resolution to increase
the number of authorized common shares to 30 million.
F-8
<PAGE> 36
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options
Viragen (Europe)'s 1997 Incentive Stock Option Plan has authorized the
grant of options to management personnel, directors, employees, or consultants
for up to 600,000 shares of our common stock, of which 310,500 remain available
at June 30, 2000.
Warrants
Class F warrants totaling 44,196 shares, with an exercise price of $105.00
per share, expired in November 1998.
In December 1998, 680,771 common stock purchase warrants, with an exercise
price of $6.00 per share, expired unexercised.
During March 1999, 632,500 common stock purchase warrants, with exercise
prices ranging between $8.00 and $12.00, expired unexercised.
Stock Based Compensation
Viragen (Europe) has elected to follow APB 25 and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Viragen (Europe) had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of zero percent for all periods; risk-free interest
rates of 5.69% and 6.09% for 2000 and 1998, respectively; volatility factors of
the expected market price of our common stock of 1.250 and .723 for 2000 and
1998, respectively; and a weighted-average expected life of the option of 3
years. The weighted average fair values of the options granted in fiscal 2000
and 1998 were $0.68 and $2.97 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 our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Viragen
(Europe)'s pro forma information follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss.............................. $(6,498,154) $(5,005,947) $(4,779,490)
Pro forma loss per share........................ (0.38) (0.47) (0.67)
</TABLE>
F-9
<PAGE> 37
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of our stock option and warrant activity and related information
for the years ended June 30, follows:
<TABLE>
<CAPTION>
OPTIONS
NUMBER OF WEIGHTED AND WEIGHTED
OPTIONS AND AVERAGE WARRANTS AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding July 1, 1997................ 50,000 $7.00 50,000 $7.00
Granted............................... 75,000 5.72
Exercised............................. -- --
Cancelled............................. -- --
-------
Outstanding at June 30, 1998............ 125,000 6.23 50,000 7.00
Granted............................... -- --
Exercised............................. -- --
Cancelled............................. -- --
-------
Outstanding at June 30, 1999............ 125,000 6.23 87,500 6.45
Granted............................... 216,500 0.95
Exercised............................. (1,600) 0.84
Cancelled............................. (2,000) 0.84
-------
Outstanding at June 30, 2000............ 337,900 $2.90 246,000 $3.68
=======
</TABLE>
The following table summarizes information about Viragen (Europe)'s stock
options and warrants outstanding at June 30, 2000:
<TABLE>
<CAPTION>
STOCK OPTIONS AND
WARRANTS OUTSTANDING STOCK OPTIONS AND
--------------------------------------------- WARRANTS EXERCISABLE
WEIGHTED ----------------------
NUMBER OF AVERAGE NUMBER OF WEIGHTED
OPTIONS REMAINING WEIGHTED OPTIONS AVERAGE
AND CONTRACTUAL LIFE AVERAGE AND EXERCISE
RANGE OF EXERCISE PRICES WARRANTS (YEARS) EXERCISE PRICE WARRANTS PRICE
------------------------ --------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.84 - $1.19......................... 212,900 5.10 $0.95 121,000 $1.04
$5.72 - $7.00......................... 125,000 2.70 6.23 125,000 6.23
------- -------
$0.84 - $7.00......................... 337,900 4.19 $2.90 246,000 $3.68
======= =======
</TABLE>
Common Shares Reserved
Shares of Viragen (Europe)'s common stock reserved at June 30, 2000, for
possible future issuance are as follows:
<TABLE>
<S> <C>
Officer and director options................................ 252,500
Employee options............................................ 75,400
Consultant warrants......................................... 10,000
-------
337,900
=======
</TABLE>
These options and warrants are exercisable through November 30, 2006, with
exercise prices ranging between $0.84 and $7.00 per share.
NOTE C. TRANSACTIONS WITH PARENT
Through a fifteen-year license agreement granted by Viragen, Viragen
(Scotland)'s ultimate parent, Viragen secured certain rights to engage in the
development, and manufacture of certain proprietary products
F-10
<PAGE> 38
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and technologies that related to the therapeutic application of human leukocyte
interferon for various diseases that affect the human immune system. With these
rights, on July 20, 1995, we entered into a license and manufacturing agreement
with the Common Services Agency of Scotland, an agency acting on behalf of the
Scottish National Blood Transfusion Service. This agreement provides that the
Transfusion Service, on behalf of Viragen (Scotland), will participate in the
manufacture and supply of our product for exclusive distribution in the European
Union in return for certain fees. The term of the Scottish agreement is five
years with two additional five-year extension terms exercisable at the option of
Viragen (Scotland).
Under the terms of our license, Viragen (Scotland) was to prepay $2 million
to Viragen within six months of the July 12, 1995 effective date. Beginning one
year from the effective date, Viragen (Scotland) was to pay to Viragen fees, as
follows: the greater of $2 million annually or 10% of gross revenues until the
sum of $18 million has been paid; 8% of gross revenues until the sum of $25
million has been paid; and 5% of gross revenues going forward. The license will
renew automatically for two consecutive fifteen-year terms.
We are currently renegotiating the terms of the first five-year renewal
under an extension of the initial contract. The extension period expires in
November 2000.
Both parties have modified the license, deferring the initial payment until
the date when Viragen transferred the processes and technology, as defined by
the license, to Viragen (Scotland). Viragen had substantially transferred the
processes and technology to Viragen (Scotland) by the end of May 1997. Viragen
required the initial licensing payment be made. Completion of the technology
transfer occurred on November 1, 1997. At that time, Viragen was deemed to have
completed the transfer of the processes and technology. The prepaid licensing
fee was fully expensed on November 1, 1997. This accounting treatment is
consistent with SFAS No. 2 -- "Accounting for Research and Development Costs,"
as we are in the process of obtaining EU regulatory approval for marketing the
licensed technology. The approval process entails performing preclinical and
clinical research.
Viragen provides certain administrative services to us including management
and general corporate assistance. These expenses are charged on the basis of
direct usage, when identifiable, or on the basis of time spent. In our opinion,
this method of allocation is reasonable. The amount of expenses allocated by
Viragen totaled approximately $174,000, $-0- and $27,000 for the years ended
June 30, 2000, 1999 and 1998, respectively.
NOTE D. INCOME TAXES
Even though Viragen, Inc.'s ownership percentage of Viragen (Europe) has
exceeded 80% since December 31, 1998, Viragen (Europe) will continue filing
separate income tax returns.
Viragen (Scotland) Ltd. files separate income tax returns in the United
Kingdom. Viragen (Germany) GmbH files separate income tax returns in Germany.
Net operating losses of Viragen (Scotland) totaling approximately $16,300,000
are being carried forward to future periods at June 30, 2000.
As of June 30, 2000, Viragen (Europe) has net operating loss carryforwards
for U.S. income tax purposes of approximately $2,800,000, including $1,200,000
whose use is limited to $48,000 per year as a result of a change in ownership in
December 1995, as defined by Internal Revenue Code Section 382, that expire at
various dates between 2003 and 2020.
F-11
<PAGE> 39
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
----------- ---------
<S> <C> <C>
Deferred Tax Assets:
Accrued liabilities (U.S.)................................ $ 12,000 $ 22,000
Net operating loss carryforwards (U.S.)................... 2,000 971,000
Capital loss carryforwards (U.S.)......................... 1,063,000 --
----------- ---------
Total deferred tax assets......................... 1,077,000 993,000
Valuation allowance for deferred tax assets............... (1,077,000) (993,000)
----------- ---------
$ -- $ --
=========== =========
</TABLE>
The change in the valuation allowance was a net increase of $84,000 for the
year ended June 30, 2000.
For financial reporting purposes, net loss before income taxes includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
U.S............................................. $ (223,305) $ (328,277) $ (401,130)
Foreign......................................... (6,149,968) (4,602,176) (4,240,996)
----------- ----------- -----------
$(6,373,273) $(4,930,453) $(4,642,126)
=========== =========== ===========
</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,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate............................. (34.00)% (34.00)% (34.00)%
State taxes, net of federal............................ (3.63) (3.63) (3.64)
Non-deductible items................................... -- 0.01 0.04
Change in valuation allowance.......................... 37.63 (52.32) 32.20
Expiration of capital loss carryforward................ -- 89.94 --
Other.................................................. -- -- 5.40
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>
NOTE E. LONG-TERM DEBT
Long-term debt at June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------
2000 1999
------- --------
<S> <C> <C>
Loan from Scotland Regional Development authority. Payable
quarterly over 20 years with an effective interest rate of
11.00 %. Note matures on August 28, 2017.................. $ 9,494 $139,852
------- --------
9,494 139,852
Less current portion........................................ (9,494) (7,879)
------- --------
$ -- $131,973
======= ========
</TABLE>
F-12
<PAGE> 40
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F. COMMITMENTS
In November 1996, Viragen (Scotland) executed a five-year lease on property
located in Edinburgh, Scotland that will serve as our laboratory and production
facilities. Base monthly rental on the property is approximately $11,000. In
addition, we may extend the term of the lease at our option, for four five-year
periods.
During the years ended June 30, 2000, 1999 and 1998, Viragen (Europe)
recognized $208,000, $195,000 and $202,000, respectively, in rent expense and
related charges arising from the property lease. Future minimum lease payments
on the facilities are: 2001 -- $134,000; and 2002 -- $33,500.
Viragen (Europe) Ltd. has entered into employment agreements with three of
its officers. These agreements represent a commitment to pay an aggregate amount
of approximately $300,000 per year in salaries to these individuals.
NOTE G. CONTINGENCIES
An action is pending in the Circuit Court for Broward County, Florida
against Viragen (Europe), then named Sector Associates, Ltd., alleging that
Sector Associates, prior to the reverse acquisition, mishandled payment of
amounts due to Roy Woods, a secured creditor (Roy Woods as Trustee v. Sector
Associates, Ltd.). Viragen (Europe) has denied the claim and has filed a
counterclaim. In addition, a former stockholder of Sector Associates is
obligated and has agreed to indemnify Viragen (Europe) in this matter and has
assumed responsibility for defense of this lawsuit. No accrual for loss has been
recorded.
In August 2000, we were informed that two parties had reached a settlement
in this matter, rendering a trial unnecessary. The parties are currently in the
process of finalizing the documents and a stipulation of dismissal. Under the
terms of the indemnification agreement, we will bear no liability of the
settlement.
NOTE H. GEOGRAPHIC INFORMATION
Identifiable assets in Scotland totaled approximately $9,192,000 and
$4,506,000 at June 30, 2000 and 1999, respectively. Identifiable assets
represent those assets used in the operations of the geographic area.
F-13
