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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, 2001
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 0-10252
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
865 SW 78TH AVENUE, SUITE 100, 33324
PLANTATION, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 233-8746
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 28,
2001 was approximately $127,545,000.
As of September 28, 2001, Viragen, Inc. had outstanding 99,786,099 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Risk Factors included in registration statement on Form S-3, File No.
333-63246, filed on June 18, 2001, 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, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2001
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation and Employment Agreements............ 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13. Certain Relationships and Related Transactions.............. 31
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 34
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Viragen, Inc. (which may be referred to as we, us or our) is a Delaware
corporation organized in 1980. We are a biotechnology company engaged in the
business of researching, developing and manufacturing innovative technologies
for the treatment of life-threatening illnesses. We are also in the business of
developing innovative technologies aimed at improving the manufacturing
processes used to manufacture certain medical therapies. Specifically, we are
primarily focused on three fields of research and development:
- human leukocyte derived interferon;
- avian transgenics technologies; and
- oncological therapies.
We operate through:
- Viragen, Inc. -- parent company;
- ViraGenics, Inc. -- 100% owned by Viragen, Inc.;
- Viragen (Europe) Ltd. -- 87% owned by Viragen, Inc.;
- Viragen (Scotland) Ltd. -- 100% owned by Viragen (Europe) Ltd.; and
- BioNative AB -- 100% owned by Viragen (Europe) Ltd.
You can learn more about us by visiting our web site at www.viragen.com.
The information on our website is neither incorporated into, nor a part of, this
report.
Interferon
We produce a natural interferon product named Omniferon (TM) from human
white blood cells, also known as leukocytes. Natural interferon stimulates and
modulates the human immune system. In addition, interferon may stop the growth
of various viruses including those involved with diseases like hepatitis,
cancer, multiple sclerosis, and HIV/AIDS.
As a result of our acquisition of BioNative AB on September 28, 2001, we
also produce a natural interferon product in Sweden named Alfanative(R).
BioNative is currently conducting Phase III clinical trials in Germany with
Alfanative for the treatment of melanoma, a potentially lethal form of skin
cancer.
Neither the United States Food and Drug Administration nor the European
Union regulatory authorities have approved Omniferon for sale to the public.
Alfanative is currently approved for use in Sweden in the treatment of hairy
cell leukemia and chronic myelogenous leukemia in patients who have failed
recombinant therapy.
Avian Transgenics
Our avian transgenic project is designed to enable Viragen to produce
protein-based drugs, including monoclonal antibodies, inside the eggs of
specially developed chickens. Our goal is to develop a technology which will
enable us to meet the large-scale production requirements for our own
therapeutic protein products. We also believe that this technology will allow us
to offer to others in the biopharmaceutical industry an alternate faster method
of production of their protein based products with higher capacity at lower
costs.
Avian transgenics offers a potential solution to the production bottleneck
currently limiting the growth and contributing to the high cost of protein
drugs. Existing protein production technologies are often inefficient and
costly. In addition, the explosion in protein drug approvals together with
protein-based drugs in pre-clinical and Phase I or Phase II clinical trials has
created a worldwide shortage of production capacity.
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We believe our avian transgenics project will offer a rapid and cost
effective way to produce large volumes of therapeutic proteins. As well as
meeting the current and future alternative production demands of the
biopharmaceutical industry and generating significant revenues for Viragen, this
project could also accelerate the progress of several life-saving drugs to the
market at an affordable cost.
Oncology Therapies
Viragen believes that no single approach or method is likely to effectively
treat all cancers. Different tumors have many different defective genes. We have
approached the treatment of targeted cancers from several directions which we
believe will increase our likelihood of clinical success.
- In collaboration with the Memorial Sloan-Kettering Cancer Center, we have
initiated the production of human monoclonal antibodies for the treatment
of melanoma and certain other cancers.
- In collaboration with the UK's Cancer Research Campaign Technology, we
are developing a vaccine designed to block the protective effect of the
protein CD55 from the surface of tumor cells. The protein CD55 is one of
a number of proteins which protect normal healthy cells from being
destroyed by the human immune system. The problem arises when cancer
cells also express this control protein to camouflage themselves from the
immune system. Under a worldwide exclusive commercial license granted to
us, we are researching a vaccine to remove this protection from tumor
cells. A successful vaccine could also offer protection against cancer
spreading. We believe this technology would be useful in the treatment of
colorectal, breast, ovarian and certain bone cancers.
- Under a worldwide exclusive license from the U.S. National Institute of
Health, we are researching the clinical applications of a monoclonal
antibody that recognizes the Notch-1 protein. Cells usually die when they
get infected or have outlived their useful purpose. This occurs when a
signal is sent to a gene in the cell which then produces Notch proteins.
One of these proteins, Notch-1, regulates apoptosis or programmed cell
death. We believe this process may be interrupted by expression of the
Notch-1 protein. An antibody to the Notch-1 protein could bind to the
tumor cell and permit the tumor cells to die. Initial potential targets
for this program are cervical, breast and lung cancers.
RECENT DEVELOPMENTS
Interferon
On September 28, 2001, Viragen and Viragen (Europe) signed a stock purchase
agreement to acquire 100% of BioNative AB, a privately-held Swedish company,
initially in exchange for approximately 3 million common shares, or 7.8%, of
Viragen (Europe)'s equity. An additional 20.5 million common shares of Viragen
(Europe) may be issued upon BioNative meeting certain performance milestones
following the closing of the transaction. If all of the additional shares are
issued, the former owners of BioNative could own up to approximately 40% of
Viragen (Europe).
BioNative's facilities are located in Umea, Sweden where we manufacture our
human leukocyte interferon (alpha) product, Alfanative. Alfanative is approved
in Sweden for the treatment of patients with hairy cell leukemia or chronic
myelogenous leukemia, who did not respond to treatment with recombinant
(synthetic) interferon. The product is also approved for sale in:
- the Czech Republic,
- Indonesia,
- Hong Kong,
- Burma,
- Thailand, and
- as purified bulk product in Egypt.
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BioNative is also conducting European Phase III clinical trials in Germany
with Alfanative in the treatment of malignant melanoma.
Avian Transgenics
On November 15, 2000, Viragen entered into a development, license and
collaboration agreement with the Roslin Institute (Edinburgh). The agreement
provides for joint continued development of transgenics technology in birds. The
technology will be used to create chickens which produce eggs containing
targeted new drugs to treat many serious diseases, including cancer. We believe
this technology promises a much faster and cost effective method of production
for many promising biopharmaceutical products.
On May 14, 2001, we entered into an option agreement with Geron
Corporation. This agreement provides Viragen the option to enter into a license
agreement with Geron, during the three-year option period ending May 14, 2004.
The license, if entered into, would be for rights to certain nuclear transfer
and transgenesis technology owned by Geron. We believe that Geron's technology
may enhance the technology which we license from the Roslin Institute
(Edinburgh).
OPERATIONS
In July 1999, Viragen (Scotland) Ltd. received regulatory approval of its
Clinical Trial Exemption Application to begin Phase I/II human clinical trials
of its Omniferon product, initially for the treatment of hepatitis C. We began
our clinical trials in the fourth calendar quarter of 1999. Through BioNative,
we are currently conducting Phase III clinical trials of Alfanative in Germany
for the treatment of melanoma, a form of skin cancer.
Pending the outcome of certain negotiations and contingent upon the
approval of regulatory and governmental authorities of a foreign country,
management will evaluate whether or not to pursue the current EU clinical trials
of Omniferon and/or to proceed to Phase III. This decision, will, in part, be
based upon that government's decision to permit us to conduct a Phase III
clinical trial based upon prior Phase I/II data. Unlike the current EU trial, we
would be reimbursed for all costs connected with that trial. Further, the
regulatory authorities may permit us to market through a representative
distributor during the Phase III clinical trial period, thereby generating
revenues. During the anticipated one year period of this trial, marketing would
be limited to a specified number of hepatitis C patients.
In the event management decides to continue European clinical trials, we
will require significant additional financing to continue to conduct and
complete clinical trials for the purpose of obtaining European Union and/or U.S.
Food and Drug Administration approvals of any product. Clinical testing toward
European Union and/or Food and Drug Administration approval is an expensive
process that is expected to take several years to complete, with no assurance
that regulatory approvals will eventually be obtained.
STRATEGIC ALLIANCES AND SUPPLY AGREEMENTS
Interferon
We have entered into a series of strategic alliances and supply agreements
with major worldwide suppliers of blood products. These agreements secure
reliable and safe sources of human white blood cells, also known as leukocytes,
which are critical to the production of interferon. During 1998, we entered into
agreements with the American Red Cross and America's Blood Centers. Between
them, they collect annually a substantial majority of the U.S. blood supply. We
also entered into a series of agreements covering a majority of the blood supply
in Germany, a major European supplier.
In July 1998, we entered into a strategic alliance and supply agreement
with America's Blood Centers for the supply of human white blood cells.
America's Blood Centers is a national network of non-profit, independent
community blood centers operating in 45 states. America's Blood Centers' members
annually collect over 45% of the U.S. blood supply through member blood donation
centers and mobile collection facilities. Under the America's Blood Centers
agreement, we have first and preferential access to all leukocytes produced by
America's Blood Centers members who have elected to participate in the program.
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We pay a fixed cost for the leukocytes provided during the first two years of
the agreement. After the first two years, the price may vary based upon
increased costs incurred by participating America's Blood Centers members. In
September 2000, the initial two-year term of the agreement was extended for a
third year under the same terms.
The America's Blood Centers agreement also provides for a royalty payment
to be paid for each leukocyte provided under this agreement. The royalty is
based on the higher of:
- a percentage of net revenues realized by Viragen,
- the estimated net revenues that could have been realized, based on the
sale of Omniferon, using the America's Blood Centers leukocytes provided,
or
- a fixed dollar amount for the leukocytes.
No minimum order requirement exists under this agreement. However, we have
agreed that, prior to the date that a New Drug Approval Application becomes
approved by the Food and Drug Administration, we will negotiate in good faith to
reach an agreement on a minimum leukocyte purchase commitment.
In August 1998, we entered into a fifteen-year agreement with the American
Red Cross for the supply of leukocytes. The American Red Cross collects
approximately half of the U.S. blood supply. The American Red Cross agreement
provides for us to purchase leukocytes, consistent with agreed upon
specifications, based on quarterly forecasts. We may pay for the leukocytes in
cash or our common stock at the option of the American Red Cross. The valuation
of shares will be based on the average closing price of our shares for the five
days prior to the payment due date less a discount. The American Red Cross
agreement also contains an initial price per leukocyte modified by a volume
discount pricing schedule and rebate program. This pricing schedule may change
based on periodic renegotiations. Upon execution of the agreement we issued a
warrant to the American Red Cross to purchase up to 500,000 shares of our common
stock with exercise prices ranging from $5.50 to $11.00 per share. We also
entered into a stockholder's agreement and registration rights agreement. These
agreements relate to shares underlying the warrant and shares received in lieu
of cash for leukocyte purchases.
In November 1998, Viragen signed an exclusive supply and distribution
agreement with AGC, a Pakistan-based, multinational conglomerate. This agreement
provides for the purchase and distribution of Omniferon. Under this agreement,
AGC's designated territories include:
- 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 the targeted territories, and
- we receive the regulatory approvals to export Omniferon from our
commercial manufacturing facility in Edinburgh, Scotland.
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AGC has agreed to provide Viragen with its projected annual requirements to
be updated quarterly. Projected requirements in excess of agreed purchase
minimums are binding on AGC. The purchase minimums, if contractually triggered,
will be secured by a $1 million irrevocable revolving letter of credit. AGC and
Viragen have agreed that if and when we obtain regulatory approval for
commercialization of Omniferon in the United States and/or Europe, both parties
will negotiate in good faith an amendment to the agreement which could modify
the purchase minimums and selling price.
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 light of the current political
climate, this agreement may be modified or substantially changed in accordance
with any new laws, rules or regulations.
In July 1999, Viragen entered into a letter of intent with Drogsan
Healthcare, a Turkish pharmaceutical company. The letter of intent outlines the
terms of a supply and exclusive distribution agreement between Viragen and
Drogsan for natural interferon in Turkey. These terms are similar to the AGC
agreement. The final agreement has not yet been completed but negotiations
continue.
Oncological Therapies
In December 1999, through Viragen (Scotland) Ltd., we entered into a
collaborative agreement with the Memorial Sloan-Kettering Cancer Center in New
York City. The agreement is for the development of a human monoclonal antibody
which may 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, Viragen 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 is taking 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 commercialize their patent pending technology based on a
tumor-associated antigen. The licensed technology covers the tumor-associated
antigen, CD55, the method of its isolation and its potential medical uses,
including cancer vaccines.
In September 2000, we obtained an exclusive worldwide license from the U.S.
National Institute of Health to use and further develop a monoclonal antibody
potentially useful in the treatment of certain cancers. The antibody or antibody
fragment recognizes the Notch-1 protein. The Notch-1 protein is over-expressed
in certain tumors including cervical, breast and lung cancers. This project
centers on the development of a drug that attacks cancer cells by inducing them
to commit suicide, a process that is known as apoptosis.
Other
In August 1998, we entered into a strategic alliance with Inflammatics,
Inc., a private drug development company, headquartered in Philadelphia, PA. At
the same time, we purchased a 10% equity interest in Inflammatics, which is
focused on the development of LeukoVAX, an immunomodulating therapy derived from
leukocytes. LeukoVAX has conducted Food and Drug Administration Phase I/II
clinical trials for rheumatoid arthritis.
In the fourth fiscal quarter 2000, we received initial Phase I/II data
which suggests no statistically significant difference in outcomes between
patients who had received LeukoVAX and those who have not. We have announced
that we will maintain our 10% equity position and exclusive manufacturing
rights.
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THE PRODUCTS
Viragen derives its human leukocyte interferon 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 industrial sources of interferon for medical use. They are
differentiated primarily by their source products, method of manufacture and
resulting composition. The first, as produced by Viragen, is a multi-species
natural, human leukocyte-derived alpha interferon. This is produced by
cultivated human white blood cells. The introduction of a harmless agent induces
the cells to produce natural interferon. Natural interferon is then separated
from other natural proteins and purified to produce a highly concentrated
product for clinical use. The second type of interferon is recombinant or
synthetic interferon (alpha or beta). This is a genetically engineered
interferon. Generally, it is produced from a single human gene in bacterial
cells by recombinant DNA techniques.
Clinical studies indicate that there may be significant therapeutic
differences between the use of natural interferon and synthetic interferon. We
believe that treatment with synthetic interferon may cause an immunological
response through the production by the human immune system of neutralizing
and/or binding antibodies. These antibodies are believed to reduce the
effectiveness of the treatment or may cause adverse side effects. Studies
suggest 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 like Viragen
were working to solve the problem of the high cost related to the
industrial-scale production of natural interferon. In 1985, Hoffman-LaRoche,
Inc. and Schering-Plough Corporation, two major pharmaceutical companies,
successfully developed synthetic interferon using recombinant DNA technology.
They subsequently received Food and Drug Administration approval to produce and
market their recombinant alpha interferon products for numerous indications.
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.
APPLICATIONS OF INTERFERON
Human leukocyte interferon is a naturally occurring protein which serves to
enhance the body's immune response to viral infections. Viragen believes
interferons can arrest the progress of viral based infections, reducing symptoms
and disease-related complications with a minimum of side effects.
Hepatitis C
The hepatitis C virus is a major worldwide cause of acute and chronic
hepatitis. Hepatitis C, previously known as "non-A, non-B hepatitis", affects an
estimated 4 million Americans and 5 million Europeans.
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Approximately 30,000 new cases are diagnosed each year in the U.S. and 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 natural interferon product may prove effective in the treatment
of this indication. The Food and Drug Administration has approved certain
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's population live in areas with a high
prevalence of hepatitis B infection. In many of these areas, the lifetime risk
of infection can exceed 60%. Most infections in these areas are acquired at
birth or during early childhood, when the risk of developing chronic infection
is highest. The United States is not in a high prevalence area. Here
approximately 300,000 cases of acute hepatitis B are diagnosed annually. Between
2% and 10% of these patients develop chronic infections. These infections put
the patients at risk of progressive liver disease possibly leading to cirrhosis
and/or hepatocellar carcinoma.
Synthetic interferon alpha is the only U.S. Food and Drug Administration
approved drug for hepatitis B. It has proven to be effective in the treatment of
some cases. Viragen believes that our human leukocyte interferon 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. Over 30,000 cases per year are diagnosed in the United
States alone. Melanoma has one of the fastest growing occurrence rates,
increasing at a rate in excess of 4% 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 which we intend to be used in
conjunction with our interferon product for treatment against this growing
concern.
BioNative is currently conducting a Phase III clinical trial in Germany
with Alfanative for the treatment of melanoma.
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.
Through BioNative we are approved in Sweden to manufacture and distribute
Alfanative for the treatment of patients with chronic myelogenous leukemia who
did not respond to treatment with recombinant interferon.
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Multiple Sclerosis
Multiple sclerosis is a chronic, often disabling disease of the central
nervous system. This disease often attacks young adults. It is estimated that
there are approximately 350,000 patients in the U.S. and a similar number in
Europe.
In June 2001, the UK's Medicines Central Agency approved our application to
commence human clinical trials with Omniferon for the treatment of multiple
sclerosis. These trials have not yet started. Completion of clinical trials for
multiple sclerosis is expected to take several years and require significant
additional funding.
HIV/AIDS
In March 1996, Viragen, in collaboration with Biodoron, a Hollywood,
Florida based clinic, received approval from Florida's Health and Rehabilitative
Services under Florida's Investigational Drug Program to conduct an
investigational study in Florida of our Alpha Leukoferon product, an interferon
product we no longer produce. 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 and well-tolerated, the overall study results proved
to be inconclusive due to the smaller than anticipated number of patients that
finished the protocol.
MANUFACTURE OF INTERFERON
Human white blood cells, also known as leukocytes, and a stimulating agent
are needed to produce human leukocyte-derived interferon. These raw materials
are readily available to us. A stimulating agent, which is harmless to humans,
is introduced into the white blood cell culture, which induces the cell to
produce interferon. The interferon is then separated from other proteins,
extracted and purified. Currently we are manufacturing human leukocyte
interferon in our Scottish and Swedish facilities.
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 human leukocyte derived interferon to patients.
However, we cannot assure you that any new manufacturing technology will achieve
the desired level of manufacturing proficiency and product improvement.
RESEARCH AND DEVELOPMENT
The entire process of research, development and European Union and/or Food
and Drug Administration approvals of a new biopharmaceutical drug can take 10 to
15 years. It also requires substantial funding. In July 1999, Viragen received
approval of its European Clinical Trial Exemption Application to begin clinical
trials of Omniferon.
We are currently evaluating the relative merits of the Omniferon and
Alfanative manufacturing processes. Our focus is to evaluate and ultimately
adopt the most efficient manufacturing methodologies targeting cell stimulation,
purification techniques, product purity and production yields. We expect that
our continued evaluation will result in lower production costs and a more
competitive sales price of our human leukocyte derived interferon product.
Research and development costs totaled $7,069,432, $4,836,753 and
$5,152,748 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively. It is not usual to spend $100 million to $500 million to take a
product from the test tube through clinical trials and to market.
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ROYALTY AGREEMENT
Viragen and Medicore, Inc., a former affiliate, have a royalty agreement.
It provides for a maximum cap on royalties to be paid to Medicore of $2,400,000.
It includes a schedule of royalty payments of:
- 5% of the first $7,000,000 of sales of interferon and related products,
- 4% of the next $10,000,000, and
- 3% of the next $55,000,000
until the total of $2,400,000 royalty is paid. The agreement also states that
royalties of approximately $108,000 previously accrued as payable to Medicore
will be the final payment. As we have had no interferon sales, no royalty
expense has been recognized for the three fiscal years ended June 30, 2001.
Management believes that the terms and conditions contained in the royalty
agreement will ultimately render the agreement moot and that no royalty payments
will be paid.
INTELLECTUAL PROPERTY
Viragen believes both its and BioNative's production techniques are unique
and are capable of yielding a superior quality product. We believe that their
production techniques will allow us to offer human leukocyte interferon at a
price competitive with the recombinant interferons.
Viragen has filed three patent applications covering Omniferon production
techniques. Our BioNative subsidiary has filed 4 patents relating to Alfanative
and related production processes. We have also submitted several foreign patent
applications relating to natural interferon for topical use. Several of these
patents have been granted. During fiscal 1999, our patent issued in Japan for
the topical use of interferon was challenged by a Japanese company. We
successfully defended our patent position.
Under a license agreement between Viragen and Viragen (Europe) Ltd. dated
July 12, 1995, Viragen (Europe) has exclusive rights to Viragen's technologies.
These include technologies covered by patent for all countries in the European
Union. In addition, we granted Viragen (Europe) the non-exclusive rights to
Viragen's technology throughout the world, excluding the United States and its
territories. Viragen (Europe) will pay Viragen a 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 had deferred the minimum licensing payment in cash
until Viragen (Europe) has the necessary cash flow to meet this payment. In June
2001, accrued licensing fees of $5,333,333 owed to Viragen were paid by Viragen
(Europe) through the issuance of 6,274,510 common shares. 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 our
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 interferons. In the event of valid
claims, Viragen may have to negotiate license agreements with patent holders to
use some processes and products. We believe that we do not infringe upon any
current patent. Also, no one has alleged patent infringement by Viragen.
Someone can challenge the validity and enforceability of a patent by
litigation after its issuance. If the outcome is against the owner of the
patent, other parties may be free to use the subject matter of the patent.
Protection provided by foreign patents may be different than in the United
States. The actual protection we receive from a foreign patent may vary from one
country to another. Protection realized may also depend on the type of patent,
scope of coverage granted and the legal remedies available in each country. We
cannot assure you that any future patents will offer substantial protection or
commercial benefit to us.
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REGULATION
United States and European Union
Viragen's 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, labeling 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 products, 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. This process takes several years and substantial
funding.
Viragen, through Viragen (Scotland), completed the preclinical studies of
its 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.
Management is considering submitting an Investigative New Drug Application to
the Food and Drug Administration for use of our human leukocyte interferon in
the U.S. To help us during the anticipated approval process, we assembled a
clinical advisory committee. It consists of scientists, medical researchers and
clinicians. They are acting in an advisory capacity to assist us in developing
the medical, scientific and clinical aspects in support of our clinical trials,
initially within the European Union and eventually in the United States.
Beginning in 1998, approval of a new drug for use in the entire EU became
possible through the European Medicine Evaluation Agency's Mutual Recognition
Procedure. The use of this process may allow for product approval across the EU
member status. Subject to the successful completion of clinical trials, we
believe this would be the most efficient method of distributing an approved
product. The European Medicines Evaluation Agency does not, however, have
jurisdiction over product pricing. Product pricing and patent reimbursement
guidelines are dictated by the EU member status and are subject to change.
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 also subject to the laws that apply
in the importing countries. For Viragen to conduct this type of sale, we must
first comply with all Food and Drug Administration rules and regulations.
It is possible that the EU regulatory authorities or the Food and Drug
Administration could modify or expand their approval criteria or reporting
requirements. These changes could significantly increase the time and expense to
develop a new product and bring that product to market.
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
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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 is still in place and will
remain until the European regulatory authorities are satisfied that the risk of
contamination has been minimized or eliminated. Due to this situation, we have
been using leukocytes collected in Germany under our preferential access German
Red Cross contractual arrangements, as well as other approved sources.
In February 2001, we entered into a new agreement with the Common Services
Agency of Scotland. This agreement replaced the July 1995 license and
manufacturing agreement.
Under the terms of the new agreement, the Common Services Agency, acting
through the Scottish National Blood Transfusion Service, agreed to supply
specific services to us in connection with the manufacture of Omniferon. The
services to be provided include:
- manufacturing management;
- dispensing, capping, coding and inspection;
- clinical waste management;
- engineering and validation services;
- quality control and regulatory services; and
- quality assurance and regulatory affairs consulting.
The agreement provides for a pre-negotiated pricing structure for all
services.
Any or all services may be terminated with three months notice by either
party except for dispensing, capping, coding and inspection which requires six
months notice.
We agreed to supply the Scottish National Blood Transfusion Service, for
medical use by National Health Service patients in Scotland, up to 10% of our
Scottish based production per year. This percentage could be increased through a
formula to 20% if all leukocytes utilized in our facility were sourced through
the Scottish National Blood Transfusion Services. We have agreed to this
provision for a period of seven years from the date we receive UK marketing
authorization for Omniferon. We have agreed to charge them the lesser of 100% of
our manufacturing costs or the UK retail price for the product provided.
In the event the restrictions on the UK blood supply are removed, the
Scottish National Blood Transfusion Service has agreed to supply us exclusively
with all available white cells collected by them at their cost. We have agreed
to pay them $11,000 per year for this provision. We have the exclusive access to
these white cells for the longer of seven years or the duration of our
commitment to provide them with a portion of our production.
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
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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 and Swedish facilities.
COMPETITION
Competition in the research, development and production of interferon,
transgenic and oncological products and other immunological products is intense
and growing. Our competition includes many 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 their recombinant
interferons (alpha and beta) and other immunological products. These relate to
the treatment of cancer and viral infections, including hepatitis C, our first
targeted use of Omniferon.
Alfa Wassermann is presently producing a natural alpha interferon product
with distribution primarily in Italy. Interferon Sciences, Inc. a New Jersey
based company, is believed to be unable to manufacture its natural interferon
product at a competitive cost and believe them not to be a competitive factor in
the market.
We believe that competition is also based on production ability,
technological superiority and administrative and regulatory expertise in
obtaining governmental approvals for testing, manufacturing and marketing of the
product.
The timing of the entry of a new pharmaceutical product into the market is
an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. Our
ability to develop products, complete clinical studies and obtain governmental
approvals in the past had been hampered by a lack of adequate capital. We are
not presently a competitive factor in the biopharmaceutical industry.
EMPLOYEES
As of September 25, 2001, we have 80 employees. Of these, 58 are research
and development, manufacturing and quality assurance/quality control personnel.
The remaining 22 employees are management, regulatory and/or administrative
personnel.
ITEM 2. PROPERTIES
In November 1996, Viragen entered into a ten year lease for 14,800 square
feet in Plantation, Florida. This location contains our domestic administrative
international marketing and executive offices. The lease contains an option for
up to two additional five-year terms. Base lease payments on the facility total
$15,700 per month plus common area maintenance charges. Our administrative
offices are located at 865 SW 78th Avenue, Suite 100, Plantation, Florida 33324;
phone (954) 233-8746.
In November 1996, through Viragen (Scotland), we entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, consisting of approximately 13,000 square feet, contains laboratory
and production facilities. The annual base lease rate for the facility is 88,000
UK pounds or approximately US$125,000 plus adjustment for common area
maintenance charges. Viragen (Scotland) has the right to renew the lease for
four additional five-year terms. We intend to exercise our first option to
extend in October 2001. This will extend our lease through October 2006.
Through BioNative we lease approximately 12,000 square feet of laboratory,
production and office facilities in Umea, Sweden. This space is covered by three
separate leases. The initial term of these leases has expired and each is
renewable on a year-by-year basis at a total lease cost of approximately $22,500
per month.
BioNative also owns a 21,500 square foot building which is currently under
renovation. This building was purchased to provide expanded production capacity
and is intended to eventually house all of BioNative's
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research, production and administrative facilities. This facility carries a 25
year mortgage held by a Swedish bank for approximately $610,000.
We believe our properties are in good condition, well-maintained and
generally suitable and adequate to carry on our business. We also believe that
we maintain sufficient insurance coverage on all of our real and personal
property.
ITEM 3. LEGAL PROCEEDINGS
In October 1997, Viragen, the company's president and Cytoferon Corp., a
former affiliate of the president, were named as defendants in a civil action
brought in the United States District Court for the Southern District of Florida
(Walter L. Smith v Cytoferon Corp. et al; Case No: 97-3187-CIV-MARCUS). The
plaintiff is a former Viragen stockholder and investor in Cytoferon Corp. The
suit alleged the defendants violated federal and state securities laws, federal
and state RICO statutes, fraud, conspiracy, breach of fiduciary duties and
breach of contract. The plaintiff was seeking an unspecified monetary judgement
and the delivery of 441,368 shares of common stock. Viragen filed a motion to
dismiss denying the allegations and requesting reimbursement of its costs.
In November 1997, the plaintiff filed a notice of voluntary dismissal with
the federal court concurrently notifying Viragen of his intent to refile a
complaint in circuit court in the state of Florida.
In December 1998, the U.S. District Court awarded us reimbursement of
attorneys' fees and expenses under Rule 11 of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act. We recovered $31,000
during fiscal 2000.
In November 1997, the plaintiff filed a complaint in the Circuit Court of
the 11th Judicial Circuit for Miami-Dade County, Florida (Case No: 97-25587
CA30) naming the same defendants. The suit alleges breach of contract, fraud,
violation of Florida's RICO statute and breach of fiduciary duties. It sought an
unspecified monetary judgment and specific performance delivery of 441,368
shares of common stock. The plaintiff claimed that he was entitled to additional
shares of common stock under a consulting agreement. He also claimed that
Viragen's president breached his fiduciary duty to Cytoferon Corp. by not
achieving sufficient financing for Viragen, which would have entitled Cytoferon
Corp. to additional shares. He also claimed misrepresentations in connection
with the previous Cytoferon financings.
In March 1998, the Circuit Court granted Viragen's motion to dismiss the
complaint. Subsequently, the plaintiff filed an amended complaint alleging
breach of contract, fraud, violation of Florida's RICO Act and breach of
fiduciary duties and seeking an unspecified monetary judgement and specific
performance delivery of 441,368 shares of common stock. In April 1998, Viragen
filed a motion to dismiss plaintiff's amended complaint which was denied by the
court.
In August 2000, counsel for plaintiff indicated that they desired to
withdraw as counsel. In January 2001, the Circuit Court ruled in favor of
Viragen on all counts related to the Circuit Court Case (No.: 97-25587 CA30). No
further claims against Viragen are pending in this matter. Viragen has submitted
to the Circuit Court a request for reimbursement of related litigation costs.
While Viragen has prevailed as a defendant in this suit, Mr. Gerald Smith,
Viragen's president, and Cytoferon Corp. continue to be named as defendants. We
have agreed to indemnify Mr. Smith for any losses that he may incur personally,
as a result of this suit. Mr. Smith denies the allegations of the complaint and
intends to continue to vigorously defend the claims. Motions seeking summary
judgment have been filed on behalf of Mr. Smith and Cytoferon and will be heard
by the Court in the near future.
We cannot determine at this point, the ultimate liability, if any,
resulting from this litigation. No accrual for loss has been recorded.
In January 2001, Viragen and its co-plaintiffs the Roslin Institute and Dr.
Helen Sang filed suit against AviGenics, Inc. in the Superior Court of
California for San Mateo County (Case No.: 415458). The lawsuit was brought in
response to allegations by AviGenics that a restrictive covenant contained in a
consulting agreement that Dr. Helen Sang, who works at the Roslin Institute, had
entered into with AviGenics precluded
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her and Roslin from doing business with Viragen. In its lawsuit, Viragen sought
a judicial declaration that (i) Dr. Sang's restrictive covenant was void and
unenforceable, (ii) Viragen, Roslin and Dr. Sang had the right to do business
together, and (iii) no trade secret information belonging to AviGenics was
implicated by Viragen's business relationship with the Roslin Institute and Dr.
Sang. The lawsuit also sought damages against AviGenics for tortuously
interfering in Viragen's business relationship with the Roslin Institute and Dr.
Sang and for attempting to enforce an invalid restrictive covenant.
By order dated March 30, 2001 that lawsuit was dismissed on forum non
convenience grounds. The order of dismissal is the subject of a pending appeal
to the Court of Appeal of the State of California, First Appellate District,
Division Three (Case No.: A094759).
In March 2001, AviGenics, Inc. filed suit against Viragen and its
co-defendants Roslin Institute and Dr. Helen Sang in the Superior Court of
Athens-Clarke County, Georgia (Case No.: SU-01-CV-0468-S). In its amended
complaint, AviGenics alleges that Viragen and its co-defendants breached
contractual duties of confidentiality, conspired to and did misappropriate
AviGenics' relationships with Dr. Sang and Roslin.
Viragen's motion to dismiss AviGenics' lawsuit in its entirety for lack of
jurisdiction over Viragen in the State of Georgia is pending before the court.
Viragen believes AviGenics' lawsuit to be entirely without substantive merit,
and Viragen possesses valid and significant legal defenses to AviGenics' claims.
Viragen is vigorously defending against AviGenics' claims, and, while the
eventual outcome cannot be assured, anticipates that those claims either will be
dismissed for lack of jurisdiction over Viragen or else will ultimately be
resolved in Viragen's favor. No accrual for loss has been recorded in this
matter.
In February 2001, Viragen filed a lawsuit, (Viragen, Inc. v. Walter Larry
Smith, W. Richard Leuck, Roland St. Louis, Jr., Esq., Juan C. Martinez, Esq.,
St. Louis, Guerra, Auslander, P.A. and John Does Nos. 1-10, Case No. 01-3842 CA
01) in a malicious prosecution and conspiracy action against the above mentioned
parties in a attempt to recapture the losses incurred by Viragen, Inc. as a
result of having to disclose the lawsuit Walter L. Smith v. Gerald Smith,
Cytoferon Corp., Viragen, Inc. and John Does Nos. 1-10, Case No. 97-25587 CA
(30) ("Smith Litigation") as well as the attorneys' fees and costs expended by
Viragen, Inc. in defending this action. The Smith Litigation wrongfully alleged
that Viragen, Inc. engaged in, among other things, fraud and RICO violations
during the course of a 1992 stock offering done by Cytoferon, Corp. In the Smith
Litigation, the Court granted final summary judgment in favor of Viragen, Inc.,
specifically finding that there was no evidence connecting Viragen, Inc. in any
way to the allegations made against it in the complaint in that action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year to a
vote of security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Viragen's common stock traded on the over-the-counter bulletin board from
June 29, 1999 through April 16, 2000, under the symbol "VRGN." Our common stock
began trading on the American Stock Exchange on April 17, 2000, under the symbol
"VRA." The following table lists the high and low closing quotations for our
common stock since July 1, 1999.
HIGH LOW
----- -----
2000 -- 2001
First quarter ended 9/30/00................................. $2.75 $1.38
Second quarter ended 12/31/00............................... 2.50 1.25
Third quarter ended 3/31/01................................. 1.69 1.12
Fourth quarter ended 6/30/01................................ 1.26 1.07
1999 -- 2000
First quarter ended 9/30/99................................. $1.05 $ .48
Second quarter ended 12/31/99............................... 1.59 .55
Third quarter ended 3/31/00................................. 4.75 1.09
Fourth quarter ended 6/30/00................................ 3.00 1.31
These quotations represent prices between dealers, and do not include
retail mark-ups, markdowns or commissions. These quotations may not necessarily
represent actual transactions.
As of September 28, 2001, we had approximately 2,600 stockholders of
record. On September 28, 2001, the closing price of the 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 future 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with selected historical consolidated
financial data of Viragen, Inc. We have prepared this information using Viragen
Inc.'s audited consolidated financial statements for the five years ended June
30, 2001.
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When you read this selected historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and related notes included in our annual reports, as well as the
section of our annual reports titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our annual reports are filed
with the Securities and Exchange Commission.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
YEAR ENDED JUNE 30,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................... $ 718 $ 171 $ 374 $ 1,143 $ 1,404
Net loss.................................... (11,008) (12,311) (10,651) (7,856) (4,775)
Loss attributable to common stock........... (11,010) (12,316) (11,653) (10,354) (14,674)
Loss per average common share............... (0.12) (0.16) (0.19) (0.21) (0.37)
Weighted average common shares
outstanding............................... 95,117 78,453 60,109 50,503 39,135
CONSOLIDATED BALANCE SHEET DATA
JUNE 30,
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
Working capital (deficit)........................ $ 6,178 $ 7,006 $(2,290) $ 7,842 $29,331
Total assets..................................... 12,821 14,450 8,529 15,895 37,462
Long-term debt................................... 25 658 352 7,466 239
Stockholders' equity............................. 10,292 11,816 3,836 5,887 32,144
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This document and other documents we may file with the Securities and
Exchange Commission contain forward-looking statements. Also our company
management may make forward-looking statements orally to investors, analysts the
media and others.
Forward-looking statements express our expectations or predictions of
future events or results. They are not guarantees and are subject to many risks
and uncertainties. They are a number of factors -- many beyond our
control -- they could cause actual events or results to be significantly
different from those described in the forward-looking statement. Any or all of
our forward-looking statements in this report or in any other public statements
we make may turn out to be wrong.
Forward-looking statements might include one or more of the following:
- projections of future revenue;
- anticipated clinical trial commencement dates, completion timelines or
results;
- descriptions of plans or objectives of management for future operations,
products or services;
- forecasts of future economic performance; and
- descriptions or assumptions underlying or relating to any of the above
items.
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They use words such as
"anticipate", "estimate", "expect", "project", "intend", "plan", "believe" or
words of similar meaning. They may also use words such as "well", "would",
"should", "could" or "may".
Factors that may cause actual results to differ materially include the
risks discussed below, as well as in the "Risk Factors" section included in our
registration statement on Form S-3 (File No. 333-63246) as filed with the
Securities and Exchange Commission on June 18, 2001. We are incorporating these
"Risk Factors"
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by reference. You should read them. You should also read the risk factors listed
from time to time in our reports on Form 10-Q, S-1, S-3 or 10-K and amendments,
if any, to these reports. Viragen will provide you with any copy of any or all
of these reports at no charge.
Among the uncertainties that may cause our results to differ materially
from our projections are:
- whether the efficacy, price and timing of our human leukocyte interferon
will enable us to compete with other well established, highly
capitalized, biopharmaceutical companies;
- whether our patents applications result in the issuance of patent, or
whether patents and other intellectual property rights provide adequate
protections in the event of misappropriation or infringement by third
parties;
- whether clinical testing confirms the efficacy of our proposed products,
and results in the receipt of regulatory approvals;
- whether we are able to secure sufficient funding to complete product
development, including clinical trials;
- whether we can generate revenues sufficient to offset our historical
losses, or achieve profitability; and
- whether we can absorb BioNative's operations successfully;
- whether, despite receipt of regulatory approvals, our products are
accepted as a treatment superior to that of our competitors.
Viragen has incurred operational losses and operated with negative cash
flows since its inception in December 1980. Losses have totaled $11,007,809,
$12,310,895 and $10,650,832 for the fiscal years ended June 30, 2001, 2000 and
1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, Viragen had on-hand approximately $7,659,000 in cash.
Between July 1, 2001 and September 28, 2001, we have raised $333,000 in
additional equity capital, net of finders fees and issuances costs. We believe
that our current cash balances, coupled with planned fundings under our
investment banking agreement with Ladenburg Thalmann & Co., Inc. will provide
sufficient capital to fund our planned operations, including clinical trials,
for at least the next 12 months.
Our working capital totaled approximately $6,178,000 on June 30, 2001, a
decrease in working capital of $828,000 from the previous year end balance. This
decrease in working capital is primarily attributable to the use of cash to fund
operations totaling approximately $9,916,000 and additions to property, plant
and equipment of $381,000. These decreases were offset, however, by the sale of
approximately 7,787,000 shares of common stock for $9,515,000, net of related
fees, during fiscal 2001. Additionally, the decreases were offset by capital
raised through stock option and warrant exercises totaling approximately
$459,000.
While subject to significant limitations, Viragen, at June 30, 2001, has
available approximately $38.5 million in net tax operating loss carryforwards
expiring between 2002 and 2021. We can use these carryforwards to offset taxable
income, if any, during those periods. Our ability to generate revenues during
future periods is dependent upon obtaining regulatory approvals for
commercialization of our different projects. As we cannot determine that we will
be successful in obtaining the necessary regulatory approvals, we are unable to
conclude that realization of benefits from our deferred tax assets is more
likely than not, as prescribed by Statement of Financial Accounting Standards
No. 109. As a result, we have recognized a valuation allowance to offset 100% of
the deferred tax assets related to these carryforwards.
We began our clinical trials for Omniferon in the European Union during the
fourth calendar quarter of 1999. We cannot assure you that we will be able to
obtain approval of this project or our oncology and avian transgenics projects
since they are subject to the successful completion of lengthy and costly
clinical trials. The completion of these projects also depends on our ability to
raise significant additional investment capital.
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We estimate that we will may require funding of approximately $25 million,
over the next two years. These funds would be used to fund operations including
clinical trials. We will also use future funding, if any, for continued product
development, general working capital purposes, including administrative support
functions, and possible equity investments in businesses complementary to our
operations.
In September 2001, we acquired 100% ownership of BioNative, AB, a privately
held Swedish company, initially in exchange for approximately 3 million common
shares of Viragen (Europe). An additional 20.5 million common shares of Viragen
(Europe) may be issued upon BioNative meeting certain performance milestones.
These milestones are tied to progressive regulatory approvals of BioNative's
Alfanative interferon product.
BioNative has had limited sales in the past, primarily to Italy under a
contractual arrangement. We intend to expand our productive capacity in Sweden
through the renovation of a 21,500 square foot facility purchased by BioNative
prior to our acquisition. The facility carries a 25 year mortgage for
approximately $610,000. We estimate the cost of renovation to be approximately
$3 million, incurred over an 18 month period.
In December 1999, we retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us in raising up to $60 million in additional
investment capital, on a best effort basis. In March 2000, the Securities and
Exchange Commission declared our related shelf registration on Form S-3 (File
No. 333-32306) effective. During fiscal 2000, we raised approximately $8,335,000
in investment capital, net of fees and other costs amounting to approximately
$590,000, under this agreement. During fiscal 2001, we raised an additional
$9,515,000, net of fees and related costs totaling approximately $416,000.
We intend to continue financing our operations for the foreseeable future
from cash on hand and additional investment placements under the Ladenburg
Thalmann agreement. As of September 28, 2001, we had drawn down placed
approximately $19.2 million of the total $60 million available under this
agreement. The Ladenburg Thalmann agreement expires on December 31, 2001.
RESULTS OF OPERATIONS
Viragen recognized no sales revenue or related costs for the fiscal years
ended June 30, 2001, 2000 or 1999. We have had limited potential for sales prior
to receiving the necessary regulatory approvals from the U.S. Food and Drug
Administration and/or comparable European authorities for the commercialization
of our projects. As a result of our acquisition of BioNative in September 2001,
we now have a licensed product, Alfanative(R). Alfanative is a human leukocyte
derived interferon, licensed for sale in Sweden for the treatment of hairy cell
leukemia and chronic myelogenous leukemia in patients who have failed therapy
with recombinant (synthetic) interferon.
2001 Compared to 2000
Research and development costs totaled approximately $7,069,000 during
fiscal 2001. This represents an increase of $2,233,000, when compared to fiscal
2000. This increase reflects significant research and development costs related
to the development, scale-up and clinical trial projects associated with our
Omniferon product. We have also realized an overall increase in our research and
development costs because of collaborative agreements entered into with the
Roslin Institute (Edinburgh), the Memorial Sloan-Kettering Cancer Center, Cancer
Research Campaign Technology Ltd., and the National Institute of Health. We have
entered into these collaborative agreements in order to more fully develop the
potential applications of our Omniferon product, as well as broaden our future
product offerings including those utilizing transgenics technologies and
monoclonal antibodies. The increase in research and development costs is
consistent with the increase in the research related activity described. During
the year ended June 30, 2001, research salaries and support fees increased by
$1,817,000, when compared to the previous year. During fiscal 2001, repairs and
maintenance expense increased by $149,000. Research related travel expenses
increased by $197,000. These increases were offset by a decrease in laboratory
supplies expense of $70,000. This decrease in laboratory supplies expense is
related to the closing of our domestic research facility during fiscal 2000.
This decrease,
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however, is temporary, as research activity in our Scottish and Swedish
facilities is expected to increase and will eventually offset domestic savings.
General and administrative expenses totaled approximately $5,317,000 and
$6,067,000 during fiscal years 2001 and 2000, respectively. This represents a
decrease of approximately $749,900 (12%) between years. We realized decreases in
stock-based compensation expense and penalties attributable to convertible
promissory notes during fiscal 2001. Stock-based compensation expense decreased
by $1,868,000, while penalties decreased by $332,000, when compared to the
preceding year. During the third quarter of fiscal 2000, the company modified
the terms of stock options held by Viragen's president resulting in a charge of
$941,000. No similar charge was recognized during the current fiscal year.
Additionally, we recognized an adjustment of $329,000 during the fourth quarter
to reduce stock-based compensation. During that quarter, a consultant's warrants
to acquire 322,220 shares of common stock expired without vesting. The decrease
in penalties is attributable to penalties incurred during the preceding year
relating to the 8% convertible promissory notes outstanding at that time. No
penalties were incurred during the current year. These decreases were offset by
increases in other costs between fiscal years 2001 and 2000. During the year,
administrative salaries and support fees increased by $276,000 and legal fees
increased by $791,000. The increase in administrative salaries and support fees
related specifically to consulting fees paid to administrative consultants. The
increase in legal fees is related to contract negotiations for research
collaborations and patent activity. Viragen has also incurred legal fees in its
successful defense against claims in the case, Walter L. Smith v Cytoferon
Corp., et al (Case No. 97-3187-CIV-MARCUS).
During fiscal 2001, we recognized approximately $19,000 in losses related
to our investment in Inflammatics, Inc. down from $653,000 in the prior year.
These losses reflected 100% of the losses incurred by Inflammatics associated
with the clinical testing of LeukoVAX and the expensing of our excess investment
costs. During the first quarter of fiscal 2001, we completed expensing our
investment in Inflammatics.
The significant decrease in interest expense is related to debt instruments
that were outstanding during fiscal 2000, but not outstanding during fiscal
2001. Specifically, during fiscal 2000, Viragen had outstanding 8% convertible
promissory notes with a principal balance of $2,000,000 and a short-term
promissory note totaling $600,000. We incurred approximately $700,000 of
additional interest expense on reset shares issued to investors upon the
conversion of the 8% convertible promissory notes. Additionally, we had two
convertible promissory notes, each for $1,000,000 in principal, which were
issued in February and March 2000. Both promissory notes were converted into
common stock in June 2000.
Our management anticipates operational losses will continue for the
foreseeable future as we broaden the focus of our research activities. In
January 1999, we began implementing a cost-reduction plan. Planned cost
reductions implemented in calendar 1999 were expected to save approximately $2.4
million annually in operating expenses. The reductions included the elimination
of administrative and research positions in the U.S. saving approximately $1.6
million. We also closed our Florida-based research facility consolidating these
operations in our Scottish facility and saving approximately an additional
$800,000 annually. We sold our Florida-based research facility in August 2000.
These changes in operations reflect the shift from developing Omniferon in our
domestic laboratories to scale-up development and conducting clinical research
in the European Union. As a result, while significant savings will be realized
in the U.S., particularly in general and administrative expenses, these savings
will be more that offset by increasing expenses in our Scottish and Swedish
facilities. Research and development related to our oncology and avian
transgenics projects are also being conducted in Scotland.
2000 Compared to 1999
Research and development costs totaled approximately $4,837,000 for fiscal
2000 compared to $5,153,000 for the previous year. This represents a decrease of
$316,000 in research related costs between years.
In November 1999, we ceased all research projects being conducted in our
Florida laboratory facility. All research related projects, including research
related to production scale-up, were shifted to our Edinburgh, Scotland
facility. We believe that this consolidation step will improve and streamline
our scientific
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development efforts, as well as reduce operating costs by consolidating
operations in one facility. During fiscal 2000, domestic laboratory supplies
expense and research related salaries and support fees decreased by $609,000 and
$503,000, respectively, when compared to the previous year, while foreign
laboratory supplies expense and research related salaries and support fees
increased by $171,000 and $647,000, respectively, when compared to the previous
year. The increase in foreign research costs also reflects the additional costs
associated with our clinical trials for hepatitis C, which began in Europe
during fiscal 2000.
General and administrative expenses totaled approximately $6,067,000 for
fiscal 2000, an increase of approximately $538,000 over the preceding year. This
increase reflects an increase in compensation expense on stock options and
warrants granted or modified of $1,485,000 offset by a decrease in
administrative salaries and support fees of $694,000 due to the implementation
of our cost reduction program. Also, legal fees decreased between the years by
$275,000, primarily due to reduced litigation fees and higher fees in the prior
year associated with contract negotiations completed in fiscal 1999.
On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock which had been granted to
Viragen's president during October 1995. The board of directors extended the
expiration of this common stock option by three years. Under the modified terms,
the common stock option will now expire on October 5, 2003. No other terms were
changed. Under the provisions of APB No. 25, we recognized compensation expense
of $941,000 relating to the modification of the grant.
We recognized approximately $653,000 in losses related to our investment in
Inflammatics, Inc. during fiscal 2000. This is down from $757,000 in the prior
year. This loss reflects 100% of the losses incurred by Inflammatics associated
with the clinical testing of LeukoVAX. The loss also includes the amortization
of the related capitalized finders fee and warrant costs. These costs are being
amortized in proportion to the losses incurred by Inflammatics as compared to
our initial cash capital contribution to Inflammatics.
The significant increase in interest expense is related to debt instruments
that were outstanding during fiscal 2000, but not outstanding during the prior
year. Specifically, Viragen had outstanding 8% convertible promissory notes with
a principal balance of $2,000,000 during the first quarter of fiscal 2000. Also,
Viragen incurred approximately $700,000 of interest expense on reset shares
issued to investors upon the conversion of the promissory notes during the first
fiscal quarter. Viragen also borrowed $1,000,000 during the current fiscal year
through two short-term promissory notes. During February and March 2000, Viragen
borrowed an additional $2,000,000 by issuing convertible notes to Active
Investors Ltd. II and AMRO International, S.A. bearing interest rates of 8% and
9.5%, respectively. Viragen recognized $440,000 in additional interest expense,
due to a beneficial conversion rate on these promissory notes. The conversion
rates on the notes were discounted 18% from the then current market price of our
common stock.
During fiscal 2000, we spent approximately $50,000 on year 2000 computer
related projects. During that period and subsequent to our year end, we did not
experience any significant year 2000 related disruptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates and market prices. We have not traded or otherwise transacted
in derivatives nor do we expect to do so in the future. We have established
policies and internal processes related to the management of market risks which
we use in the normal course of our business operations.
Interest Rate Risk
The fair value of long-term interest rate debt is subject to interest rate
risk. As we had a minimal amount of long-term debt at June 30, 2001, a change in
interest rates would not have a material impact on our future operating results
or cash flows.
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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 to date have been located in Scotland, and the
United Kingdom which are not participating 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
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED AS OFFICER
NAME AGE POSITION WITH THE COMPANY AND/OR DIRECTOR SINCE CLASS
---- --- ------------------------- --------------------- -----
Gerald Smith............................. 70 Chairman of the Board 1994
Chief Executive Officer 1998 C
President 1993
Dennis W. Healey......................... 53 Chief Financial Officer 1980
Treasurer 1980 B
Director 1984
Executive Vice President 1993
Secretary 1994
D. Magnus Nicolson, Ph.D................. 41 Chief Operating Officer 1999
Melvin Rothberg.......................... 54 Executive Vice President 1999
Carl N. Singer........................... 85 Director 1997 C
Peter D. Fischbein....................... 61 Director 1981 B
Charles J. Simons........................ 83 Director 1998 A
Robert C. Salisbury...................... 57 Director 1998 A
Abraham Cohen............................ 65 Director 2001 B
E. Donald Shapiro........................ 70 Director 2001 B
On February 28, 1997, we amended our Certificate of Incorporation and set
up a classified board of directors with the 1997 annual meeting. Following that
meeting, we divided directors into three subclasses consisting of class A, class
B and class C. The initial term of the class A directors expired after the 1998
annual meeting of stockholders; the term of the class B directors initially
expired after the 1999 annual meeting; and the term of the class C directors
initially expired after the 2000 annual meeting.
At each annual meeting of stockholders, directors for the respective class
whose term has expired will be elected. The directors chosen to succeed those
whose terms have expired will be elected to hold office for a term to expire at
the third ensuing annual meeting of stockholders after their election, and until
their respective successors are elected and qualified. Terms of our directors
expire as follows:
- class A -- after our 2001 annual meeting of stockholders;
- class B -- after our 2002 annual meeting of stockholders; and
- class C -- after our 2003 annual meeting of stockholders
Gerald Smith became president of Viragen in May 1993. Since 1982, Mr. Smith
was a principal stockholder, president, chief executive officer and a director
of Business Development Corp. Business Development has served as a managing
entity and consultant to several high technology ventures including Compupix
Technology Joint Venture. From August 1991 to December 1991, Mr. Smith was the
chief executive officer of Electronic Imagery, Inc., a company engaged in the
development of imaging software. Mr. Smith was also the president, chief
executive officer and a director of Cinescopic Corporation and International
Database Service, Inc. These are computer-oriented companies which developed
database technology using the personal computer for audio, video, animation and
real time communication. Mr. Smith discontinued the operations of Business
Development Corp. in order to devote all of his time to Viragen. Mr. Smith is
also chairman of the board and president of Viragen (Europe) Ltd.
Dennis W. Healey is a certified public accountant. He was appointed
chairman of the board and chief executive officer on April 13, 1993. In June
1994, Mr. Healey relinquished his position as chairman of the board to Mr.
Smith. In July 1994, he relinquished the position of chief executive officer.
Upon Gerald Smith becoming president in May 1993, Mr. Healey became executive
vice president. He has served as chief financial officer and treasurer since
1980. Mr. Healey was appointed secretary in 1994. Mr. Healey is also executive
vice president, treasurer, secretary and a director of Viragen (Europe).
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D. Magnus Nicolson, Ph.D. was appointed chief operating officer of Viragen
and Viragen (Europe) in July 1999 and August 1999, respectively. Dr. Nicolson
was elected a director of Viragen (Europe) in 1997. He has served as the
managing director of Viragen (Scotland) since April 1996. From 1992 to 1995, Dr.
Nicolson was employed by Scottish Enterprise, an agency of the Scottish
government responsible for generating economic development in Scotland. During
his time at Scottish Enterprise, he served as:
- 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. He earned a Masters Degrees in both Immunology and
Business in 1985 and 1992, respectively. Dr. Nicolson is a Fellow of the Royal
Society of Medicine, a Member of the Royal Society of Chemistry, and a Member of
the Chartered Institute of Marketing.
Melvin Rothberg joined Viragen as chief executive officer of Viragen U.S.A.
in April 1998. In April 1999, Mr. Rothberg assumed the position of an executive
vice president of Viragen. Prior to joining Viragen, Mr. Rothberg served as a
vice president of Althin Medical, Inc., a U.S. subsidiary of a Swedish medical
company, from 1990 to 1998. Mr. Rothberg served as a director and manager of a
number of divisions of C.D. Medical, a division of the Dow Chemical Company,
from 1983 to 1990. Mr. Rothberg also serves as a director of Viragen (Europe).
Carl N. Singer was elected a director in August 1997 and currently serves
as chairman emeritus. He currently serves as chairman of the executive committee
and as a member of the compensation committee of the board of directors. Since
1981, Mr. Singer has served as chairman of Fundamental Management Corporation, a
Florida-based institutional investment fund. During fiscal 2000, a fund managed
by Fundamental Management Corporation invested a total of $2,000,000 in Viragen,
in two separate transactions, receiving 1,800,016 shares of common stock. Mr.
Singer has also served as a director, president and CEO of Sealy, Inc., Scripto,
Inc. and the BVD Company. Mr. Singer also serves as a director of Viragen
(Europe).
Peter D. Fischbein is an attorney who has been practicing law for
approximately 36 years. Mr. Fischbein has served as a director of Viragen since
1981. Mr. Fischbein served as Viragen's secretary between May and December 1994.
Mr. Fischbein was appointed to serve on the audit and finance committee in
November 2000. His former law firm on occasion represented Viragen and the
Viragen Research Associates Limited Partnership, which has contracts with
Viragen, Inc. Mr. Fischbein has been general partner of several limited
partnerships engaged in oil exploration and real estate development.
Charles J. Simons was elected to the board of directors in July 1998. He
currently serves as chairman of the audit and finance committee and the
compensation committees of the board of directors. Mr. Simons is the
vice-chairman of the board of G.W. Plastics, Inc., a plastic manufacturer. Also,
he is an independent management and financial consultant. From 1940 to 1981, he
was employed by Eastern Airlines, last serving as vice chairman, executive vice
president and as a director. Mr. Simons is a director of Veridian Corporation,
an aerospace company, and a number of private companies. He was also a director
of Home Intensive Care, Inc. from 1988 until July 1993. Mr. Simons is also a
director of MedWaste, Inc., Diasa Inc. and Excalibur Corporation. Mr. Simons is
an investor in Active Investors II, a fund managed by Fundamental Management
Corporation. During fiscal 2000, Active Investors II invested a total of
$2,000,000 in Viragen in two separate transactions, in exchange for 1,800,016
shares of our common stock.
Robert C. Salisbury was appointed a director of Viragen in December 1998.
From 1974 to 1995, Mr. Salisbury was employed by the Upjohn Company serving in
several financial related positions. These positions included manager of cash
management, internal control and corporate finance from 1975 to 1981. He also
served as a vice president from 1985 to 1990, senior vice president from 1991 to
1994, and executive vice president for finance and chief financial officer from
1994 to 1995. Following the merger of Pharmacia and Upjohn, Inc. in 1995, Mr.
Salisbury served as executive vice president and chief financial officer until
1998.
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Mr. Salisbury also serves as a director of Packard Bio-Science Company, a
leading supplier of instruments to the life sciences research and nuclear
industries. Mr. Salisbury also serves as a director and investor in Fundamental
Management Corporation, a Florida-based institutional investment fund. During
fiscal 2000, a fund managed by Fundamental Management Corporation invested a
total of $2,000,000 in Viragen, in two separate transactions, receiving
1,800,016 shares of common stock.
Mr. Abraham Cohen was elected by our board of directors, during March 2001,
to serve as a class B director. Mr. Cohen currently serves as a director of Akzo
Corporation (Netherlands), Teva Pharmaceutical Industries Ltd. (Israel),
Gen-Probe, Inc., and Smith Barney -- Mutual Funds. Previously, Mr. Cohen served
as President of the Merck Sharp & Dohme International Division and as Senior
Vice President of Merck & Co.
Mr. E. Donald Shapiro was elected by our board of directors, during March
2001, to serve as a class B director. Mr. Shapiro currently serves as a director
of Loral Space & Communications, United Industrial Corporation, Frequency
Electronics, Inc., Vasomedical, Inc. and Group Health Inc. He is also the Dean
and Professor Emeritus of the New York Law School. Previously, Mr. Shapiro has
served as a visiting Professor at Harvard Medical School, New York University
School of Medicine and Law, Cleveland-Marshall College and The University
College at Buckingham School of Law, England.
There is no family relationship between any of the officers and directors.
In September 2000, Robert H. Zeiger resigned his position as a director of
Viragen and member of the executive committee. His resignation was due to health
reasons. Sidney Dworkin, Ph.D., a director of Viragen and member of the audit
and finance committee died on October 17, 2000. During September 2001, Jose I.
Ortega resigned his position as controller of Viragen and Viragen (Europe).
During fiscal 2001, Viragen's board of directors met on 5 occasions.
Viragen has an executive committee, an audit and finance committee and a
compensation committee.
Executive Committee
The executive committee acts for the full board during intervals between
board meetings, except on matters which by law may not be delegated. The
executive committee will meet as necessary. All actions by the committee are
reported at the next board of directors meeting. During fiscal 2001, the
executive committee met on 4 occasions. The executive committee consists of Carl
N. Singer (chairperson) and Gerald Smith.
Audit and Finance Committee
The audit and finance committee of the Viragen, Inc. board of directors was
organized in February 1998. It is composed of three independent directors and
operates under a written charter adopted by the board of directors in July 2000.
The committee members are Charles J. Simons (chairperson), Robert C. Salisbury
and Peter D. Fischbein. During fiscal 2001, the audit and finance committee met
on 5 occasions.
The audit and finance committee reviews our financial reporting process on
behalf of the board of directors. Management has the primary responsibility for
the financial statements and the reporting process, including the system of
internal controls. In this context, the committee has met and held discussions
with management and the independent auditors. Management represented to the
committee that Viragen's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the committee has
reviewed and discussed the consolidated financial statements with management and
the independent auditors. The committee discussed with the independent auditors
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication With Audit Committees).
In addition, the committee has discussed with the independent auditors, the
auditor's independence from the company and its management, including the
matters in the written disclosures required by the Independence Standards Board
Standard No. 1 (Independence Discussions With Audit Committees).
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27
The committee discussed with our independent auditors the overall scope and
plans for their respective audit. The committee meets with the independent
auditors, with and without management present, to discuss the results of their
examinations, the evaluations of Viragen's internal controls, and the overall
quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the committee
recommended to the board of directors, and the board has approved, that the
audited consolidated financial statements be included in Viragen's annual report
on Form 10-K for the year ended June 30, 2001, for filing with the Securities
and Exchange Commission.
Compensation Committee
The compensation committee provides overall guidance for officer
compensation programs, including salaries and other forms of compensation
including all employee stock option grants and warrant grants to non-employees.
The compensation committee consists of Charles J. Simons (chairperson), Carl N.
Singer and Robert C. Salisbury.
AUDIT AND FINANCE COMMITTEE AND COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Currently, there are three members of the audit and finance committee and
the compensation committee. All members are outside directors.
ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table includes information concerning the compensation and
employment agreements of the chief executive officers of Viragen and the four
other most highly compensated executive officers as of June 30, 2001.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-----------------------
AWARDS
-----------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
------------------------------------------------ STOCK OPTIONS/
OTHER ANNUAL AWARDS SARS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) ($) (#)
--------------------------- ---- ---------- --------- ---------------- ---------- ----------
Gerald Smith............... 2001 $296,333 $ -- $ -- $ -- 850,000
Chairman of the 2000 282,000 -- -- -- --
Board, CEO and 1999 282,000 -- -- -- --
President
Dennis W. Healey........... 2001 252,000 -- -- -- 150,000
Exec. V.P., 2000 252,000 -- -- -- --
Treasurer, CFO 1999 252,000 -- -- -- --
and Director
D. Magnus Nicolson......... 2001 170,000 -- -- -- --
COO 2000 170,000 -- -- -- 200,000
1999 115,000 -- -- -- --
Melvin Rothberg............ 2001 172,500 -- -- -- --
Exec. V.P. 2000 160,000 -- -- -- 350,000
1999 150,000 -- -- -- --
LONG TERM COMPENSATION
------------------------------
PAYOUTS
------------------------------
LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS($) COMPENSATION($)
--------------------------- ----------- ----------------
Gerald Smith............... $ -- $ --
Chairman of the -- --
Board, CEO and -- --
President
Dennis W. Healey........... -- --
Exec. V.P., -- --
Treasurer, CFO -- --
and Director
D. Magnus Nicolson......... -- --
COO -- --
-- --
Melvin Rothberg............ -- --
Exec. V.P. -- --
-- --
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Employment Agreements
On March 1, 1997, Mr. Smith entered into a two-year employment agreement.
This agreement provided for:
- a salary of $190,000 and $200,000 for the first and second years,
respectively,
- options to purchase 1,000,000 shares of common stock at $3.22 per share
exercisable over five years,
- health and life insurance,
- similar employee benefits generally available to other employees,
- use of an automobile and related maintenance, and
- reimbursement of business related expenses.
On March 1, 1997, Mr. Smith also entered into a two year employment
agreement with Viragen (Europe) Ltd. under terms similar to those of his Viragen
employment agreement. The agreement provided for an annual salary of $10,000 and
$20,000 for the first and second years. We amended the agreement on July 3,
1997, to provide for an annual salary of $72,000 for the year July 1, 1997
through June 30, 1998, and $82,000 per annum for the period from July 1, 1998
through February 28, 1999. Mr. Smith's employment agreements with both Viragen
and Viragen (Europe) expired on March 1, 1999. On that date, he entered into a
single two year employment agreement with Viragen under terms similar to his
previous agreements. This agreement provided for a total annual salary of
$282,000.
On March 1, 2001, Mr. Smith renewed his two year employment agreement with
Viragen. Under the new agreement, Mr. Smith is to receive an annual salary of
$325,000. He also received options to purchase 850,000 shares of common stock at
$1.35 per share. The options vest one-half on the date of grant and one-half on
the first year anniversary. The options are exercisable over five years from the
vest dates. Mr. Smith's employment agreement contains a provision that in the
event Viragen were to spin-off or split-off any present or future subsidiaries,
he would be entitled to receive a certain number of options in the spun-off
company. The number of options he would receive would be based on a formula
reflecting his then current option position relative to the fully diluted common
stock of Viragen then outstanding. The pricing of the new options would be based
on the relationship of the exercise price of his existing options with the fair
market value of Viragen's stock at the date of the transaction. All other terms
are similar to his previous agreements.
Mr. Smith continues to serve as the president and chairman of Viragen
(Europe).
On March 1, 1997 Mr. Healey entered into a two-year employment agreement.
The agreement, which was amended on July 1, 1997, provided for:
- a salary $190,000 and $195,000 for the first and second years,
- options to purchase 300,000 shares of common stock at $3.22 per share,
exercisable over five years,
- health and life insurance,
- similar employee benefits generally available to other employees, and
- reimbursement of automobile and business related expenses.
On March 1, 1997, Mr. Healey entered into a two-year employment agreement
with Viragen (Europe) Ltd., subsequently amended on July 3, 1997. This agreement
was to run concurrent with Mr. Smith's Viragen (Europe) agreement and superceded
all previous agreements. This agreement provided for a salary of $31,700 for the
four month period ending June 30, 1997, $52,000 for the year ended June 30,
1998, and $38,000 for the eight month period ending February 28, 1998. Upon the
expiration of Mr. Healey's employment agreements with Viragen and Viragen
(Europe), on March 1, 1999, he entered into a single employment agreement with
Viragen under terms similar to his previous agreements. The agreement provided
for a total annual salary of $252,000.
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On March 1, 2001, Mr. Healey renewed his two year employment agreement with
Viragen. Under the new agreement, Mr. Healey is to receive an annual salary of
$252,000. He also received options to purchase 150,000 shares of common stock at
$1.35 per share. The options vest one-half on the date of grant and one-half on
the first year anniversary. The options are exercisable over five years from the
vest dates. Mr. Healey's employment agreement contains a provision that in the
event Viragen were to spin-off or split-off any present or future subsidiaries,
he would be entitled to receive a certain number of options in the spun-off
company. The number of options he would receive would be based on a formula
reflecting his then current option position relative to the fully diluted common
stock of Viragen then outstanding. The pricing of the new options would be based
on the relationship of the exercise price of his existing options with the fair
market value of Viragen's stock at the date of the transaction. All other terms
are similar to his previous agreements.
Mr. Healey continues to serve as executive vice president, chief financial
officer, secretary and director of Viragen (Europe).
On July 1, 1999, Dr. Nicolson entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:
- an annual salary of $170,000,
- the grant of an option to acquire 200,000 shares of 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.
On July 1, 2001, Dr. Nicolson renewed his two year employment agreement
with Viragen. Under the new agreement, Dr. Nicolson is to receive an annual
salary of $172,500. He also received options to purchase 50,000 shares of
Viragen (Europe) Ltd. common stock at $0.85 per share. The options vest one-half
on the date of grant and one-half on the first year anniversary. The options are
exercisable over five years from the vest dates. All other terms are similar to
his previous agreement.
On July 1, 1999, Mr. Rothberg entered into a two year employment agreement
with Viragen. This agreement supercedes all previous agreements. The agreement
provided for:
- an annual salary of $160,000 and $172,500 for the first and second years,
respectively,
- the grant of an option to acquire 250,000 shares of common stock at $.625
per share, vesting one-half on the date of grant and one-half on the
first year anniversary,
- health insurance,
- similar employee benefits generally available to executive employees,
- $400 per month auto allowance, and
- reimbursement of business related expenses.
In April 2000, Mr. Rothberg was granted an option to acquire 100,000 shares
of common stock at $2.00 per share, vesting on the date of grant. These options
were granted simultaneously with the cancellation of an option to acquire
100,000 shares of Viragen U.S.A., Inc. at $0.22 per share held by Mr. Rothberg.
The potential replacement of Viragen U.S.A. options was addressed in Mr.
Rothberg's April 28, 1998 option agreement.
On July 1, 2001, Mr. Rothberg renewed his two year employment agreement
with Viragen. Under the new agreement, Mr. Rothberg is to receive an annual
salary of $172,500. He also received options to purchase 50,000 shares of common
stock at $1.25 per share. The options vest one-half on the date of grant and
one-half
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on the first year anniversary. The options are exercisable over five years from
the vest dates. Mr. Rothberg's auto allowance was increased to $600 per month.
All other terms are similar to his previous agreements.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table includes information as to the grant of options to
purchase shares of common stock during the fiscal year ended June 30, 2001 to
each person named in the summary compensation table.
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5% 10%
---- ------------ ------------ ----------- ---------- -------- --------
Gerald Smith.................. 850,000 48.9% $1.35 2/28/07 $352,750 $790,500
Dennis W. Healey.............. 150,000 8.6 1.35 2/28/07 103,750 232,500
D. Magnus Nicolson............ -- -- -- -- -- --
Melvin Rothberg............... -- -- -- -- -- --
OPTION EXERCISES AND HOLDINGS
The following table includes information as to the exercise of options to
purchase shares of common stock during the fiscal year ended June 30, 2001 by
each person named in the summary compensation table and the unexercised options
held as of the end of the 2001 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY END(#) AT FY END($)
SHARES ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------------ ----------- ----------- ------------- ----------- -------------
Gerald Smith............... -- $ -- 2,475,000 425,000 $750,000 $ --
Dennis W. Healey........... 100,000 94,000 425,000 75,000 -- --
D. Magnus Nicolson......... -- -- 113,333 66,667 71,400 42,000
Melvin Rothberg............ -- -- 225,000 -- 78,750 --
1997 AMENDED STOCK OPTION PLAN AND 1995 AMENDED STOCK OPTION PLAN
On May 15, 1995 the board of directors adopted, subject to approval by the
stockholders, a stock option plan, called the 1995 stock option plan. On
September 22, 1995, the board of directors amended the 1995 stock option plan to
define certain terms and clarify the minimum exercise price of the non-qualified
options. The minimum exercise price of non-qualified options cannot be less than
55% of the fair market value. Viragen stockholders ratified the 1995 stock
option plan at the annual meeting held on December 15, 1995.
On January 27, 1997 the board of directors adopted, subject to approval by
the stockholders, a stock option plan called the 1997 stock option plan. The
1997 stock option plan contains terms and provisions similar to the 1995 stock
option plan. Viragen stockholders ratified the 1997 stock option plan at the
annual meeting held on February 28, 1997. On April 24, 1998 the board of
directors adopted, subject to ratification by the stockholders, an amendment to
the 1997 stock option plan. This amendment reserved an additional 1,000,000
shares of common stock for issuance under that plan. This amendment brought the
total shares reserved under the 1997 stock option plan to 4,000,000 shares. On
July 31, 1998, the stockholders ratified this amendment to the 1997 stock option
plan.
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The audit and finance committee and the compensation committee of the board
of directors and the board of directors currently administer the plans.
Administration of the plan includes determining:
- the persons who will be granted plan options,
- the type of plan options to be granted,
- the number of shares subject to each plan options, and
- the plan options price.
Options granted under either the 1995 or the 1997 stock option plans may
qualify as incentive stock options, under Section 422 of the Internal Revenue
Code of 1986, as amended. In addition, the plans also include a reload option
provision. This provision permits an eligible person to pay the exercise price
of the plan option with shares of common stock owned by the eligible person. The
person then receives a new plan option to purchase shares of common stock equal
in number to the tendered shares. Any incentive option, which is granted under a
plan must provide for an exercise price of not less than 100% of the fair market
value of the underlying shares, on the date of such grant. The exercise price of
any incentive option granted to an eligible employee owning more than 10% of our
common stock must be at least 110% of the fair market value, as determined on
the date of the grant. The board of directors, the audit and finance committee
or the compensation committee determine the term of each plan option and the
manner in which it may be exercised. No plan option may be exercisable more than
10 years after the date of its grant. In the case of an incentive option granted
to an eligible employee owning more than 10% of Viragen's common stock, no plan
option may be exercisable more than five years after the date of the grant.
Officers, directors, key employees and consultants of Viragen and its
subsidiaries are eligible to receive non-qualified options under the stock
option plans. Only officers, directors and employees who are employed by Viragen
or by any of its subsidiaries are eligible to receive incentive options.
Incentive options are non-assignable and nontransferable, except by will or
by the laws of descent and distribution during the lifetime of the optionee.
Only the optionee may exercise incentive options. Under a recent amendment to
the 1997 stock option plan, non-qualified options may be transferable under
limited circumstances for estate planning, if authorized by the board of
directors or the committee. If an optionee's employment is terminated for any
reason, other than his death or disability, or if an optionee is not an employee
but is a member of Viragen's board of directors and his service as a director is
terminated for any reason, other then death or disability, the plan option
granted to him will lapse to the extent unexercised on the earlier of the
expiration date or 30 days following the date of termination. If the optionee
dies during the term of his employment, the plan option granted to him will
lapse to the extent unexercised on the earlier of the expiration date of the
plan option or the date one year following the date of the optionee's death. If
the optionee is permanently and totally disabled, the plan option granted to him
lapses to the extent unexercised on the earlier of the expiration date of the
option or one year following the date of the disability.
The board of directors may amend, suspend or terminate the stock option
plans at any time. However, no amendment can be made which changes the minimum
purchase price, except in the event of adjustments due to changes in Viragen's
capitalization. Unless the plans have been suspended or terminated by the board
of directors, the 1995 stock option plan will terminate on May 15, 2005, and the
1997 stock option plan will terminate on January 27, 2007. The termination of
either plan will not affect the validity of any plan options previously granted.
As of September 28, 2001, there were no additional options available under
the 1995 or 1997 stock option plans.
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OTHER OPTION GRANTS
On February 14, 2001, Viragen granted options to purchase an aggregate
315,000 shares of common stock to four directors and one officer. The options
vest one-half on the date of grant and one-half on the first year anniversary.
The options are exercisable over five years from the vest dates, at $1.35 per
share. The options were allocated, as follows:
- Peter D. Fischbein -- 5,000 shares;
- Robert C. Salisbury -- 5,000 shares;
- Charles J. Simons -- 5,000 shares;
- Carl N. Singer -- 250,000 shares; and
- Jose I. Ortega -- 50,000 shares.
On March 21, 2001, we also granted options to purchase common stock to
Abraham Cohen and E. Donald Shapiro. Both are directors of Viragen and received
these options as compensation for additional consulting services being provided
to us. Each received options to purchase 200,000 common shares at $1.20 per
share. These options vest 50,000 shares at the date of grant and 50,000 shares
every six months through September 2002. The options are exercisable over five
years from the vest dates.
Additionally, Messrs. Cohen and Shapiro each received options to purchase
5,000 common shares at $1.16. These options were granted as compensation for
participation in a board of directors meeting held on May 16, 2001. These
options vest one-half on the date of grant and one-half on the first year
anniversary. The options are also exercisable over five years from the vest
dates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows certain information regarding Viragen's common
stock beneficially owned at September 28, 2001, by:
- each person who is known by us to own beneficially or exercise voting or
dispositive control over 5% or more of Viragen's common stock,
- each of Viragen'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
28, 2001, there were 99,786,099 shares of common stock outstanding.
COMMON SHARES
BENEFICIALLY OWNED
--------------------------
BENEFICIAL PERCENT OF ACQUIRABLE
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS CURRENTLY WITHIN 60 DAYS
------------------------ ---------- ---------- --------- --------------
Gerald Smith...................................... 2,917,000 2.8% 17,000 2,475,000
Carl N. Singer.................................... 4,265,841 4.3 3,815,841 291,666
Dennis W. Healey.................................. 865,000 0.9 365,000 425,000
Peter D. Fischbein................................ 405,000 0.4 350,000 52,500
Charles J. Simons................................. 40,000 0.0 10,000 27,500
Robert C. Salisbury............................... 30,000 0.0 30,000 2,500
Abraham Cohen..................................... 210,000 0.2 -- 105,000
E. Donald Shapiro................................. 210,000 0.2 -- 105,000
Officers & Directors (as a Group of 10 persons)... 9,418,141 9.0 4,603,141 3,914,166
The beneficial ownership figures include 3,836,341 common shares and
warrants to acquire 100,000 common shares held by Fundamental Management
Corporation, a Florida-based institutional investment fund, which have been
attributed to Carl N. Singer. Mr. Singer is the chairperson of Fundamental
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33
Management Corporation. Mr. Salisbury is also a director and investor in
Fundamental Management Corporation.
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 their ownership and reports of changes in their ownership of
common stock and other equity securities of Viragen. 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 these reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended June 30, 2001, 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
Gerald Smith and Dennis W. Healey, who are principal officers of Viragen,
also serve as the principal officers of Viragen (Europe).
On September 1, 1998, Gerald Smith and Dennis W. Healey each exercised
250,000 options to purchase Viragen common stock. Both exercised their options
through the issuance of promissory notes payable to Viragen totaling $300,000.
Mr. Smith and Mr. Healey also entered into related pledge and escrow agreements.
The promissory notes carried an interest rate of 5.47%, payable semi-annually,
and were secured by the underlying common stock purchased. The purchased shares
were being held in escrow, pending payment of the related notes pursuant to the
provisions of the pledge and escrow agreements. Mr. Smith paid $100,000 of the
principal on his promissory note, plus related interest, during January 2000.
Mr. Healey paid-in-full the $150,000 principal, plus related interest, on his
promissory note, during March 2000. Viragen released the collateral on the two
promissory notes.
Carl N. Singer, a director of Viragen and the chairman of its executive
committee, also exercised options for 50,000 shares on October 1, 1998. Peter
Fischbein, a director, exercised options for 200,000 shares on October 8, 1998.
Charles F. Fistel, a former officer, exercised options totaling 410,000 shares
on May 3, 1999 and May 11, 1999. These options were all exercised through the
issuance of promissory notes payable Viragen totaling $302,000, and related
pledge and escrow agreements. The promissory notes bear interest at rates
ranging between 5.06% and 5.15%, payable semi-annually, and are secured by the
underlying common stock purchased. The purchased shares are being held in
escrow, pending payment of the related notes pursuant to the provisions of the
pledge and escrow agreements. During February 2000, Mr. Fischbein exercised
options for an additional 25,000 common shares through the issuance of another
promissory note and escrow agreement. Principal on the promissory note totals
$12,500 and bears interest at 6.46%. Mr. Singer paid-in-full the $59,000
principal, plus related interest, on his promissory note, during March 2000. Mr.
Singer's collateral was released from escrow upon receipt of his payment. Mr.
Fistel paid $30,000 of the principal on his promissory notes, plus related
interest, during March 2000. A pro-rated number of escrowed common shares were
released to Mr. Fistel upon receipt of his payment.
During January 2000, we contracted Cameron Associates, Inc. to act as an
investor relation's consultant. Cameron Associates received $6,000 per month
through February 2000, subsequently reduced to $3,000 per month, as compensation
for their services. They also received warrants to purchase 100,000 common
shares of Viragen at $1.17 per share through January 2005. Mr. Singer serves as
a director on Cameron Associates' board of directors and is a minority
stockholder.
On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock, which had been granted to
Mr. Smith, Viragen's president, during October 1995. The board of directors
extended the expiration of this common stock option by three years. Under the
modified
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terms, the common stock option will now expire on October 5, 2003. No other
terms were changed. Under the provisions of APB 25, we recognized compensation
expense of $941,000 relating to this modification.
On February 18, 2000, we entered into a subscription agreement with Active
Investors Ltd. II, an investment fund managed by Mr. Carl Singer, a director of
Viragen, through Fundamental Management Corporation, a Florida-based
institutional investment fund. Under the terms of the subscription agreement, we
issued to Active Investors Ltd. II a convertible promissory note for the
principal amount of $1,000,000. The promissory note had an interest rate of 9.5%
per annum. The principal and interest were payable on February 17, 2001.
Active Investors Ltd. II could elect to convert the unpaid principal and
interest, at any time, into common shares at the fixed rate of $1.00 per share.
They also received a warrant to purchase 100,000 common shares. The warrant is
exercisable at $2.00 per share through February 17, 2003. This note was
converted into 1,015,716 shares of common stock, which included $35,400 in
interest on June 30, 2000.
Active Investors Ltd. II has also participated as an investor under the
shelf registration on Form S-3 dated March 21, 2000 (File No. 333-32306). Active
Investors Ltd. II invested $1,000,000 in exchange for 784,300 shares of our
common stock.
Mr. Robert Salisbury, a director of Viragen, also serve as a director and
investor in Fundamental Management Corporation which manages the Active
Investors II fund. Mr. Charles Simons, a director of Viragen, is an investor in
the Active Investors II fund.
Between February and March 2000, Mr. Smith exercised options for 400,000
additional common shares through the issuance of two promissory notes and escrow
agreements. Principal on the promissory notes totaled $200,000. Mr. Smith
paid-in-full both notes during March 2000 and the escrowed shares were released.
During March 2000, Melvin Rothberg, an executive vice-president of Viragen,
exercised options for 100,000 common shares through the issuance of a promissory
note and related escrow agreement. Principal on the promissory note totaled
$62,500. Mr. Rothberg paid-in-full the principal on his note during April 2000,
and the escrowed shares were released.
Commencing in March 2000, Mr. Singer is receiving $100,000 per year for his
services as a director and chairperson of the executive committee. He receives
no other director fees. In addition, for these services on March 14, 2000, Mr.
Singer was granted an option to acquire 100,000 shares of common stock. The
option provides for:
- an exercise price of $3.75 per share,
- are exercisable for 5 years from the vesting date,
- an exercisable 33,333 shares on the grant date; 33,333 shares on the
first anniversary of the grant date and 33,334 shares on the second
anniversary of the grant date.
During fiscal 2001, Mr. Simons received $36,000 as compensation for serving
as chairman of the audit and finance committee.
During October 2000, Dennis W. Healey and Sidney Dworkin, a former director
of Viragen, each exercised 100,000 options to purchase common stock. Both
exercised their options through the issuance of promissory notes payable to
Viragen totaling $100,000. Messrs. Healey and Dworkin also entered into related
pledge and escrow agreements. The promissory notes carry an interest rate of
6.00%, payable semi-annually, and are secured by the underlying common stock
purchased. The purchased shares are being held in escrow, pending payment of the
related notes pursuant to the provisions of the pledge and escrow agreements.
During March 2001, Abraham Cohen and E. Donald Shapiro entered into
consulting agreements with Viragen. Each is to provide consulting services to
Viragen for a two year period ending March 31, 2003. These consulting services
are in addition to their service on the board of directors. As compensation,
each was granted options to purchase 200,000 common shares at $1.20 per share.
These options vest 50,000 shares at
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the date of grant and 50,000 shares every six months through September 2002. The
options are exercisable over five years from the vest dates.
During May 2001, Robert C. Salisbury entered into a consulting agreement
with Viragen. He is to provide consulting services to Viragen for a three year
period ending May 31, 2004. These consulting services are in addition to his
service on the board of directors. As compensation, he will be granted warrants
to purchase up to 110,000 common shares. The warrants will be granted in
tranches upon performance of specific criteria. The warrants will vest one-half
on the first anniversary of the date of grant and one-half on the second
anniversary of the date of grant. The warrants will be exercisable for five
years from the vest dates, at 115% of the fair market value of Viragen's common
stock on the dates of grant.
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PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this annual
report.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1. -- All financial statements see Index to Consolidated Financial
Statements.
2. -- Exhibits
3. -- Articles of Incorporation and By-Laws.
3.1 -- Articles of Incorporation and By-Laws (incorporated by
reference to Viragen's registration statement on Form S-1
dated June 8, 1981, File No. 2-72691).
3.2 -- Certificate of Amendment of Certificate of Incorporation
dated September 11, 1986 (incorporated by reference to
Viragen's registration statement on Form S-2 dated October
24, 1986, File No. 33-9714).
3.3 -- Certificate of Amendment of Certificate of Incorporation
dated April 8, 1987 (incorporated by reference to Viragen's
current report on Form 8-K dated April 17, 2000, filed on
April 13, 2000).
3.4 -- Certificate of Amendment of Certificate of Incorporation
dated May 11, 1993 (incorporated by reference to Viragen's
current report on Form 8-K dated April 17, 2000, filed on
April 13, 2000).
3.5 -- Certificate of Amendment of Certificate of Incorporation
dated February 28, 1997 (incorporated by reference to
Viragen's current report on Form 8-K dated April 17, 2000,
filed on April 13, 2000).
3.6 -- Certificate of Amendment of Certificate of Incorporation
dated July 2, 1997 (incorporated by reference to Viragen's
current report on Fort 8-K dated April 17, 2000, filed on
April 13, 2000).
3.7 -- Certificate of Amendment of Certificate of Incorporation
dated October 4, 1999 (incorporated by reference to
Viragen's current report on Form 8-K dated April 17, 2000,
filed on April 13, 2000).
3.8 -- Certificate of Amendment of Certificate of Incorporation
dated August 28, 2001, filed on August 28, 2001.
4. -- Instruments defining the rights of security holders,
including indentures.
4.1 -- Form of common Stock Certificate (incorporated by reference
to Viragen's registration statement on Form S-1 dated June
8, 1981, File No. 2-72691).
4.2 -- Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part
II, Item 16, 4.4).
4.3 -- Specimen Certificate for Unit (Series A Preferred Stock and
Class A Warrant) (incorporated by reference to 1986 Form
S-2, Part II, Item 15.
4.4 -- 1995 Stock Option Plan (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed June 9,
1995).
4.5 -- 1997 Stock Option Plan (incorporated by reference to
Viragen's Registration Statement of Form S-8 filed April 17,
1998).
4.6 -- Subscription Agreement between Active Investors Ltd. II and
Viragen, Inc. dated February 18, 2000 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
4.7 -- Loan and Escrow Agreement between AMRO International, S.A.
and Viragen, Inc. dated March 1, 2000 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
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37
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.8 -- Common Stock Purchase Warrant issued to Equitable Equity
Lending, Inc. dated November 1, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-3
filed May 19, 2000).
4.9 -- Common Stock Purchase Warrant granted to Girmon Investment
Co., Limited dated December 21, 1998 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.10 -- Common Stock Purchase Warrant granted to Robert Keller, M.D.
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.11 -- Common Stock Purchase Warrant granted to David W.
Kirchembaum dated November 1, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.12 -- Common Stock Purchase Warrant granted to Bradford J. Beilly
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.13 -- Common Stock Purchase Warrant granted to Catherine Patrick
dated November 1, 1999 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.14 -- Form of Common Stock Purchase Warrants granted to Pablo A.
Guzman, M.D. between April 2, 1998 and November 4, 1999
(incorporated by reference to Viragen's Registration
Statement on Form S-8 filed May 19, 2000).
4.15 -- Common Stock Purchase Warrant granted to Dunwoody Brokerage
Services, Inc. dated December 28, 1999 (incorporated by
reference to Viragen's Registration Statement on Form S-8
filed May 19, 2000).
4.16 -- Common Stock Purchase Warrant granted to David Squillacote
dated July 1, 1999 (incorporated by reference to Viragen's
Registration Statement on Form S-8 filed May 19, 2000).
4.17 -- Common Stock Purchase Warrant granted to Cameron Associates,
Inc. dated January 17, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.18 -- Common Stock Purchase Warrant granted to Nassau Securities,
Int'l. dated April 17, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
4.19 -- Stock Option Agreement between Viragen, Inc. and Gerald
Smith dated February 7, 2000 (incorporated by reference to
Viragen's Registration Statement on Form S-8 filed May 19,
2000).
10. -- Material contracts.
10.1 -- Research Agreement between the Registrant and Viragen
Research Associates Limited Partnership dated December 29,
1983 (incorporated by reference to Medicore's S-1, File No.
2-89390, dated February 10, 1984 ("Medicore's S-1"), Part
II, Item 16(a)(10)(xxxiii)).
10.2 -- License Agreement between the Registrant and Viragen
Research Associates Limited Partnership dated December 29,
1983 (incorporated by reference to Medicore's S-1, Part II,
Item 16(a)(10)(xxxiv)).
10.3 -- Royalty Agreement between the Company and Medicore, Inc.
dated November 7, 1986 (incorporated by reference to the
November 1986 Form 8-K, Item 7(c)(i)).
10.4 -- Amendment to Royalty Agreement between the Company and
Medicore, Inc. dated November 21, 1989 (incorporated by
reference to the Company's Current Report on Form 8-K dated
December 6, 1989, Item 7(c)(i)).
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38
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.5 -- Agreement for Sale of Stock between the Company and
Cytoferon Corp. dated February 5, 1993 (incorporated by
reference to the Company's Current Report on Form 8-K dated
February 11, 1993 Item 7(c)(28)).
10.6 -- Addendum to Agreement for Sale of Stock between the Company
and Cytoferon Corp. dated May 4, 1993 (incorporated by
reference to the Company's Current Report on Form 8-K dated
May 5, 1993, Item 7(c)(28)(i)).
10.7 -- Amendment No. 2 to the Royalty Agreement between the Company
and Medicore, Inc. dated May 11, 1993 (incorporated by
reference to the Company's June 30, 1993 Form 10-K, Part IV,
Item 14(a)(10)(xix)).
10.8 -- Marketing and Management Services Agreement between the
Company and Cytoferon Corp. dated August 18, 1993
(incorporated by reference to the Company's June 30, 1993
Form 10-K, Part IV, Item 14(a)(10)(xxiii)).
10.9 -- Agreement for Sale of Stock between Cytoferon and the
Company dated November 19, 1993 (incorporated by reference
to the Company's June 30, 1994 Form 10-K, Part IV, Item
14(a)(10)(xxiv)).
10.10 -- Amendment No. 1 to Agreement for Sale of Stock with
Cytoferon (incorporated by reference to the Company's 1995
Form SB-2, Part II, Item 27(10)(xxxii)).
10.11 -- License and Manufacturing Agreement with Common Services
Agency (incorporated by reference to the Company's 1995 Form
SB-2, Part II, Item 27(10)(xxxvi)).
10.12 -- Series H Convertible Preferred Stock, Form of Subscription
Agreement dated February 17, 1998 and related Registration
Agreement and Common Stock Purchase Warrants (incorporated
By reference to the Company's Registration Statement on Form
S-3 dated April 17, 1998).
10.13 -- Series I Convertible Preferred Stock, Form of Subscription
Agreement dated April 2, 1998 and related Registration
Rights Agreement and Common Stock Purchase Warrants
(incorporated by reference to the Company's Registration
Statement on Form S-3 dated April 17, 1998).
10.14 -- Cooperation and Supply Agreement between the Company,
Viragen Deutschland GmbH and German Red Cross dated March
19, 1998 (Certain portions of this exhibit have been
redacted pursuant to a Confidentiality Request submitted to
The Securities and Exchange Commission).
10.15 -- Buffycoat Supply Agreement between America's Blood Centers
and the Company dated July 15, 1998 (Certain portions of
this exhibit have been redacted pursuant to a
Confidentiality Request submitted to the Securities and
Exchange Commission).
10.16 -- Agreement between the Company and the American Red Cross
dated August 18, 1998 (Certain portions of this exhibit have
been redacted pursuant to a Confidentiality Request
submitted to the Securities and Exchange Commission).
10.17 -- Strategic Alliance Agreement between the Company and
Inflammatics, Inc. and Inflammatics Inc. Series A
Convertible Preferred Stock Purchase Agreement (incorporated
By reference to the Company's Annual Report on Form 10-K for
The year ended June 30, 1998).
10.18 -- Gerald Smith Pledge and Escrow Agreement for 200,000 shares
dated September 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998).
10.19 -- Gerald Smith Pledge and Escrow Agreement for 50,000 shares
dated September 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K/A for the year ended
June 30, 1998).
10.20 -- Dennis W. Healey Pledge and Escrow Agreement for 200,000
Shares dated September 1, 1998 (incorporated by reference to
The Company's Annual Report on Form 10-K/A for the year
Ended June 30, 1998).
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39
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.21 -- Dennis W. Healey Pledge and Escrow Agreement for 50,000
Shares dated September 1, 1998 (incorporated by reference to
The Company's Annual Report on Form 10-K/A for the year
Ended June 30, 1998).
10.22 -- Southern Health SDN. BHD Option to Purchase Master License
dated March 23, 1998.
10.23 -- Placement Agreement, Placement Agent Warrant and Investor
Warrant dated September 22, 1998 (incorporated by reference
to Viragen's Annual Report on Form 10-K for the year ended
June 30, 1998).
10.24 -- Purchase Agreement between the Registrant, the Isosceles
Fund and Cefeo Investments Limited dated March 17, 1999
(incorporated by reference to Viragen's Amendment No. 1 to
Registration Statement on Form S-3 filed on June 21, 1999,
File No. 333-75749).
10.25 -- 8% Redeemable Convertible Promissory Note to the Isosceles
Fund dated March 17, 1999 (incorporated by reference to
Viragen's Form S-3 registration statement filed April 6,
1999, File No. 333-75749).
10.26 -- 8% Redeemable Convertible Promissory Note to Cefeo
Investments Limited dated March 17, 1999 (incorporated by
reference to Viragen's Form S-3 registration statement filed
April 6, 1999, File No. 333-75749).
10.27 -- Common Stock Purchase Warrant issued to the Isosceles Fund
Dated March 17, 1999 (incorporated by reference to Viragen's
Form S-3 registration statement filed April 6, 1999, File
No. 333-75749).
10.28 -- Supply and Distribution Agreement between Viragen and the
Adamjee Group of Companies dated November 16, 1998
(incorporated by reference to the Viragen (Europe) Ltd.
Annual Report on Form 10-K for the year ended June 30,
1999).
10.29 -- Employment Agreement between Viragen and Gerald Smith dated
March 1, 1999 (incorporated by reference to Viragen's Annual
Report on Form 10-K for the year ended June 30, 1999).
10.30 -- Employment Agreement between Viragen and Dennis W. Healey
Dated March 1, 1999 (incorporated by reference to Viragen's
Annual Report on Form 10-K for the year ended June 30,
1999).
10.31 -- Memorandum of Agreement between the Isosceles Fund and the
Company dated March 17, 1999 (incorporated by reference to
Viragen's Annual Report on Form 10-K for the year ended June
30, 1999).
10.32 -- Letter of Intent between the Company and Drogsan Healthcare
Dated July 2, 1999 (incorporated by reference to the Viragen
(Europe) Ltd. Annual Report on Form 10-K for the year ended
June 30, 1999).
10.33 -- Common stock and Warrants Agreement. Stock Purchase Warrant
and Registration Rights Agreement dated November 24, 1999
(incorporated by reference to Viragen's Current Report on
Form 8-K dated December 9, 1999).
10.34 -- Carl N. Singer Promissory Note, Pledge and Escrow Agreement
for 50,000 shares dated October 1, 1998 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
10.35 -- Peter Fischbein Promissory Note, Pledge and Escrow Agreement
for 200,000 shares dated October 8, 1998 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
10.36 -- Employment Agreement, Stock Option Agreement between Viragen
and Melvin Rothberg dated July 1, 1999 (incorporated by
reference to Viragen's Form S-1/A registration statement
filed December 22, 1999, File No. 333-75749).
37
40
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.37 -- Employment Agreement, Stock Option Agreement between Viragen
(Scotland) Ltd. and Dr. D. Magnus Nicolson dated July 1,
1999 (incorporated by reference to Viragen's Form S-1/A
registration statement filed December 22, 1999, File No.
333-75749).
10.38 -- Promissory Note and Mortgage and Security Agreement dated
August 10, 1999 (incorporated by reference to Viragen's Form
S-1/A registration statement filed December 22, 1999, File
No. 333-75749).
10.39 -- Mortgage and Security Agreement dated November 3, 1999
(incorporated by reference to Viragen's Form S-1/A
registration statement filed December 22, 1999, File No.
333-75749).
10.40 -- Dennis W. Healey Promissory Note, Pledge and Escrow
Agreement for 100,000 shares dated October 3, 2000.*
10.41 -- Development, License and Collaborative Agreement between
Roslin Institute (Edinburgh) and Viragen, Inc. dated
November 15, 2000 (incorporated by reference to Viragen's
Form S-3 registration statement filed December 29, 2000,
File No. 333-52996).
10.42 -- Employment Agreement, Stock Option Agreement between Viragen
and Gerald Smith dated March 1, 2001.*
10.43 -- Employment Agreement, Stock Option Agreement between Viragen
and Dennis W. Healey dated March 1, 2001.*
10.44.. -- Consulting Agreement, Stock Option Agreement between Viragen
and E. Donald Shapiro dated March 21, 2001.*
10.45.. -- Consulting Agreement, Stock Option Agreement between Viragen
and Abraham Cohen dated March 21, 2001.*
10.46.. -- Option Agreement between Geron Corporation and Viragen, Inc.
Dated May 14, 2001 (incorporated by reference to Viragen's
Form S-3 registration statement filed June 18, 2001, File
No. 333-63246).
10.47.. -- Consulting Agreement between Viragen and Robert C. Salisbury
dated May 23, 2001.*
10.48.. -- Agreement for the Acquisition of BioNative AB between Hakon
Borg and others, Viragen (Europe) Limited and Viragen, Inc.
dated September 28, 2001 (incorporated by reference to
Viragen (Europe) Limited's annual report on Form 10-K filed
September 28, 2001).
21. -- Subsidiaries of the registrant.*
23. -- Consent of Independent Certified Public Accountants.*
---------------
* Filed herewith
38
41
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, INC.
By: /s/ GERALD SMITH
------------------------------------
Gerald Smith
Chairman of the Board of Directors
and President
Dated: September 28, 2001
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERALD SMITH Chairman of the Board of September 27, 2001
------------------------------------------------ Directors, President and
Gerald Smith Principal Executive Officer
/s/ CARL N. SINGER Director, Chairman Emeritus September 27, 2001
------------------------------------------------ and Chairman of the
Carl N. Singer Executive Committee
/s/ DENNIS W. HEALEY Executive Vice President, September 27, 2001
------------------------------------------------ Treasurer, Principal
Dennis W. Healey Financial Officer, Principal
Accounting Officer, Director
and Secretary
/s/ CHARLES J. SIMONS Director and Chairman of the September 27, 2001
------------------------------------------------ Audit and Finance Committee
Charles J. Simons
/s/ ABRAHAM COHEN Director September 28, 2001
------------------------------------------------
Abraham Cohen
/s/ PETER D. FISCHBEIN Director September 28, 2001
------------------------------------------------
Peter D. Fischbein
/s/ ROBERT C. SALISBURY Director September 28, 2001
------------------------------------------------
Robert C. Salisbury
/s/ E. DONALD SHAPIRO Director September 28, 2001
------------------------------------------------
E. Donald Shapiro
39
42
FORM 10-K -- ITEM 8
VIRAGEN, INC. AND SUBSIDIARIES
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen, Inc. and
subsidiaries are included:
Report of Independent Certified Public Accountants.......... F-2
Consolidated balance sheets -- June 30, 2001 and 2000....... F-3
Consolidated statements of operations -- Years ended June
30, 2001, 2000 and 1999................................... F-4
Consolidated statements of stockholders' equity -- Years
ended June 30, 2001, 2000 and 1999........................ F-5
Consolidated statements of cash flows -- Years ended June
30, 2001, 2000 and 1999................................... F-6 - F-7
Notes to consolidated financial statements.................. F-8
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
43
VIRAGEN, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Viragen, Inc.
We have audited the accompanying consolidated balance sheets of Viragen,
Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2001. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Viragen, Inc.
and subsidiaries at June 30, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Miami, Florida
August 17, 2001, except for Note R
as to which the date is September 28, 2001
F-2
44
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
---------------------------
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,659,153 $ 8,094,448
Prepaid expenses.......................................... 185,072 418,238
Other current assets...................................... 420,634 294,776
------------ ------------
Total current assets.............................. $ 8,264,859 $ 8,807,462
Property, Plant and Equipment:
Land, building and improvements........................... 2,341,557 3,557,486
Equipment and furniture................................... 3,994,890 5,976,641
Construction in progress.................................. -- 59,026
------------ ------------
6,336,447 9,593,153
Less accumulated depreciation............................. (1,813,561) (4,073,394)
------------ ------------
4,522,886 5,519,759
Investment in unconsolidated company........................ -- 18,767
Deposits and other assets................................... 33,206 103,938
------------ ------------
$ 12,820,951 $ 14,449,926
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,440,322 $ 1,061,457
Accrued expenses and other liabilities.................... 606,611 616,400
Current portion of long-term debt......................... 39,490 123,400
------------ ------------
Total current liabilities......................... 2,086,423 1,801,257
Royalties payable........................................... 107,866 107,866
Long-term debt, less current portion........................ 25,488 600,106
Minority interest........................................... 308,765 66,772
Put warrants, 100,000 common shares exercisable at $2.75 per
share through June 20, 2001............................... -- 58,000
Commitments and Contingencies:
Stockholders' Equity:
Convertible 10% Series A cumulative preferred stock, $1.00
par value. Authorized 375,000 shares; issued and
outstanding 2,650 shares. Liquidation preference value:
$10 per share, aggregating $26,500..................... 2,650 2,650
Common stock, $.01 par value. Authorized 150,000,000 and
125,000,000 shares at June 30, 2001 and 2000,
respectively; issued 100,259,174 and 91,397,402 shares
at June 30, 2001 and 2000, respectively, of which
845,277 shares are held as treasury stock at June 30,
2001 and 2000.......................................... 1,002,590 913,972
Capital in excess of par value............................ 85,300,017 75,408,262
Treasury stock, at cost................................... (1,277,613) (1,277,613)
Accumulated deficit....................................... (73,847,731) (62,837,272)
Accumulated other comprehensive loss...................... (620,308) (231,213)
Notes due from directors.................................. (267,196) (162,861)
------------ ------------
Total stockholders' equity........................ 10,292,409 11,815,925
------------ ------------
$ 12,820,951 $ 14,449,926
============ ============
See notes to consolidated financial statements which are an integral part of
these statements.
F-3
45
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Income:
Interest and other income.......................... $ 717,567 $ 170,512 $ 374,064
------------ ------------ ------------
717,567 170,512 374,064
Costs and Expenses:
Research and development costs..................... 7,069,432 4,836,753 5,152,748
General and administrative expenses................ 5,316,842 6,066,784 5,528,410
Equity in losses of unconsolidated company......... 18,767 652,978 757,256
Interest expense................................... 23,470 1,717,316 574,375
------------ ------------ ------------
12,428,511 13,273,831 12,012,789
------------ ------------ ------------
Loss before minority interest........................ (11,710,944) (13,103,319) (11,638,725)
Minority interest in loss of consolidated
subsidiaries....................................... 703,135 792,424 987,893
------------ ------------ ------------
NET LOSS................................... (11,007,809) (12,310,895) (10,650,832)
Deduct required dividends on convertible preferred
stock, series A.................................... 2,650 2,650 2,650
Deduct required dividends on convertible preferred
stock, series H.................................... -- -- 676,498
Deduct required dividends on convertible preferred
stock, series I.................................... -- 2,699 322,774
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK.................... $(11,010,459) $(12,316,244) $(11,652,754)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE, after
deduction for required dividends on convertible
preferred stock.................................... $ (0.12) $ (0.16) $ (0.19)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES..... 95,116,909 78,452,813 60,109,133
============ ============ ============
See notes to consolidated financial statements which are an integral part of
these statements.
F-4
46
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
PREFERRED CAPITAL COMPREHENSIVE NOTES DUE
STOCK, COMMON IN EXCESS OF TREASURY ACCUMULATED (LOSS) FROM
SERIES A STOCK PAR VALUE STOCK DEFICIT INCOME DIRECTORS
--------- ---------- ------------ ----------- ------------ ------------- ---------
Balance at July 1, 1998.......... $2,650 $ 534,168 $45,686,143 $ (996,541) $(39,624,889) $ 284,990 $ --
Consulting fees paid with common
stock......................... 250 12,250
Compensation expense on stock
options and warrants.......... 369,647
Exercise of compensatory common
stock options and warrants.... 500 49,500
Exercise of compensatory common
stock options with promissory
notes......................... 11,600 592,900 (459,500)
Exercise of debt and equity
offering warrants............. 2,785 200,704
Sale of detachable warrants on
convertible promissory
notes......................... 344,854
Cost of warrants issued to
finders on convertible
promissory notes.............. 24,078
Private placement of common
stock......................... 27,500 1,347,500
Purchase of treasury stock...... (281,072)
Accrued interest income on
directors' notes.............. (7,342)
Capitalized cost of warrants
issued for investment in
unconsolidated company........ 329,000
Capital contribution to Viragen
(Europe) Ltd.................. (788,641)
Conversion of series H preferred
stock......................... 82,556 4,917,444
Conversion of series I preferred
stock......................... 32,718 1,857,282
Dividend on series A preferred
stock......................... (2,650)
Accretion of series H and series
I preferred stock............. (242,657)
Accretion paid in common
stock......................... 7,058 410,544
Foreign currency translation
adjustment.................... (240,329)
Unrealized gain on marketable
securities, available for
sale.......................... 2,091
Net loss........................ (10,650,832)
------ ---------- ----------- ----------- ------------ --------- ---------
Balance at June 30, 1999......... $2,650 $ 699,135 $55,353,205 $(1,277,613) $(50,521,028) $ 46,752 $(466,842)
Consulting fees paid with common
stock......................... 1,070 85,930
Conversion of convertible
promissory notes into common
stock......................... 61,529 4,054,832
Reset shares issued on 8%
convertible promissory notes.. 10,981 686,265
Beneficial conversion rate on
convertible promissory
notes......................... 440,000
Exercise of compensatory common
stock options and warrants.... 15,674 1,310,421
Exercise of compensatory common
stock options with promissory
notes......................... 5,250 269,750 (275,000)
Exercise of debt and equity
offering warrants............. 15,286 816,403
Compensation expense on stock
options and warrants.......... 2,149,654
Sale of detachable warrants on
convertible promissory notes
and short-term borrowings..... 166,250
Private placement of common
stock, net.................... 102,281 10,485,867
Collections on promissory notes
issued for common stock
exercises..................... 571,500
Dividend on series A preferred
stock......................... (2,650)
Capital contribution to Viragen
(Europe) Ltd.................. (532,512)
Exercise of subsidiaries' common
stock options................. 1,344
Conversion of series I preferred
stock......................... 2,461 107,539
Accretion of series I preferred
stock......................... (2,699)
Accretion paid in common
stock......................... 305 13,314
Accrued interest income on
directors' notes.............. 7,481
Foreign currency translation
adjustment.................... (277,965)
Net loss........................ (12,310,895)
------ ---------- ----------- ----------- ------------ --------- ---------
Balance at June 30, 2000......... 2,650 913,972 75,408,262 (1,277,613) (62,837,272) (231,213) (162,861)
Consulting fees paid with common
stock......................... 2,667 334,833
Compensation expense on stock
options and warrants.......... 513,533
Private placement of common
stock, net.................... 77,868 9,436,986
Exercise of compensatory common
stock options and warrants.... 6,083 453,027
Exercise of compensatory common
stock options with promissory
notes......................... 2,000 98,000 (100,000)
Capital contribution to Viragen
(Europe) Ltd.................. (945,128)
Exercise of subsidiaries' common
stock options................. 504
Dividend on series A preferred
stock......................... (2,650)
Accrued interest income on
directors' notes.............. (4,335)
Foreign currency translation
adjustment.................... (389,095)
Net loss........................ (11,007,809)
------ ---------- ----------- ----------- ------------ --------- ---------
Balance at June 30, 2001......... $2,650 $1,002,590 $85,300,017 $(1,277,613) $(73,847,731) $(620,308) $(267,196)
====== ========== =========== =========== ============ ========= =========
See notes to consolidated financial statements which are an integral part of
these statements.
F-5
47
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net loss.................................................... $(11,007,809) $(12,310,895) $(10,650,832)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 610,894 682,009 635,692
Consulting fees paid with common stock.................... 337,500 47,000 12,500
Compensation expense on stock options and warrants........ 513,533 2,149,654 369,647
Minority interest in loss of subsidiary................... (703,135) (792,424) (987,893)
Gain on sale of property, plant and equipment............. (195,919) -- --
Impairment loss recognized on long-lived assets........... -- 101,859 --
Amortization of discounts on convertible promissory notes
and short-term borrowings............................... -- 236,373 274,731
Interest expense on reset shares.......................... -- 697,246 --
Interest expense on beneficial conversion rate of
convertible promissory notes............................ -- 440,000 --
Recovery of bad debts..................................... -- (24,630) --
Bad debt expense.......................................... -- -- 24,630
Increase (decrease) relating to operating activities from:
Prepaid expenses.......................................... 198,024 (72,759) (37,566)
Other current assets...................................... (125,858) (43,713) 344,887
Investment in unconsolidated company...................... 18,767 652,977 757,256
Deposits and other assets................................. 70,732 223,801 215,977
Accounts payable.......................................... 378,865 (70,866) 302,662
Accrued expenses and other liabilities.................... (7,139) 88,807 (9,783)
Deferred income........................................... -- -- (200,000)
Notes due from directors.................................. (4,335) 7,481 (7,342)
------------ ------------ ------------
Net cash used in operating activities................... (9,915,880) (7,988,080) (8,955,434)
Investing Activities:
Additions to property, plant and equipment................ (380,949) (237,712) (497,117)
Sale of property, plant and equipment..................... 721,050 -- --
Investment in unconsolidated company...................... -- -- (1,100,000)
Sale of marketable securities, available-for-sale......... -- -- 6,108,504
------------ ------------ ------------
Net cash provided by (used in) investing
activities....................................... 340,101 (237,712) 4,511,387
Financing Activities:
Payments on long-term debt................................ (725,066) (285,937) (168,977)
Proceeds from private placements, net..................... 9,514,854 10,588,148 1,375,000
Proceeds from exercise of compensatory common stock
options and warrants.................................... 459,110 1,326,095 50,000
Proceeds from exercise of debt and equity offering
warrants................................................ -- 831,689 203,489
Collections on promissory notes issued for compensatory
common stock option exercises........................... -- 651,500 --
Proceeds from sale of convertible promissory notes, net... -- 1,772,985 1,516,966
Proceeds from sale of detachable warrants with convertible
promissory notes and short-term borrowings.............. -- 166,250 344,854
Proceeds from short-term borrowings, net.................. -- 887,740 --
Payments on short-term borrowings......................... -- (400,000) --
Preferred dividends paid to preferred stock series A...... (5,300) -- --
Purchase of treasury stock................................ -- -- (281,072)
Proceeds from exercise of subsidiaries' common stock
options................................................. 504 1,344 --
------------ ------------ ------------
Net cash provided by financing activities............... 9,244,102 15,539,814 3,040,260
Effect of exchange rate fluctuations on cash............ (103,618) (275,161) (248,943)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents.......... (435,295) 7,038,861 (1,652,730)
Cash and cash equivalents at beginning of period.......... 8,094,448 1,055,587 2,708,317
------------ ------------ ------------
Cash and cash equivalents at end of period................ $ 7,659,153 $ 8,094,448 $ 1,055,587
============ ============ ============
See notes to consolidated financial statements which are an integral part of
these statements.
F-6
48
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION:
YEAR ENDED JUNE 30,
----------------------------
2001 2000 1999
------- ------- --------
Interest paid............................................ $23,470 $94,446 $299,644
Income taxes paid........................................ -- -- --
During the years ended June 30, 2001, 2000 and 1999, Viragen had the
following non-cash investing and financing activities:
YEAR ENDED JUNE 30,
-----------------------------------
2001 2000 1999
--------- ---------- ----------
Exercise of common stock options with promissory
notes............................................ $ 100,000 $ 275,000 $ 604,500
Contribution of intercompany balances as capital to
Viragen (Europe) Ltd............................. (945,128) (532,512) (788,641)
Purchase of insurance with notes payable........... 22,858 33,422 94,627
Purchase of assets with notes payable.............. 78,953 -- --
Settlement of note payable upon trade-in of
asset............................................ (33,916) -- --
Cancellation of put warrants....................... (58,000) -- --
Refinancing of short-term borrowings to long-term
debt............................................. -- 600,000 --
Accrued consulting fees paid with common stock..... -- 40,000 --
Conversion of convertible notes and accrued
interest into common stock....................... -- 4,116,361 --
Issuance of put warrants for consulting fees....... -- 58,000 --
Conversion of preferred stock into common stock.... -- 110,000 6,890,000
Accretion paid in common stock..................... -- 13,619 417,602
Equipment acquired through capital leases.......... -- -- 4,809
Capitalized cost of warrants issued for investment
in unconsolidated company........................ -- -- 329,000
Cost of warrants issued to finders on convertible
notes............................................ -- -- 24,078
See notes to consolidated financial statements which are an integral part of
these statements.
F-7
49
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation: Viragen, Inc. and its
subsidiaries are engaged in the research, development and manufacture of
immunological products for commercial application. The consolidated financial
statements include the parent company and all subsidiaries, including those
operating outside the United States of America. All significant transactions
between our businesses have been eliminated.
Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Costs related to this transaction include finder's fees
and warrants issued. These costs are being amortized in proportion to the losses
incurred by Inflammatics as compared to our initial cash contribution to
Inflammatics. During the first quarter of fiscal 2001, we completed expensing
our investment in Inflammatics.
On September 28, 2001, subsequent to fiscal 2001, Viragen and Viragen
(Europe) Ltd. purchased through the issuance of Viragen (Europe) Ltd. stock,
100% of BioNative AB, a privately-held Swedish corporation, engaged in the
development, manufacture and distribution of human leukocyte derived interferon.
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.
Cash and Cash Equivalents: Cash equivalents include demand deposits,
certificates of deposit and time deposits with maturity periods of three months
or less when purchased.
Marketable Securities, Available-for-Sale: Viragen invests in debt
securities, rated A or better, issued by the U.S. Treasury, other U.S.
government agencies and corporations. These investments are classified as
current assets, in accordance with ARB No. 43, at their fair market value based
upon published quotations. Realized gains and losses are computed based on the
cost of securities sold using the specific identification method.
Financial Instruments: The carrying amount of financial instruments
including cash and cash equivalents, accounts payable, and accrued expenses and
other liabilities approximate fair value as of June 30, 2001, due to their
short-term nature. The carrying value of long-term debt approximates fair value
as of June 30, 2001, based on the current interest rates and repayment terms.
Other Current Assets: Other current assets consisted of the following at
June 30, 2001 and 2000:
JUNE 30,
-------------------
2001 2000
-------- --------
Note receivable............................................. $115,885 $115,885
VAT tax refund receivable................................... 222,965 143,104
Other current assets........................................ 81,784 35,787
-------- --------
$420,634 $294,776
======== ========
F-8
50
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment: Property, plant and equipment is stated at
the lower of cost or net realizable value. Depreciation was computed by using
the straight-line method over the estimated useful life for financial reporting
purposes and by using accelerated methods for income tax purposes. The estimated
useful lives used for financial reporting purposes are:
Building and improvements................................... 15-39 years
Equipment and furniture..................................... 5-10 years
Debt Issued with Stock Purchase Warrants: Viragen accounts for debt issued
with stock purchase warrants in accordance with APB 14 -- "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants."
Accrued Expenses and Other Liabilities: Accrued expenses and other
liabilities consisted of the following at June 30, 2001 and 2000:
JUNE 30,
-------------------
2001 2000
-------- --------
Accrued salaries............................................ $ 49,951 $ 46,114
Accrued rent expense........................................ 129,943 129,249
Accrued accounting fees..................................... 20,000 156,867
Accrued legal fees.......................................... 91,160 3,798
Other accrued expenses...................................... 315,557 280,372
-------- --------
$606,611 $616,400
======== ========
Sale of Stock by Subsidiaries: Viragen accounts for sales of stock by its
subsidiaries as capital transactions for financial reporting purposes.
Foreign Currency Translation: For foreign operations, local currencies are
considered their functional currencies. Viragen translates assets and
liabilities to their U.S. dollar equivalents at rates in effect at the balance
sheet date and records translation adjustments in stockholders' equity.
Statement of operations accounts is translated at average rates for the period.
Transaction adjustments, which are not material, are recorded in results of
operations.
Research and Development Costs: Viragen accounts for research and
development costs in accordance with SFAS No. 2 -- "Accounting for Research and
Development Costs." Accordingly, all research and development costs are expensed
as incurred.
Stock Based Compensation: Viragen accounts for stock-based compensation
plans under the provisions of APB No. 25 -- "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense for stock option
grants where the exercise price equals or exceeds fair market value at date of
grant. We have provided supplemental disclosures as required by the provisions
of SFAS No. 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 No. 128 -- "Earnings per Common Share." The effects of
convertible debt and equity securities, warrants, and options totaling
11,202,258 are antidilutive. As a result, diluted loss per share data does not
include the assumed conversion of these instruments and has been presented
jointly with basic loss per share. Loss attributable to common stock
F-9
51
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reflects adjustments for cumulative preferred dividends, as well as embedded
dividends arising from discounted conversion terms on convertible preferred
stocks and related warrants.
Embedded dividends included in loss attributable to common stock during
each fiscal year presented are:
YEAR ENDED JUNE 30,
----------------------
PREFERRED STOCK 2001 2000 1999
--------------- ---- ---- --------
Series H.................................................... $ -- $ -- $510,731
Series I.................................................... -- -- 245,884
Comprehensive Loss: SFAS No. 130 -- "Reporting Comprehensive Income"
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Viragen's comprehensive loss for fiscal
years 2001, 2000, and 1999 totaled $11,396,904, $12,588,860 and $10,889,070,
respectively.
Recent Pronouncements: In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141 -- "Business Combinations" and SFAS No.
142 -- Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations. It also
changes the criteria to recognize intangible assets apart from goodwill. SFAS
No. 142 changes the method of accounting for goodwill and indefinite lived
intangible assets. The requirements of both SFAS Nos. 141 and 142 are effective
for transactions occurring after June 30, 2001.
Management believes that the impact of SFAS 141 and SFAS 142 will not be
significant to Viragen.
NOTE B. REDEEMABLE PREFERRED STOCK, SERIES H AND SERIES I
During the third and fourth fiscal quarters of 1998, Viragen closed $7
million in financing replacing a portion of the funds used to redeem previous
preferred stock issuances. In February 1998, we received net proceeds of
approximately $4,625,000 from the sale of 500 shares of series H convertible
preferred stock with an aggregate stated value of $5 million. In April 1998,
Viragen received net proceeds of approximately $1,840,000 from the sale of 200
shares of series I convertible preferred stock. We incorporated certain
restrictions as part of the series H and series I preferred stock designations
which, in the opinion of management, would facilitate a more orderly market
relative to the underlying shares of our common stock. The series H and series I
preferred stock did not bear dividends although, upon liquidation or conversion,
an 8% accretion factor was included in the calculation for purposes of
determining the liquidation and conversion amount.
Neither the series H preferred stock nor the series I preferred stock
issuances were convertible until August 19, 1998, the six month anniversary of
the Series H closing. The conversion price was the lower of (1) $1.59 per share,
and (2) the variable conversion price which was equal to 82% of the market price
at the date of conversion. Management retained the right to redeem both
issuances of preferred stock at various prices upon receipt of a notice of
conversion.
In addition, the right of conversion was further limited to a maximum of
15% of the aggregate principal amount of the series H and series I preferred
stock issued to each holder for each one month period cumulatively to a maximum
of not in excess of 25% for any month in the event the holder has converted less
than 15% in any of the preceding months.
Pursuant to the terms of the subscription agreements, the holders of the
series H and series I preferred stock also received Nine Month warrants, Twelve
Month warrants and Fifteen Month warrants to purchase
F-10
52
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock of Viragen. The number of warrants and exercise price
were to be determined at future dates during fiscal 1999.
During fiscal 1999, Viragen allocated the warrants reserved for the series
H and I investors, as follows:
H INVESTORS I INVESTORS TOTAL
----------- ----------- ---------
Investor warrants reserved at June 30, 1998............ 1,948,052 779,221 2,727,273
Less warrants allocated to investors during fiscal
1999:
Nine Month warrants (exercise price = $0.80/share)... 352,627 166,273 518,900
Twelve Month warrants (exercise price =
$0.59/share)...................................... 193,221 114,406 307,627
Fifteen Month warrants (exercise price =
$0.39/share)...................................... -- 56,410 56,410
--------- ------- ---------
Investor warrants cancelled during fiscal 1999......... 1,402,204 442,132 1,844,336
========= ======= =========
The Nine Month, Twelve Month, and Fifteen Month warrants are exercisable
through February 17, 2003. During fiscal 1999, the series H and I investors
exercised 189,490 of the Nine Month warrants. They also exercised 88,983 of the
Twelve Month warrants during fiscal 1999.
During fiscal 2000, the series H and I investors exercised 216,469 of the
Nine Month warrants. They also exercised 147,457 of the Twelve Month warrants
during fiscal 2000. All of the Fifteen Month warrants were exercised during
fiscal 2000. During fiscal 2001, the series H and I investors did not exercise
any of their warrants. At June 30, 2001, there are 112,941 and 71,187 of the
Nine Month and Twelve Month warrants outstanding, respectively.
The series H and series I placement agent received a commission of $490,000
for the placement of the series H preferred stock and H warrants and series I
preferred stock and I warrants. In addition, the placement agent received
placement agent warrants to purchase an aggregate of 402,052 shares of common
stock, which were subsequently transferred to affiliates and employees of the
placement agent. The placement agent warrants entitle the holders to exercise
those warrants at an exercise price of $1.684 per share at any time between the
date of their respective issuances and February 19, 2003; provided that if the
date of exercise occurs after February 19, 1999, the exercise price of the
placement agent warrants will be the lesser of $1.684 per share or the lowest
reset price as calculated on each one year anniversary of the date of issuance
during the warrant term. During fiscal 2000, these individuals exercised
warrants for 109,064 shares of common stock. During fiscal 2001, these
individuals did not exercise any of the remaining warrants. The H and I
placement agents have 292,988 warrants remaining at June 30, 2001.
NOTE C. CAPITAL STOCK
PREFERRED STOCK, SERIES A
The series A preferred stock provides for a 10% cumulative dividend,
payable at the option of Viragen, in either cash or common stock and is
convertible into 4.26 shares of common stock. The holders of the series A
preferred stock are not entitled to vote unless dividends are in arrears for
five annual dividend periods. Management has the right to call the preferred
stock for redemption, in whole or in part, if the closing bid for common stock
is $6.00 per share or higher for a period of ten consecutive business days, at
$11.00 per share for a period of five years from that date, and then at $10.00
per share.
COMMON STOCK
During May 1999, Viragen completed a private placement for the sale of
2,750,000 shares of common stock. The common shares were sold to three
accredited investors at $0.50 per share. Viragen received proceeds of $1,375,000
from the sale of these shares. During October 1999, Viragen issued the finder
37,500 shares of common stock for identifying the three investors.
F-11
53
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:
- AMRO International, S.A.,
- Markham Holdings, Limited, and
- Tashdale Ltd.
The agreement was for gross proceeds of $2.5 million. Viragen issued, in
three tranches between November 24, 1999 and February 11, 2000, an aggregate
4,600,000 shares of common stock and warrants to purchase 375,000 shares of
common stock. The warrants are exercisable at $1.15 per share and expire on
November 30, 2002. We entered into this financing under Regulation S of the
Securities Act of 1933.
In connection with this transaction, Viragen paid a fee of 7% of the amount
invested to AMRO International in consideration of locating the other two
investors, as well as other issuance costs. Total costs approximated $247,000.
Net proceeds from this transaction totalled $2,253,000.
AMRO International also received warrants to purchase 125,000 shares of
common stock. The warrants are exercisable at $1.15 per share through November
30, 2002. During fiscal 2000, the finder exercised 15,000 of these warrants.
In December 1999, Viragen retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us 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 our shelf registration on Form S-3 (File No.
333-32306) effective. Between April 1 and June 30, 2000, we raised approximately
$8,335,000 in additional capital, net of a 7% finders fee and other issuance
costs amounting to approximately $590,000, under the shelf registration. We
issued an aggregate of 5,590,528 common shares, as a result of this financing
activity. We also issued warrants, to the investors and to the finders, to
purchase an aggregate 336,448 common shares. These warrants are exercisable at
prices ranging between $1.70 and $2.55 per share, through June 2003.
Active Investors Ltd. II, an investment fund managed by Carl N. Singer
through Fundamental Management Corporation, has participated as an investor
under the shelf registration. Mr. Singer is a director of Viragen and the
chairman of its executive committee. Robert C. Salisbury, also a director of
Viragen, and member if its audit and finance committee and its compensation
committee, is a director and investor in Fundamental Management Corporation.
Charles J. Simons, a director of Viragen and the chairman of its audit and
finance committee and its compensation committee, is an investor in Active
Investors Ltd. II. Active Investors Ltd. II invested $1,000,000 in exchange for
784,300 shares of our common stock, as part of the above financing activity. We
did not pay any finders fees on the investment by Active Investors Ltd. II.
Also, no warrants were issued in this transaction.
During fiscal 2001, we continued to raise capital using our shelf
registration on Form S-3. During the year, we raised approximately $9,515,000 in
additional capital, net of finders fee and other issuance costs amounting to
approximately $416,000. We issued an aggregate of 7,786,825 common shares and
warrants to purchase an additional 426,738 common shares. These warrants are
exercisable at prices ranging between $1.32 and $1.97 per share, through June
2004.
On February 14, 2001, our shareholders ratified an amendment to our
Certificate of Incorporation increasing the number of authorized shares of our
common stock from 125,000,000 to 150,000,000.
F-12
54
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS AND WARRANTS
Under Viragen's 1995 stock option plan, 4,000,000 shares of common stock
were reserved for issuance to officers, directors, employees and consultants of
Viragen for stock options designated as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. Options granted under the
1995 stock option plan have various vest dates and all options granted have
five-year terms from the vesting date.
Viragen's 1997 stock option plan, adopted during February 1997, authorized
the grant of options to officers, directors, employees and consultants for up to
3,000,000 shares of common stock. In April 1998, the 1997 stock option plan was
amended increasing the number of common shares authorized to 4,000,000 shares.
Options granted under the plan have various vest dates and all options granted
have 5 year terms from the vesting date.
At June 30, 2001, no shares remain available for issuance under the 1995
and the 1997 stock option plans.
STOCK BASED COMPENSATION
Viragen has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, Viragen recognized compensation expense in the
amount of $1,600, $940,800 and $172,000 in 2001, 2000, and 1999, respectively,
because the exercise price of a portion of the company's employee stock options
was less than the market price of the underlying stock on the date of grant.
During 2001, 2000 and 1999, we recognized approximately $512,000, $1,209,000 and
$199,000, respectively, in compensation expense on warrants granted to
consultants pursuant to SFAS 123.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if we had accounted for our
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: dividend
yield of zero percent for all periods; expected life of the option within a
range of 1 to 15 years; risk-free interest rates within a range of 4.00% to
6.40%; and a volatility factor of the expected market price of Viragen's common
stock of 1.04, 0.98 and 0.77 for 2001, 2000 and 1999, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Viragen's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options and warrants.
Based on calculations using a Black-Scholes option valuation model, the
weighted average grant date fair value of options was $0.75, $0.80 and $0.57 in
fiscal 2001, 2000 and 1999, respectively. The pro forma impact on Viragen's net
loss per share had compensation cost been recorded as determined under the fair
value method is shown below.
2001 2000 1999
------------ ------------ ------------
Pro forma net loss........................... $(11,867,275) $(12,484,278) $(11,122,679)
Pro forma loss attributable to common
stock...................................... (11,869,925) (12,489,627) (12,124,601)
Pro forma loss per common share.............. (0.12) (0.16) (0.20)
F-13
55
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen's stock option activity, and related information for
the years ended June 30, follows:
NUMBER OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- ---------------- ----------- ----------------
Outstanding at July 1, 1998....... 8,213,000 $1.62 7,379,500 $1.54
Granted......................... 94,000 1.00
Exercised....................... (1,210,000) 0.54
Cancelled/Expired............... (33,500) 2.21
----------
Outstanding at June 30, 1999...... 7,063,500 1.79 6,896,500 1.79
Granted......................... 740,000 1.25
Exercised....................... (1,651,100) 0.82
Cancelled/Expired............... (154,000) 1.00
----------
Outstanding at June 30, 2000...... 5,998,400 2.02 5,599,199 2.08
Granted......................... 1,737,000 1.31
Exercised....................... (540,000) 0.72
Cancelled/Expired............... (140,833) 2.30
----------
Outstanding at June 30, 2001...... 7,054,567 $1.94 5,705,266 $1.96
==========
The following table summarizes information about stock options outstanding
at June 30, 2001:
STOCK OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED AVERAGE STOCK OPTIONS EXERCISABLE
REMAINING ----------------------------
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------ --------- ---------------- ---------------- --------- ----------------
$0.50................. 1,000,000 2.27 $0.50 1,000,000 $0.50
$0.61 -- $1.00........ 780,400 2.37 0.80 682,933 0.83
$1.16 -- $1.20........ 410,000 5.47 1.20 105,000 1.20
$1.31 -- $2.00........ 1,859,667 4.49 1.48 1,196,167 1.55
$2.06 -- $2.79........ 908,000 1.85 2.43 908,000 2.43
$3.06 -- $3.22........ 1,707,500 0.67 3.22 1,707,500 3.22
$3.69 -- $4.13........ 377,000 1.64 4.01 93,666 3.80
$7.13................. 12,000 1.58 7.13 12,000 7.13
--------- ---------
$0.50 -- $7.13........ 7,054,567 2.58 $1.94 5,705,266 $1.96
========= =========
F-14
56
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen's warrant activity, excluding warrants issued in
conjunction with debt and equity offerings, and related information for the
years ended June 30, is as follows:
WEIGHTED
NUMBER OF AVERAGE WARRANTS WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- -------------- ----------- ----------------
Outstanding at July 1, 1998.......... 635,256 $1.06 635,256 $1.06
Granted............................ 1,500,000 3.67
Exercised.......................... -- --
Cancelled/Expired.................. (305,000) 1.26
---------
Outstanding at June 30, 1999......... 1,830,256 3.12 405,256 1.26
Granted............................ 809,500 1.24
Exercised.......................... (441,256) 0.54
Cancelled/Expired.................. -- --
---------
Outstanding at June 30, 2000......... 2,198,500 2.94 1,226,280 1.38
Granted............................ 1,010,000 1.47
Exercised.......................... (268,280) 0.64
Cancelled/Expired.................. (629,120) 1.83
---------
Outstanding at June 30, 2001......... 2,311,100 $2.87 1,236,100 $1.61
=========
The following table summarizes information about stock warrants, excluding
warrants issued in conjunction with debt and equity offerings, outstanding at
June 30, 2001:
STOCK WARRANTS EXERCISABLE
-----------------------------------------------
WEIGHTED AVERAGE STOCK WARRANTS OUTSTANDING
REMAINING ----------------------------
NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES WARRANTS (YEARS) EXERCISE PRICE WARRANTS EXERCISE PRICE
------------------------ --------- ---------------- ---------------- --------- ----------------
$0.50 - $ 0.86........ 96,000 3.19 $ 0.64 96,000 $0.64
$1.00 - $ 1.46........ 1,460,000 4.10 1.32 835,000 1.21
$1.78 - $ 2.75........ 342,600 2.20 1.84 242,600 1.86
$5.50 - $ 7.50........ 62,500 12.12 7.50 62,500 7.50
$9.00 - $11.00........ 350,000 12.12 10.14 -- --
--------- ---------
$0.50 - $11.00........ 2,311,100 5.21 $ 2.87 1,236,100 $1.61
========= =========
The weighted-average fair values of each Viragen warrant granted in fiscal
2001, 2000 and 1999 were $0.96, $0.63 and $1.00 respectively.
Viragen's majority owned subsidiary, Viragen (Europe) Ltd., has also
granted stock options to one of its officers. The fair value of Viragen (Europe)
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: dividend yield of zero
percent for all periods; risk-free interest rate of 5.69% for 2000; volatility
factor of the expected market price of Viragen (Europe)'s common stock of 1.250
for 2000; and an expected life of the options of 3 years. The weighted average
fair value of the Viragen (Europe) options granted in fiscal 2000 was $0.68 per
share.
F-15
57
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Viragen (Europe)'s stock option and warrant activity, and
related information for the years ended June 30, follows:
NUMBER OF OPTIONS AND
OPTIONS AND WEIGHTED AVERAGE WARRANTS WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ---------------- ----------- ----------------
Outstanding at July 1, 1998....... 125,000 $6.23 50,000 $7.00
Granted......................... -- --
Exercised....................... -- --
Cancelled/Expired............... -- --
-------
Outstanding at June 30, 1999...... 125,000 6.23 87,500 6.45
Granted......................... 216,500 0.95
Exercised....................... (1,600) 0.84
Cancelled/Expired............... (2,000) 0.84
-------
Outstanding at June 30, 2000...... 337,900 2.90 246,000 3.68
Granted......................... -- --
Exercised....................... (600) 0.84
Cancelled/Expired............... (30,000) 5.97
-------
Outstanding at June 30, 2001...... 307,300 $2.61 271,500 $2.84
=======
The following table summarizes information about Viragen (Europe)'s stock
options and warrants outstanding at June 30, 2001:
STOCK OPTIONS AND WARRANTS OUTSTANDING STOCK OPTIONS AND
------------------------------------------------- WARRANTS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
NUMBER OF REMAINING NUMBER OF
OPTIONS AND CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS AND WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES WARRANTS (YEARS) EXERCISE PRICE WARRANTS EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$0.84 - $1.19......... 207,300 4.10 $0.95 171,500 $0.98
$5.72 - $7.00......... 100,000 2.20 6.04 100,000 6.04
------- -------
$0.84 - $7.00......... 307,300 3.45 $2.61 271,500 $2.84
======= =======
F-16
58
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Viragen's majority owned subsidiary, Viragen U.S.A., Inc., has also granted
stock options to certain officers and employees. A summary of Viragen U.S.A.'s
stock option activity, and related information for the years ended June 30
follows:
WEIGHTED
NUMBER OF AVERAGE EXERCISE OPTIONS WEIGHTED AVERAGE
OPTIONS PRICE EXERCISABLE EXERCISE PRICE
--------- ----------------- ----------- ----------------
Outstanding at July 1, 1998........ 125,000 $0.22 -- $ --
Granted.......................... -- --
Exercised........................ -- --
Cancelled........................ -- --
--------
Outstanding at June 30, 1999....... 125,000 0.22 50,000 0.22
Granted.......................... -- --
Exercised........................ -- --
Cancelled........................ (125,000) 0.22
--------
Outstanding at June 30, 2000....... -- -- -- --
Granted.......................... -- --
Exercised........................ -- --
Cancelled........................ -- --
--------
Outstanding at June 30, 2001....... -- $ -- -- $ --
========
COMMON SHARES RESERVED
Shares of our common stock reserved at June 30, 2001 for possible future
issuance are as follows:
Convertible preferred stock, series A....................... 11,289
Officers and directors options (exercisable through
September 2007)........................................... 6,538,267
Employee option plans (exercisable through February 2007)... 516,300
Consultant warrants (exercisable through August 2013)....... 2,311,100
Debt and equity offering warrants (exercisable through
October 2004)............................................. 1,825,302
----------
11,202,258
==========
NOTE D. PUT WARRANTS
During fiscal 2000, Viragen issued to a consultant warrants to purchase
100,000 common shares at $2.75 per share. The consultant could put the
underlying shares to Viragen, upon exercise of the warrants. The warrants were
exercisable through June 2001.
In accordance with Accounting Series Release 268, the put warrants were
classified as temporary capital on the balance sheet. We valued the put warrants
at $58,000 using a Black-Scholes valuation model.
During September 2000, we cancelled these put warrants upon terminating the
related consulting agreement due to non-performance.
NOTE E. INVESTMENT IN UNCONSOLIDATED COMPANY
In August 1998, Viragen entered into a strategic alliance concurrent with
the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company headquartered in Philadelphia, PA. Inflammatics is focused
on the development of therapeutic drugs for autoimmune disorders. Its lead
product is LeukoVAX, an immunomodulating leukocyte preparation currently in Food
and Drug Administration Phase I/II clinical trials for rheumatoid arthritis.
F-17
59
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Inflammatics agreement, Viragen made an initial
investment in the form of series A convertible preferred stock of Inflammatics
for $1 million and warrants to purchase 250,000 shares of common stock at prices
ranging between $1.00 and $1.78 per share. Viragen further obtained two options
to acquire an additional 70% equity position in Inflammatics through two
additional fundings to be made at our option. The first additional funding,
subject to management's evaluation of the Phase I/II clinical trial results,
provides for the issuance of 1,000,000 shares of common stock, the issuance of
300,000 common stock purchase warrants exercisable at $1.00 through August 14,
2003, and the underwriting of Phase III clinical trials, in exchange for an
additional 36.3% equity interest. Preliminary estimates for the funding of Phase
III clinical trials of LeukoVAX range between $6.0 million and $10.0 million.
The second additional funding, subject to management's further evaluation of
clinical trial results, provides for the issuance of an additional 2,000,000
shares of common stock in exchange for an additional 33.3% equity interest.
During the fourth quarter of fiscal 2000, we received initial Phase I/II data
which suggests no statistically significant difference in outcomes between
patients who have received LeukoVAX and those who have not. We are still
evaluating the results reflected in the Phase I/II data and have not yet reached
a decision regarding additional funding, if any. We have announced that we will
maintain our 10% equity position and exclusive manufacturing rights.
The investment in Inflammatics was capitalized at $1,429,000, which
consisted of the $1,000,000 paid to Inflammatics, a $100,000 finders fee paid to
Sumitomo Bank, and $329,000 in costs associated with the warrants issued, which
were valued using a Black-Scholes valuation model.
Viragen recognized approximately $19,000, $653,000 and $757,000 in losses
related to its investment in Inflammatics, Inc. during the fiscal years ended
June 30, 2001, 2000 and 1999, respectively. These losses reflect 100% of the
losses incurred by Inflammatics associated with the clinical testing of
LeukoVAX. The losses also include the amortization of the capitalized finders
fee and warrant costs. These costs were being amortized in proportion to the
losses incurred by Inflammatics as compared to our initial cash capital
contribution to Inflammatics. During the first quarter of fiscal 2001, we
completed expensing our investment in Inflammatics.
NOTE F. CONVERTIBLE PROMISSORY NOTES WITH DETACHABLE WARRANTS
On March 17, 1999, we entered into a purchase agreement with the Isosceles
Fund Limited and Cefeo Investments Limited, which was subsequently amended on
June 16, 1999. Under the purchase agreement, we issued Isosceles and Cefeo 8%
convertible promissory notes in the aggregate principal amount of $2,000,000
with detachable warrants to purchase 932,039 shares of our commons stock.
Viragen received $1,861,820 from the issuance of the convertible notes and
detachable warrants. The proceeds were net of $138,180 paid as finders' fees. As
required by APB No. 14 -- "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants," we recorded the value of the detachable warrants as a
discount on principal. We valued the warrants at $344,854 using a Black-Scholes
valuation model.
One-half of the principal balance, which accrued interest at a rate of 8%
annually, and accrued interest on the related principal converted automatically
into 2,049,533 shares of our common stock on July 7, 1999. In addition, the
remaining one-half of the principal balance and accrued interest on the notes
converted automatically into 2,062,685 shares of our common stock on August 6,
1999. The conversion price was $0.50 per common share.
In addition to the shares issued on conversion of the notes, the note
holders were entitled to receive additional shares of our common stock 30 days
after each one-half of the notes converted into shares of our common stock, as
required by a re-set provision. The purpose of this arrangement was to make sure
that the note holders had a return of at least 20% on the shares received on the
conversion of the first half of the notes and at least a 22% return on the
conversion on the remaining half of the notes. The number of additional shares
to which the note holders were entitled was calculated by dividing $0.644 by the
lowest closing bid price of our common stock during the ten consecutive trading
days preceding each re-set date.
F-18
60
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 6, 1999, Isosceles and Cefeo received an aggregate amount of
546,990 additional common shares, based on the first re-set calculation. These
shares were issued using a future price of $0.61 per share. On September 5,
1999, Isosceles and Cefeo received an aggregate amount of 551,203 additional
common shares, based on the second re-set calculation. These shares were issued
using a future price of $0.62 per share. Viragen recognized approximately
$700,000 in interest expense, as a result of issuing these additional shares.
The warrants issued to Isosceles and Cefeo to purchase an aggregate of
932,039 shares of our common stock were exercisable until March 17, 2004 with an
exercise price of $.50 per share. Isosceles and Cefeo exercised all of their
warrants during fiscal 2000.
We also issued warrants to purchase an aggregate of up to 155,339 shares of
our common stock at $.773 per share to certain parties in consideration for
introducing Viragen to Isosceles and Cefeo. The warrants issued were exercisable
currently until March 17, 2004. As we did not pre-pay the notes issued to
Isosceles and Cefeo before July 7, 1999, one-half of these warrants were
returned to Viragen. The remaining 77,670 warrants were exercised during fiscal
2000.
Events of default, on our obligations to Isosceles and Cefeo, included:
default under the promissory notes, failure to maintain effectiveness of our
registration under the Securities Act of 1933, delisting our stock from NASDAQ
(which occurred), and failure to have our registration statement become
effective by July 7, 1999 (which occurred).
Because the related registration statement (File No. 333-75749) was not
effective by July 7, 1999, we began incurring $40,000 in penalties per month,
until the registration statement became effective on February 11, 2000. We
incurred $332,000 in penalties in that time. The penalties were paid during
March 2000.
On February 18, 2000, we entered into a subscription agreement with Active
Investors Ltd. II, an investment fund managed by Carl N. Singer through
Fundamental Management Corporation. Mr. Singer is a director of Viragen and the
chairman of its executive committee. Under the terms of the subscription
agreement, we issued to Active Investors Ltd. II a convertible promissory note
for the principal amount of $1,000,000. The promissory note had an interest rate
of 9.5% per annum. The principal and accrued interest were payable on February
17, 2001. Robert C. Salisbury, also a director of Viragen and member of its
audit and finance committee and its compensation committee, is a director and
investor in Fundamental Management Corporation. Charles J. Simons, a director of
Viragen and the chairman of its audit and finance committee and its compensation
committee, is an investor in Active Investors Ltd. II. Under the subscription
agreement, Active Investors Ltd. II also received warrants to purchase 100,000
common shares. The warrants are exercisable at $2.00 per share through February
17, 2003. We valued the warrants at $56,000 using a Black-Scholes valuation
model. The value of the warrants was recorded as a discount on the principal
amount of the convertible promissory note, as required by APB No. 14.
Active Investors Ltd. II could elect to convert the unpaid principal and
interest, at any time, into common shares. Viragen recognized $220,000 in
additional interest expense, due to a beneficial conversion rate on the
promissory note. The conversion rate was discounted 18% from the current market
price of our common stock. Active Investors Ltd. II elected to convert the
entire principal balance and accrued interest of $35,400 into 1,015,716 common
shares, on June 30, 2000.
On March 1, 2000, Viragen entered into a loan and escrow agreement with
AMRO International, S.A. Under the terms of this agreement, we issued to AMRO
International a convertible promissory note for the principal amount of
$1,000,000. The promissory note had an interest rate of 8% per annum. The
principal and accrued interest were payable on March 1, 2001. Viragen paid
$70,000 for placement fees and expenses on the transaction. Under the
subscription agreement, AMRO International also received warrants to purchase
100,000 common shares. The warrants are exercisable at $1.72 per share through
March 1, 2004. We valued
F-19
61
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the warrants at $96,000 using a Black-Scholes valuation model. The value of the
warrants was recorded as a discount on the principal amount of the loan, as
required by APB No. 14.
AMRO International could elect to convert the unpaid principal and
interest, at any time, into common shares at the fixed rate of $1.00 per share.
Viragen recognized another $220,000 in additional interest expense, due to a
beneficial conversion rate on the promissory note. The conversion rate was
discounted 18% from the current market price of our common stock. On June 20,
2000, AMRO International elected to convert the entire principal balance and
accrued interest of $24,900 into 1,024,899 common shares.
NOTE G. SHORT-TERM BORROWINGS
On August 10, 1999, Viragen mortgaged its Florida-based research facility
for $600,000. We were required to pay interest on the promissory note in eleven
monthly installments, which began on September 10, 1999. Interest was calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal, and the rate was adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest were due on July 10, 2000. On June 16, 2000,
we refinanced this note to be paid over five years. On August 15, 2000 this note
was paid in full.
On November 3, 1999, Viragen secured a $400,000 short-term loan by pledging
its domestic scientific equipment and a second mortgage on our Florida based
research facility as collateral. We paid interest on the promissory note in 6
monthly installments, beginning on December 3, 1999. Interest was calculated at
the rate of 12% per annum. The principal balance of $400,000 plus any unpaid
interest was due on May 3, 2000. The lender also received 25,000 detachable
warrants exercisable at $0.95 per share through October 31, 2004. We valued the
warrants at $14,250 using a Black-Scholes valuation model. The value of the
warrants was recorded as a discount on the principal amount of the promissory
note, as required by APB No. 14. The note and accrued interest were paid in full
on April 21, 2000.
On May 15, 2000, Viragen was approved for a $500,000 unsecured line of
credit. Interest was payable monthly at the prime rate, as quoted by The Wall
Street Journal. The interest rate was adjustable daily. The outstanding
principal plus unpaid interest is payable on May 15, 2001. The unsecured line of
credit was renewed, under the same terms, through May 15, 2002. Viragen has
never borrowed any funds using the unsecured line of credit.
NOTE H. LONG-TERM DEBT
Long-term debt at June 30, 2001 and 2000 is as follows:
JUNE 30,
-------------------
2001 2000
-------- --------
Mortgage note payable secured by Florida-based research
facility. Payable in monthly installments of $2,500 plus
accrued interest. The remaining principal and accrued
interest are payable on June 16, 2005. Interest rate is
based on prime rate +1% and is to be adjusted on a daily
basis. Mortgage note payable was paid in full on August
15, 2000.................................................. $ -- $600,000
Notes payable resulting from purchase of insurance. Notes
range in term up to 36 months, with interest rates ranging
from 7.00% to 10.75%...................................... 27,677 105,723
Note payable resulting from purchase of company assets.
Payable monthly over 36 months, with an effective interest
rate of 8.40%. Note matures on May 17, 2004............... 37,301 --
F-20
62
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30,
-------------------
2001 2000
-------- --------
Unsecured loan from Scotland Regional Development Authority.
Payable quarterly over 20 years, with an effective
interest rate of 11.00%. Note matures on August 28, 2017.
Note was paid in full on September 1, 2000................ -- 9,494
Capital lease obligations resulting from acquisition of
equipment, with a cost totaling $217,939 capitalized from
three to five years....................................... -- 8,289
-------- --------
64,978 723,506
Less current portion........................................ (39,490) (123,400)
-------- --------
$ 25,488 $600,106
======== ========
Scheduled maturities of long-term debt at June 30, 2001 are:
2002 -- $39,490; 2003 -- $12,806; and 2004 -- $12,682.
NOTE I. INCOME TAXES
Viragen, Inc. and its majority-owned subsidiaries, as defined by the
Internal Revenue Code, file consolidated federal and state income tax returns,
except for Viragen (Europe) Ltd.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Viragen's deferred tax liabilities and assets as of June 30, 2001 and 2000 are
as follows:
JUNE 30,
---------------------------
2001 2000
------------ ------------
Deferred tax liabilities
Tax over book depreciation.............................. $ -- $ 57,000
Prepaid expenses and other.............................. -- 174,000
------------ ------------
Total deferred tax liabilities.................. -- 231,000
Deferred tax assets
Net operating loss carryforwards........................ 14,494,000 13,405,000
Research and development credit......................... 756,000 645,000
Book over tax depreciation.............................. 25,000 --
Deferred compensation................................... 1,205,000 1,069,000
Other................................................... 65,000 204,000
------------ ------------
Total deferred tax assets....................... 16,545,000 15,323,000
Valuation allowance for deferred tax assets............. (16,545,000) (15,092,000)
------------ ------------
-- 231,000
------------ ------------
Net deferred taxes.............................. $ -- $ --
============ ============
The change in the valuation allowance was a net increase of $1,453,000,
$2,333,000 and $2,296,000 for the years ended June 30, 2001, 2000 and 1999,
respectively.
Viragen has undergone two ownership changes, as defined by Internal Revenue
Code Section 382, which will cause the utilization of the net operating losses
and tax credits to be limited. The effects of these limitations have not been
calculated at this time.
F-21
63
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Viragen has net operating loss and tax credit carryforwards, with
expiration dates, as follows:
NET OPERATING LOSSES TAX CREDITS EXPIRATION
-------------------- ----------- -----------
291,$000........ $127,000 2002
4,374,000...... 5,000 2003 -- 2005
2,539,000...... -- 2006 -- 2008
31,312,000..... 624,000 2009 -- 2021
----------- --------
38,5$16,000..... $756,000
=========== ========
For financial reporting purposes, a valuation allowance has been recognized
to offset the deferred tax assets related to these carryforwards.
The reconciliation of income tax computed at the U.S. federal statutory
rate applied to Viragen's net loss is as follows:
YEAR ENDED JUNE 30,
--------------------------
2001 2000 1999
------ ------ ------
Tax at U.S. statutory rate............................... (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit...................... (3.63) (3.63) (3.63)
Non-deductible items..................................... 1.43 1.08 0.18
Change in valuation allowance............................ 38.30 34.45 34.21
Other.................................................... (2.10) 2.10 3.24
------ ------ ------
--% --% --%
====== ====== ======
Viragen (Europe) Ltd. was included in Viragen's consolidated federal and
state income tax returns for the period December 8, 1995 through March 15, 1996,
when Viragen, Inc.'s percentage ownership of Viragen (Europe) Ltd. exceeded 80%.
Even though Viragen's ownership percentage of Viragen (Europe) exceeds 80% again
as of December 31, 1998, Viragen (Europe) will continue filing separate income
tax returns. Viragen (Scotland) Ltd., a wholly-owned subsidiary of Viragen
(Europe), files separate income tax returns in the United Kingdom. Viragen
(Germany) GmbH, also a wholly-owned subsidiary of Viragen (Europe), files
separate income tax returns in Germany.
Deferred tax assets of Viragen (Europe)'s U.S. operations at June 30, 2001
and 2000 are as follows:
JUNE 30,
-------------------------
2001 2000
----------- -----------
Total deferred tax assets................................... $ 1,168,000 $ 1,077,000
Valuation allowance for deferred tax assets................. (1,168,000) (1,077,000)
----------- -----------
$ -- $ --
=========== ===========
At June 30, 2001, Viragen (Europe) has net operating loss carryforwards
totaling approximately $3,100,000, expiring between 2003 and 2021. Viragen
(Scotland) has approximately $21,100,000 in net operating losses available to
carry-forward at June 30, 2001.
For financial reporting purposes, net loss before income taxes includes the
following components:
YEAR ENDED JUNE 30,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
U.S.......................................... $ (3,335,009) $ (6,160,927) $ (6,048,656)
Foreign...................................... (7,672,800) (6,149,968) (4,602,176)
------------ ------------ ------------
$(11,007,809) $(12,310,895) $(10,650,832)
============ ============ ============
F-22
64
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J. TRANSACTIONS WITH RELATED PARTIES
On July 31, 1998, we held our 1997 annual shareholders meeting. Certain
directors did not seek re-election to serve as directors of the company. In
appreciation of their past service, Viragen waived the requirement to exercise
outstanding stock options within 90 days of their last day as directors. All
outstanding stock options will expire under their normal terms. We recognized
approximately $199,000 in compensation expense upon waiving the 90-day
expiration clause.
During fiscal 1999, certain directors and a former officer exercised
1,160,000 options to purchase common stock at prices ranging between $0.30 and
$1.19 per share. The options were exercised through the issuance of promissory
notes payable to Viragen with related pledge and escrow agreements. The
promissory notes bear interest at rates ranging between 5.06% and 5.47%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes pursuant to
the provisions of the pledge and escrow agreements. During fiscal 2000, Viragen
collected $339,000 in related principal payments. Viragen released 650,000
shares from escrow upon receipt of the payments.
During January 2000, we contracted Cameron Associates, Inc. to act as an
investor relations consultant. Cameron Associates receives $6,000 per month
through February 2000, subsequently reduced to $3,000 per month as compensation
for their services. This Agreement was terminated in June 2000. They also
received warrants to purchase 100,000 common shares of Viragen at $1.17 per
share through January 2005. Carl N. Singer, a director of Viragen, serves as a
director on Cameron Associates' board of directors. He is also a minority
stockholder of Cameron Associates.
On February 7, 2000, the board of directors voted to modify the terms of an
option to purchase 1.4 million shares of common stock, which had been granted to
Gerald Smith, Viragen's president, during October 1995. The board of directors
extended the expiration of this common stock option by three years. Under the
modified terms, the common stock option will now expire on October 5, 2003. No
other terms were changed. Under the provisions of APB No. 25, we recognized
compensation expense of approximately $941,000 relating to this modification.
During fiscal 2000, Active Investors II invested a total of $2,000,000 in
Viragen, in two separate transactions, receiving 1,800,016 shares of common
stock. The Active Investors II fund is managed through Fundamental Management
Corporation, a Florida-based institutional fund. Mr. Carl N. Singer, a director
of Viragen and chairman of its executive committee, serves as the chairman of
Fundamental Management Corporation. Mr. Robert C. Salisbury, a director of
Viragen, also serves as a director and investor in Fundamental Management
Corporation. Mr. Charles J. Simons, a director of Viragen, is an investor in the
Active Investors II fund.
During fiscal 2000, certain directors and an officer exercised 525,000
options to purchase common stock at prices ranging between $0.50 and $0.63 per
share. The options were exercised through the issuance of promissory notes
payable to Viragen with related pledge and escrow agreements. The promissory
notes bear interest at rates ranging between 6.46% and 6.69%, payable
semi-annually and are secured by the underlying common stock purchased. The
shares are being held in escrow pending payment of the related notes, pursuant
to the provisions of the pledge and escrow agreements. During fiscal 2000,
Viragen collected $262,500 in related principal payments. Viragen released
500,000 shares from escrow upon receipt of the payments.
During fiscal 2001, two directors exercised 200,000 options to purchase
common stock at $0.50 per share. The options were exercised through the issuance
of promissory notes payable to Viragen with related pledge and escrow
agreements. The promissory notes bear interest at 6.00%, payable semi-annually
and are served by the underlying common stock purchased. The shares are being
held in escrow pending payment of the related notes, pursuant to the provisions
of the pledge and escrow agreements.
F-23
65
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During March 2001, two directors entered into consulting agreements with
Viragen. Each is to provide consulting services to Viragen for a two year period
ending March 31, 2003. These consulting services are in addition to their
service on the board of directors. As compensation, each was granted options to
purchase 200,000 common shares at $1.20 per share. These options vest 50,000
shares at the date of grant and 50,000 shares every six months through September
2002. The options are exercisable over five years from the vest dates. Because
the options were granted for non-director services, compensation expense, on
these option grants, is calculated pursuant to the provision of SFAS 123. During
fiscal 2001, we recognized an aggregate $194,812, in compensation expense
related to these options.
During May 2001, another director entered into a consulting agreement with
Viragen. He is to provide consulting services to Viragen for a three year period
ending May 31, 2004. These consulting services are in addition to his service on
the board of directors. As compensation, he will be granted warrants to purchase
up to 110,000 common shares. The warrants will be granted in tranches upon
performance of specific criteria. The warrants will vest one-half on the first
anniversary of the date of grant and one-half on the second anniversary of the
date of grant. The warrants will be exercisable for five years from the vest
dates, at 115% of the fair market value of Viragen's common stock on the dates
of grant. Compensation expense on these grants will also be calculated pursuant
to the provisions of SFAS 123.
NOTE K. COST REDUCTION PLAN
During fiscal 1999, Viragen began implementing a cost-reduction plan
targeted to reduce domestic research costs. These changes in operations
reflected our shift from developing our product in our domestic laboratories to
scale-up development and clinical research in our European facility. We closed
our Florida-based research facility during November 1999, and consolidated these
operations in our Scottish facility.
EITF 94-3 -- "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity" requires restructuring costs to be
accrued under specific guidelines. SFAS No. 121 -- "Accounting for the
Impairment of Long-Lived Assets" requires impairment losses to be recorded on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less then the assets'
carrying amount.
Viragen recognized no exit costs, because the criteria for recognizing exit
costs, as specified in EITF 94-3, were not met. Personnel reductions came from
the elimination of positions where employment agreements had expired.
Accordingly, these individuals did not receive severance pay.
Upon termination of research activities in our domestic facility, equipment
considered to be useful to our Scottish operations was transferred to our
Scottish facility, where it is being used in continuing research activity, as
well as manufacturing and quality assurance operations.
At June 30, 2000, Viragen recognized a loss totaling $101,859 due to
impairment of some of our long-lived plant equipment and furniture held for
sale. This loss was included in general and administrative expenses in the
statements of operations. These items had been used in the Florida-based
research facility. The plant equipment and furniture were sold for the highest
bid, during August 2000. We recognized an additional loss of approximately
$75,000, upon the disposal of these items.
In August 2000, Viragen also completed the sale of its Florida-based
research facility. The land, building and related improvements were sold for
$699,000, net of $61,000 in settlement costs. A gain on the sale of the
facility, totaling $279,000, was recognized during the first quarter of fiscal
2001. The related mortgage note was paid in full at the time of the sale.
F-24
66
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L. LICENSE AND MANUFACTURING AGREEMENTS
Through a fifteen-year license agreement granted by Viragen, Viragen
(Europe) Ltd. and its wholly-owned subsidiary, Viragen (Scotland) Ltd., secured
certain rights to engage in the research, development, and manufacture of
certain proprietary products and technologies that relate to the therapeutic
application of human leukocyte-derived interferon for various diseases that
affect the human immune system.
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.
Both parties modified the license deferring the initial payment until the
date when Viragen transferred the processes and technology, as defined by the
license, to Viragen (Scotland). Viragen had substantially transferred the
processes and technology to Viragen (Scotland) by the end of May 1997. At that
time, Viragen required the initial royalty payment be made. Completion of the
transfer occurred on November 1, 1997.
In April 1998, Viragen entered into an option agreement with Southern
Health SDN.DHD, a private Malaysian/Australian-based healthcare investment
group. The option agreement initially provided Southern Health the right to
acquire, through September 30, 1998, subsequently extended to March 31, 1999, an
exclusive, private-label manufacturing and distribution license covering
Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Korea, Singapore,
Australia and New Zealand, for our proprietary natural interferon production
process in exchange for an initial cash licensing fee of $20 million and a
continuing royalty of 12% of Southern Health's related revenues. Southern Health
paid a $200,000 option fee.
On March 31, 1999, the option agreement expired, without being exercised.
We recognized one-half of the fee, or $100,000, as revenue, and the balance was
refunded to Southern Health during April 1999.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Viragen has a contract with Viragen Research Associated Limited
Partnership, for Viragen to perform the research and development with respect to
two therapeutic products for the topical treatment of herpes virus infections.
Pursuant to the contract, we assigned all of our patent rights to the processes
and topical products to Viragen Research Associated in exchange for an exclusive
worldwide licensing agreement. Viragen Research Associated is to receive 5% of
the gross revenues of topical products until it has received approximately
$900,000 and, thereafter, it is to receive 2% of the gross revenues of topical
products.
NOTE N. ROYALTY AGREEMENT
Viragen has a royalty agreement with Medicore, Inc. that will pay Medicore
a maximum of $2,400,000 in royalties. Royalties are to be paid as follows: 5% on
the first $7 million of sales of interferon and related products; 4% of the next
$10 million of sales; and 3% on the next $55 million of sales up to the maximum
of $2,400,000 in royalty payments. Royalties incurred in prior years under the
agreement, totaling approximately $108,000, are included in royalties payable.
This amount will be paid as the final payment under the royalty agreement.
NOTE O. COMMITMENTS
In November 1996, Viragen (Scotland) Ltd. executed a five-year lease on
property located in Edinburgh, Scotland that will serve as our laboratory and
production facilities. Base monthly rental on the property is approximately
$10,400. In addition, Viragen (Scotland) may extend the term of the lease at its
option, for four
F-25
67
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five-year periods. We will be exercising our first option to extend in October
2001. This will extend our lease through October 2006.
In November 1996, Viragen entered into a ten-year lease on property in
Plantation, Florida. This facility contains our executive and administrative
offices. Monthly rental on the property is approximately $15,700. The lease
contains provisions for two additional five-year periods at the Company's
option.
During the years ended June 30, 2001, 2000 and 1999, Viragen recognized
rent expense and related charges of $318,000, $274,000 and $298,000,
respectively for its Plantation, Florida property lease and $296,000, $208,000
and $195,000 respectively, attributable to its Edinburgh, Scotland facility.
Future minimum lease payments on the two facilities are: 2002 -- $225,219;
2003 -- $200,913; 2004 -- $207,945; 2005 -- $215,223; and 2006 and thereafter
$394,171.
Upon extension of the Viragen (Scotland) lease, future minimum lease
payments on the facility will be at least $125,000 per year, through October
2006. This rate may increase based on local markets at the time of renewal.
Viragen has entered into employment agreements with its officers and key
employees. These agreements represent a commitment to pay an aggregate amount of
approximately $922,000, per year in salaries to these individuals.
NOTE P. CONTINGENCIES
In October 1997, Viragen, the company's president and Cytoferon Corp., a
former affiliate of the president, were named as defendants in a civil action
brought in the United States District Court for the Southern District of Florida
(Walter L. Smith v Cytoferon Corp. et al; Case No: 97-3187-CIV-MARCUS). The
plaintiff is a former Viragen stockholder and investor in Cytoferon Corp. The
suit alleged the defendants violated federal and state securities laws, federal
and state RICO statutes, fraud, conspiracy, breach of fiduciary duties and
breach of contract. The plaintiff was seeking an unspecified monetary judgement
and the delivery of 441,368 shares of common stock. Viragen filed a motion to
dismiss denying the allegations and requesting reimbursement of its costs.
In August 2000, counsel for plaintiff indicated that they intended to
withdraw as counsel.
In January 2001, the Circuit Court ruled in favor of Viragen on all counts
related to the Circuit Court Case (No.: 97-25587 CA30). No further claims
against Viragen are pending in this matter.
Viragen has submitted to the Circuit Court a request for reimbursement of
related litigation costs.
While Viragen has prevailed as a defendant in this suit, Mr. Gerald Smith,
Viragen's president, and Cytoferon Corp. continue to be named as defendants. We
have agreed to indemnify Mr. Smith for any losses that he may incur personally,
as a result of this suit. Mr. Smith denies the allegations of the complaint and
intends to continue to vigorously defend the claims. Motions seeing summary
judgment have been filed on behalf of Mr. Smith and Cytoferon and will be heard
by the Court in the near future.
We cannot determine at this point, the ultimate liability, if any,
resulting from this litigation. No accrual for loss has been recorded.
In January 2001, Viragen and its co-plaintiffs, the Roslin Institute and
Dr. Helen Sang, filed suit against AviGenics, Inc. in the Superior Court of
California for San Mateo County (Case No.: 415458). The lawsuit was brought in
response to allegations by AviGenics that a restrictive covenant contained in a
consulting agreement that Dr. Helen Sang, who works at the Roslin Institute, had
entered into with AviGenics precluded her and Roslin from doing business with
Viragen. In its lawsuit, Viragen sought a judicial declaration that (i) Dr.
Sang's restrictive covenant was void and unenforceable, (ii) Viragen, Roslin and
Dr. Sang had the right to do business together, and (iii) no trade secret
information belonging to AviGenics was implicated by
F-26
68
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Viragen's business relationship with the Roslin Institute and Dr. Sang. The
lawsuit also sought damages against AviGenics for tortuously interfering in
Viragen's business relationship with the Roslin Institute and Dr. Sang. The
lawsuit also sought damages against AviGenics for tortuously interfering in
Viragen's relationships with its co-plaintiffs, and for attempting to enforce an
invalid restrictive covenant in violation of Cal. Bus. & Prof. Code sec. 17200.
By order dated March 30, 2001 that lawsuit was dismissed on forum non
convenience grounds. The order of dismissal is the subject of a pending appeal
to the Court of Appeal of the State of California, First Appellate District,
Division Three (Case No.: A094759).
In March 2001, AviGenics, Inc. filed suit against Viragen and its
co-defendants, Roslin Institute and Dr. Helen Sang in the Superior Court of
Athens-Clarke County, Georgia (Case No.: SU-01-CV-0468-S). In its amended
complaint, AviGenics alleges that Viragen and its co-defendants breached
contractual duties of confidentiality, conspired to and did misappropriate
AviGenics' relationships with Dr. Sang and Roslin.
Viragen's motion to dismiss AviGenics' lawsuit in its entirety for lack of
jurisdiction over Viragen in the State of Georgia is pending before the court.
Viragen believes AviGenics' lawsuit to be entirely without substantive merit,
and Viragen possesses valid and significant legal defenses to AviGenics' claims.
Viragen is vigorously defending against AviGenics' claims, and, while the
eventual outcome cannot be assured, anticipates that those claims either will be
dismissed for lack of jurisdiction over Viragen or else will ultimately be
resolved in Viragen's favor. No accrual for loss has been recorded in this
matter.
NOTE Q. GEOGRAPHIC INFORMATION
Identifiable assets in Scotland totaled approximately $4,435,000 and
$9,192,000 at June 30, 2001 and 2000, respectively. Identifiable assets
represent those assets used in the operations of the geographic area.
NOTE R. SUBSEQUENT EVENTS
On September 28, 2001, Viragen and Viragen (Europe) entered into an
agreement to acquire 100% of BioNative AB, a privately-held Swedish company. The
agreement provides for the initial purchase of all of BioNative's ownership
shares in exchange for approximately 3 million Viragen (Europe) shares. Up to an
additional 20.5 million Viragen (Europe) shares may also be issued upon
BioNative meeting certain performance milestones following the closing of the
transaction.
BioNative's facilities are located in Umea, Sweden where they manufacture
their human leukocyte interferon (alpha) product, Alfanative(R). Alfanative is
approved in Sweden for the treatment of patients with hairy cell leukemia or
chronic myelogenous leukemia, who did not respond to treatment with recombinant
(synthetic) interferon. The product is also approved for sale in:
- the Czech Republic,
- Indonesia,
- Hong Kong,
- Burma,
- Thailand, and
- as purified bulk in Egypt.
BioNative is also conducting European Phase III clinical trials with
Alfanative in the treatment of malignant melanoma.
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69
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE S. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following summarizes certain quarterly operating data:
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- ----------- -----------
FISCAL 2000
Revenues.................................. $ 19,948 $ 15,276 $ 27,077 $ 108,211
Net loss.................................. (2,862,529) (2,509,570) (3,653,227) (3,285,569)
Loss per share
basic and diluted...................... (0.04) (0.03) (0.05) (0.04)
FISCAL 2001
Revenues.................................. $ 322,973 $ 143,926 $ 137,104 $ 113,564
Net loss.................................. (1,672,816) (3,033,652) (2,700,564) (3,600,777)
Loss per share
basic and diluted...................... (0.02) (0.03) (0.03) (0.04)
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