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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ___________
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
incorporated or organization) Identification No.)
865 SW 78TH AVENUE, SUITE 100, PLANTATION, FLORIDA 33324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 233-8746
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the common stock on September
18, 1997 was approximately $108,955,000
As of September 18, 1997, the Company had outstanding 48,441,127 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registration Statement on form S-3, File No. 333-25187, dated April 21,
1997 - Part IV, Exhibits.
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VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1997
PART I
PAGE
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 10
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................... 11
Item 6. Selected Financial Data........................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 13
Item 8. Financial Statements and Supplementary Data....................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures......................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant............... 19
Item 11. Executive Compensation and Employment Agreements................. 22
Item 12. Security Ownership of Certain Beneficial Owners and Management... 27
Item 13. Certain Relationships and Related Transactions................... 29
PART IV
Item 14. Exhibits and Reports on Form 8-K...................................31
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Viragen, Inc., (the "Company" or "Viragen") was organized in December
1980 to engage in the research, development and manufacture of certain
immunological products for commercial application, particularly human leukocyte
interferon, for antiviral and therapeutic applications.
Viragen, Inc. has five subsidiaries: Viragen (Europe), Ltd. ("VEL"),
Vira-Tech, Inc. ("Vira-Tech"), Viragen Technology, Inc. ("Viragen Technology"),
Viragen, U.S.A., Inc. ("VUSA") and Viragen Reagents, Inc. ("Viragen Reagents").
VEL is a majority-owned publicly-traded subsidiary of which Viragen holds 70.3%
of the outstanding Common Stock. VEL (NASDAQ Small Cap: "VERP"), owns all of the
Common Stock of Viragen (Scotland) Limited, a Scottish private company ("VSL").
Viragen, VEL, Vira-Tech, Viragen Technology, VUSA, VSL and Viragen Reagents are
hereinafter referred to collectively as the "Company," unless the context
otherwise requires.
The Company's product is multi-species, natural, human
leukocyte-derived alpha interferon ("Natural Interferon"). Natural Interferon is
a protein substance that stimulates and modulates the human immune system
inhibiting malignant cell growth without materially interfering with normal
cells. In addition, Natural Interferon impedes the growth and propagation of
various viruses. The Company has developed two variations of its Natural
Interferon. Alpha Leukoferon(TM), its original product, and Omniferon(TM),
currently under development, are the trade names of the Company's products in
injectable form (referred to hereafter as a "Product" or collectively as the
"Products"). Neither of the Company's Products have been approved by the United
States Food and Drug Administration ("FDA") nor the European Union ("EU")
regulatory authorities and there can be no assurance that such approvals will be
obtained at any time in the future.
The Company intends to obtain FDA and EU approvals for various uses of
its Omniferon product in the future. Such approvals are expected to require
several years of clinical trials and substantial additional funding. To date,
Viragen has not distributed either Product other than Alpha Leukoferon for
research purposes pursuant to a limited Florida investigatory license and
protocol which was discontinued in March 1996 (with the exception of certain
limited enrollments approved by the Florida HRS for humanitarian purposes under
an HIV/AIDS study protocol conducted at no charge to patients). Viragen expects
to concentrate its efforts in preparing, filing and processing its applications
and obtaining approvals for Omniferon from the FDA and the EU. The Company has
assembled an advisory committee consisting of scientists, medical researchers
and clinicians to assist the Company in its applications to the FDA and the EU.
The Company's majority-owned subsidiary, Viragen (Europe) Ltd., acting
through its wholly-owned subsidiary Viragen (Scotland) Ltd., entered into a
License and Manufacturing Agreement with The Common Services Agency of Scotland
(the "Agency") an agency acting on behalf of the Scottish National Blood
Transfusion Service ("SNBTS"). Pursuant to such Licensing and Manufacturing
Agreement, SNBTS on behalf of VSL, will assist in the manufacture of VSL's
Omniferon product for exclusive distribution within the EU and non-exclusively
worldwide in return for certain royalties and preferential access to the Product
for Scottish Agency patients at preferential prices. The Agency has committed to
assist in the manufacture of Omniferon in sufficient scale to accommodate the EU
clinical trials and, subsequently, for commercial sales in amounts to be agreed
upon by the parties. The Agency will also work with the Company in conducting
studies relevant to Omniferon and cooperate with the Company to enable it to
comply with the laws and regulations of the EU in connection with production,
clinical trials and distribution of Omniferon.
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RECENT DEVELOPMENTS
Between June 1996 and February 1997, the Company raised gross proceeds
of $40 million through a series of four private placements to institutional
investors under the provisions of Regulation D. The funds were raised through
the issuance of: 5% Series B - $15 million; Series C - $5 million; 6% Series D -
$15 million and 5% Series E - $5 million, cumulative preferred convertible stock
issuances. Each preferred stock series provided for the conversion of the
outstanding principal into common stock of the Company at a discount (except
Series C) from the prevailing market price of the Company's common stock.
During July and August of 1997, the terms of the four series of
preferred stock were modified in order to eliminate or otherwise restrict the
timing or number of conversions of the preferred stock into common stock over a
given period. This restructuring was initiated in order to mitigate concerns
regarding the "overhang" of the Company's common stock represented by the
potential conversion of the outstanding series of preferred stock under their
original terms.
In July 1997, the unconverted Series B Preferred Stock was exchanged
for a Promissory Note in the amount of $9,720,240. The Note bears interest at
10% per annum with principal and interest payable over nine monthly installments
commencing in October 1997. The Note may be prepaid without penalty and is not
convertible into common stock of the Company.
Also in July 1997, the holders of the Series C Preferred Stock agreed
to modify their conversion price and limit conversions of their remaining 974
shares ($1,000 stated value per share) over a two month period. The modified
conversion price was the lower of (i) $2.20 per share or (ii) the average
closing price of the Company's Common Stock over the five day period ending
the day prior to the notice of conversion. This agreement also contains a
"floor" provision which provides that if the fair market value of the Company's
common stock is below $3.46 per share at the date of conversion, the Company
will convert at $3.46 and pay the difference between the floor ($3.46 per share)
and the conversion price in cash to the holders of the Series C Preferred
Stock. As part of the July 1997 modification, the conversion price can not
exceed $2.20 per share despite the trading value of the Common Stock at
conversion.
In September 1997, the Company concluded two Exchange Agreements
whereby the terms of the Series D Preferred Stock and Series E Preferred Stock
were modified with the remaining unconverted shares of Series D (7,950 Preferred
Shares with a stated value of $1,000 per share) and Series E (4,000 Preferred
Shares with a stated value of $1,000 per share) being exchanged for a like
number of Series F and Series G Preferred Shares, respectively.
The Series F Preferred Stock provides for a limitation on the holder
limiting conversion during any two week period to 800 shares ($800,000). The
terms also provide the Company with a cash-out option at the face amount being
converted plus 12%. In consideration for the holder of the Series D Preferred
Stock agreeing to a limitation on future conversions, the Company agreed to
increase the dividend rate from 6% for the Series D Preferred Stock to 10% for
the Series F Preferred Stock.
Terms of the Series G Preferred Stock provide that commencing in
September 1997, the holder is limited to converting 667 shares ($667,000) per
month over a 6 month period. The provisions further provide that the Company
will be required to redeem 667 shares ($667,000) per month less the number of
Series G Preferred Stock converted during the preceding calendar month. In
addition, the holder is restricted from converting into common stock if the
market price of the Company's common stock is less than $2.50, subject to
adjustment, at the date of the conversion notice. In consideration for the
restrictions on conversion, the Company agreed to increase the dividend rate
from 5% for the Series E Preferred Stock to 10% for the Series G Preferred
Stock. No other material changes have been made in the substantive terms from
the previously issued Series E Preferred Stock.
In June 1996, the Company entered into a Letter of Intent with the
American Red Cross - Biomedical Services Division. The Company is currently
negotiating the terms of the agreement, establishing the scope of the
relationship and respective obligations of the parties.
In June 1995, the Company organized a wholly-owned subsidiary, Viragen
Technology in order to facilitate the Company's marketing and technology
transfers in support of the contemplated distribution of Omniferon on a
worldwide basis. In July 1995, the Company and its existing wholly-owned
subsidiary, Vira-Tech, Inc., assigned all of its proprietary rights, products
and technologies relating to the manufacture of human leukocyte interferon to
Viragen Technology. Concurrent with this transaction, Viragen Technology
licensed to VSL the right
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to manufacture and distribute Omniferon in those countries comprising the
European Union on an exclusive basis and on a non-exclusive basis for other
parts of the world except the United States and its territories. Pursuant to
the terms of the Agreement, VSL is obligated to pay an annual royalty payment
equal to the greater of (i) $2,000,000 or (ii) 10% of VSL's gross revenues
until such time as total royalty payments of $18 million has been paid to VTI.
Once the $18 million royalty amount has been paid, VSL is obligated to pay VTI
an amount equal to 8% of VSL's gross revenues until such time as total royalty
payment of $25 million has been paid to VTI. Once the $25 million royalty amount
has been paid, VSL is obligated to pay VTI an amount equal to 5% of VSL's gross
revenues thereafter. The initial term of the license agreement is for fifteen
years and automatically renews for 2 successive fifteen year periods. In
September 1997, VTI and VSL mutually agreed to extend the technology transfer
completion dates. Accordingly, the Agreement was modified such that the
$2,000,000 Initial Royalty Prepayment paid to Viragen in June 1997 would
represent the contractual prepayment for the one year period commencing
November 1, 1997. The Agreement was further modified to provide that in the
event the proprietary technology was not transferred pursuant to the provisions
of the Agreement, which is not anticipated, the Initial Royalty Prepayment
would be refunded to VSL.
In July 1995, the Company and VSL entered into a License and
Manufacturing Agreement with the Common Services Agency on behalf of the
National Blood Service in Scotland. The Agency owns and operates a blood
fractionation facility in Edinburgh, Scotland, and has the physical and
technical capacity and expertise to participate in the manufacture the Company's
Omniferon product, as well as providing a reliable source of human leukocytes, a
critical component in the manufacture of Omniferon. The Agency is also providing
the Company, on a fee basis, with certain administrative and regulatory support
in connection with the Company's various regulatory filings associated with
planned EU clinical trials.
OPERATIONS
Viragen initially obtained approval for use of Alpha Leukoferon through
approved investigational protocols in 1983 under Florida Statute 402.36 (Cancer
Therapeutic Act), the predecessor to Florida Statute 499. In 1984, Florida
Statute 499.018 (the "499 Program"), was amended to include the Company's
protocols and Florida Statute 402.36 was repealed. In 1986, the Company received
approval from the Florida HRS under the 499 Program, to distribute Alpha
Leukoferon under specific investigative clinical study protocols through
hospitals, pharmacies and Florida licensed physicians for the treatment of
patients within the State of Florida. The Company subsequently received State of
Florida regulatory approval for the investigational use of Alpha Leukoferon in
the treatment of Multiple Sclerosis ("MS"), HIV/AIDS, AIDS Related Complex,
AIDS/Kaposi Sarcoma, 32 types of cancers, hepatitis and certain other viral
diseases. During fiscal 1997, the Company provided Alpha Leukoferon under the
499 Program on a no-charge basis for the treatment of HIV/AIDS. In December
1994, the Company discontinued enrollment of new patients in its Multiple
Sclerosis Study 499 Program. In August 1995, the Company negotiated an agreement
with the Florida Department of Health and Rehabilitative Services ("HRS") which
provided for the elimination of the enrollment of new patients in its existing
499 Program (with the exception of certain limited enrollments approved by the
Florida HRS for humanitarian purposes including the Company's HIV/AIDS study
conducted at no charge to patients), the continued participation by previously
enrolled patients in the 499 Program and resolution of other issues. The Company
believes, while there can be no assurance as to future regulatory approvals, if
any, the discontinuation of the Company 499 Program could facilitate efforts in
obtaining FDA and EU approvals based on management's concern that the
continuation of the 499 Program, which involved the ongoing distribution of the
Alpha Leukoferon and receipt of limited revenues, was an impediment to obtaining
such approvals. All other previously approved indications and protocols for the
use of Alpha Leukoferon are inactive.
The Company will require additional financing to engage in and complete
clinical trials for the purpose of obtaining FDA and EU approvals for Omniferon.
Clinical testing toward FDA and EU approval is an expensive process which is
expected to take several years to accomplish with no assurance such approvals
will eventually be obtained.
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THE PRODUCT
The Company derives its Omniferon from human white cells (leukocytes).
Natural Interferon is one of the body's natural defensive responses to foreign
substances such as viruses, and is so named because it "interfers" with viral
growth. Natural Interferon consists of protein molecules that induce antiviral,
antitumor and immunomodulatory responses within the body. Medical studies have
indicated that interferons may inhibit malignant cell and tumor growth without
affecting normal cell activity.
There are two basic types of interferon, differentiated primarily by
their method of manufacture and resultant composition. The first, as produced by
the Company, is multi-species, natural, human leukocyte-derived alpha interferon
produced by cultivated human white blood cells, which are stimulated by the
introduction of a harmless agent. This process induces the cells to produce
natural interferon. Natural interferon is then separated from other natural
proteins and purified to produce a highly concentrated product for clinical use.
The second, recombinant interferon (alpha or beta), is a genetically engineered
synthetic interferon generally produced from a single human gene in bacterial
cells by recombinant DNA techniques ("Synthetic Interferon").
Clinical studies suggest that there may be significant therapeutic
differences between the use of Natural Interferon and synthetic interferon. The
Company is advised that studies have found that treatment with synthetic
interferon in certain cases may cause an immunological response ("the production
by the human immune system of neutralizing and/or binding antibodies") that
reduces the effectiveness of the treatment or which may cause adverse side
effects. The Company believes that the production of neutralizing and/or binding
antibodies is virtually non-existent in patients treated with Natural
Interferon. Furthermore, primarily due to biological differences, the side
effects of treatment with Natural Interferon, in certain instances, may be less
severe than with Synthetic Interferon.
THE INDUSTRY
Prior to 1985, natural interferon was the only type of interferon
available. Research institutions and other biomedical companies like the Company
were working to solve the problem of 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 DNA technology and subsequently received
FDA approval to produce and market their respective recombinant alpha interferon
products for the treatment of hairy-cell leukemia, hepatitis and Kaposi's
Sarcoma, an AIDS-related skin cancer. See "Regulation" and "Competition" below.
After the emergence of recombinant alpha interferon, the medical community's
interest in Natural Interferon diminished due primarily to the high cost of
production, and most clinical studies thereafter utilized the synthetic product.
Hoffman-LaRoche, Inc., and Schering-Plough Corporation continue to
actively market their products and promote the therapeutic benefits of their
respective Synthetic Interferon products. In 1993 Chiron Corp. received FDA
approval of BetaSeron(TM), its recombinant beta interferon for the treatment of
relapsing/remitting MS. In 1996, Biogen, Inc. received FDA approval for
Avonex(TM) its recombinant beta interferon for relapsing/remitting MS. In 1997,
Teva Pharmaceuticals received FDA approval of its peptide chemical compound,
Copaxne(TM), for relapsing/remitting MS. In addition to the manufacturers of
synthetic interferon, a domestic manufacturer of natural interferon-alpha,
Interferon Sciences, Inc., received FDA approval in 1989 to sell, in injectable
form, Alferon(TM) their natural interferon product for genital warts. They
continue to conduct FDA sanctioned clinical trials and attempt to market their
product for the approved indication.
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APPLICATIONS OF INTERFERON
Multiple Sclerosis
In 1988, following regulatory approval for use of the Company's product
by HRS for the treatment of multiple sclerosis, the Company, entered into a
research agreement with the University of Miami School of Medicine, Department
of Neurology Multiple Sclerosis Center. Pursuant to the 499 Program this study
was a patient funded, multi-phase clinical trial for the treatment of multiple
sclerosis with Alpha Leukoferon. The study was conducted on a double-blind basis
with certain patients receiving different dosage levels of the Product and
certain patients receiving a placebo. The study terminated in mid-1992.
Published information on these trials indicated that, in many cases, the
Company's interferon product provided favorable results in the treatment of
patients afflicted with relapsing/remitting, relapsing progressive and chronic
progressive MS.
The Principal Investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of the Company's Alpha Leukoferon product in the treatment of various
types of multiple sclerosis. The abstract was published in the Annuals of
Neurology, the official journal of the American Neurological Association in
1994. An additional article was published by the investigators and the Company
appearing in the Journal of International Medical Research in 1996.
HIV/AIDS
In July 1990, the Company received approval from the Florida HRS for an
HIV/AIDS treatment protocol using Alpha Leukoferon in injectable form. This
Product had been previously approved for treatment of patients, who were
eligible Florida residents, with HIV/AIDS, AIDS Related Complex and AIDS/Kaposi
Sarcoma. In September 1993, the Company initiated distribution on a limited
basis of its Product under this protocol. However, in December 1994, HRS
informed the Company that no new patients may be enrolled under the 499 Program,
including those patients with HIV/AIDS, ARC and Kaposi's Sarcoma, until the
Company has satisfied HRS regarding compliance with FDA promulgated current Good
Manufacturing Practice ("GMP") requirements. In July 1995, the Company
discontinued enrollment of new patients in its 499 Program and in August 1995,
reached a settlement agreement with the Florida HRS which provided for the
elimination of the enrollment of new patients in its 499 Program (with the
possible exception of certain limited enrollments approved by the Florida HRS
for humanitarian purposes), the continued participation by previously enrolled
patients in the 499 Program and the resolution of other issues.
In March 1996, the Company in collaboration with Biodoron, a
Hollywood, Florida based clinic, received approval from HRS under Florida's
Investigational Drug Program to conduct an investigational study in Florida, of
Viragen's natural human alpha interferon product, Alpha Leukoferon for the
treatment of HIV/AIDS in hemophiliacs. The Company entered into an agreement
with Quantum Health Resources, Inc., ("Quantum") which provided to the Company
$330,000 toward to the cost of the study. Quantum, a subsidiary of Olsten
Services Corp., is a national provider of alternate site therapies and support
services for people affected by chronic disorders, including hemophilia. The
study commenced in March 1996, pursuant to which 35 patients enrolled to receive
Alpha Leukoferon for a minimum of six months in combination with a comprehensive
HIV/AIDS treatment program. As yet the Company has not yet received the results
of the study including the patient follow-up period.
MANUFACTURE OF INTERFERON
Human white blood cells (leukocytes) and a stimulating agent, raw
materials which are readily available to the Company, are needed to produce
human interferon. An FDA approved stimulating agent, which is harmless to
humans, is introduced into the white blood cell which induces the cell to
produce interferon. The interferon is then separated from other proteins,
extracted and purified. The Company's Natural Interferon was distributed in
Florida under the 499 Program under the name Alpha Leukoferon. The Company
discontinued its production of Alpha Leukoferon in January 1995. The Company's
new Natural Interferon product, Omniferon, is currently at its final development
stage and the Company intends to submit animal safety and preclinical studies
to the EU regulatory authorities to begin human clinical testing.
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Production methods developed by Company, as well as enhanced methods
currently under development (see "Research and Development", below) could serve
to reduce the Company's costs of production and, therefore, the market price.
There can be no assurances that such new manufacturing technology will enable
the Company to achieve the level of manufacturing proficiency and product
improvement anticipated by management.
The Company discontinued production of Alpha Leukoferon in January
1995. Subsequently, the Company received notice from the HRS concerning cGMP
deficiencies as noted by the FDA in its Form 483 report relating to the
production of Alpha Leukoferon. In July 1995, the Company discontinued
enrollment of new patients in the 499 Program. In August 1995, the Company
reached an agreement with the Florida HRS which provided for the elimination of
the enrollment of new patients in its 499 Program (with the exception of certain
limited enrollments approved by the Florida HRS for humanitarian purposes,
including the Company HIV/AIDS study), and resolution of all other issues.
RESEARCH DEVELOPMENT
The entire process of research, development and FDA and/or EU approvals
(if obtained), of a new pharmaceutical takes several years and requires
substantial funding. The Company is not currently engaged in any FDA or EU
clinical trials and, while proposed for the future, completion of such studies
is dependent upon obtaining significant additional funding. The Company's
present focus is the continued research and development of Omniferon for the
treatment of Hepatitis B and C, Multiple Sclerosis, herpes and HIV/AIDS.
In 1991, the Company, due to its then absence of available funds,
suspended its research and development activities. In 1993, following receipt of
new equity financing and the election of new management, the Company personnel
recommenced limited research efforts focusing on improving production
techniques. Following receipt of additional funding from private placement
offerings which were completed in August and December 1994, respectively,
research efforts and related costs increased and can be expected to continue to
increase as the Company continues its development of Omniferon. Research and
development costs totaled $2,168,914, $1,503,434 and $605,025 for fiscal years
ended June 30, 1997, 1996 and 1995, respectively.
PURIFICATION SYSTEM
The Company has expended a substantial amount of time and resources
towards the research and development of improved cell stimulation and
purification techniques. These processes are believed to enhance the purity of
the product while increasing production yields. It is believed that increased
production yields will significantly lower related costs of production allowing
a lower more competitive sales price of the Product.
ROYALTY AGREEMENT
In November 1991, in consideration of the Company's former parent,
Medicore, Inc., having financed the Company and deferring payment of certain
indebtedness (which was subsequently exchanged for an equity interest in the
Company), the Company modified its Royalty Agreement with Medicore pursuant to
which it was to pay Medicore a royalty of 12% of its net sales up to
$20,000,000, of interferon, transfer factor and products using such substances,
and a royalty of 7% for sales in excess of $20,000,000. The royalty agreement
was to expire on November 6, 2001.
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The Company and Medicore have further amended the Royalty Agreement to
provide for a maximum cap on royalties to be paid to Medicore of $2,400,000,
with 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 of sales and 3% of
the next $55,000,000 of sales until the total of $2,400,000 royalty is paid. The
amendment further provided that royalties of approximately $108,000 previously
accrued as payable to Medicore will be the final payment due under the
agreement.
The Company recognized royalties expense of $11,901 and $28,826 for the
years ended June 30, 1996 and 1995, respectively.
PATENTS
The Company believes its production techniques are unique and are
capable of yielding a superior quality product while reducing production costs
which may enable the Company to ultimately lower the price of its Omniferon
product. The Company intends to file patent applications relative to certain
production techniques currently under development. The Company has also
submitted several foreign patent applications relating to the Product for
topical use several of which have been granted.
United States patents have been issued to others with respect to
genetically engineered and human-derived interferon. Subject to the extent of
such existing patent claims, the Company may have to negotiate license
agreements with such patent holders to use such processes and products. The
Company believes that it does not infringe upon any current patent.
The validity and enforceability of a patent can be challenged by
litigation after its issuance and if the outcome of such litigation is adverse
to the owner of the patent, other parties may be free to use the subject matter
covered by the patent. The degree of protection afforded by foreign patents may
be different than in the United States. There can be no assurance that patents
obtained in the future will be of substantial protection or commercial benefit
to the Company. (See "Competition" below).
REGULATION
Federal and European
The Company's activities and the Products and processes resulting from
such activities are subject to substantial government regulation, both state and
federal. The interstate manufacturing, advertising and sale of biologic
substances and pharmaceutical products are regulated by, and require approval
of, the FDA, EU, state and local agencies. The Company, under State of Florida
HRS guidelines relating to its limited distribution of the Product, followed
strict production and distribution procedures. The FDA has established mandatory
procedures and standards which apply to the clinical testing, marketing and
manufacture of the Products. Obtaining FDA and/or EU approval for
commercialization of a new product can take significant time and capital since
it involves extensive testing procedures and often lengthy clinical trials
including the measurement of product safety, toxicity, and efficacy, if any,
under specific protocols. The process of obtaining FDA and EU regulatory
approval initially includes extensive animal testing to demonstrate product
safety and preferred dosages. Subsequent human tests are undertaken to show the
same and to document such findings as effectiveness, toxicity and side effects.
Biostatistical analysis of data is then gathered in such studies, followed by
the submission of all information and data to the regulatory authorities.
At the present time, the Company has no pending application relative to
Omniferon before the EU regulatory authorities or the FDA for the treatment of
any disease indications, although the Company intends to commence clinical
trials in the EU during 1998 and eventually submit an Investigative New Drug
Application to the FDA. For these purposes, the Company has assembled a Clinical
Advisory Committee comprised of scientists, medical researchers and clinicians
who will act in an advisory capacity in order to assist the Company in
developing the medical, scientific and clinical aspects in support of the
Company's anticipated applications to be
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filed initially with the EU and eventually FDA regulatory authorities.
In the United States and Europe, human clinical trial programs
generally involve a three phase process. Typically, Phase I trials are conducted
in healthy volunteers to determine the early side effect profile 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 efficacy and safety required by federal regulatory
agencies. If Phase II evaluations indicate that a product has shown indications
of potential effectiveness and has an acceptable safety profile, Phase III
trials are undertaken to conclusively demonstrate clinical efficacy and safety
within an expanded patient population from multiple clinical study sites.
Regulatory authorities may also require Phase IV studies to track patients after
a product is approved for commercial sale.
Regulatory approval of a new pharmaceutical product often take five
years or more (unless accelerated in certain instances for life-threatening
diseases) and involves the utilization and expenditure of substantial resources.
Approval depends on a number of factors, including the severity of the disease
in question, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials.
American pharmaceutical manufacturers who sell outside of the United
States are also subject to FDA jurisdiction. Semi-finished drugs may be shipped
under certain controlled circumstances for further processing, packaging,
labeling and distribution to third parties residing in approved foreign
countries, subject to such laws as apply in those countries. The Company must
comply with all FDA rules and regulations as well as those of the country to
which the Company intends to ship the Product before it would be permitted to
export crude or finished interferon products outside the United States.
The Scottish Agreement
In certain instances, EU regulations, may require less stringent
preclinical studies for naturally occurring substances such as the Company's
Omniferon product than for genetically engineered products. Accordingly, while
there can be no assurance, the Company expects to possibly receive a more
expeditious review of the various EU processes and clinical trials prerequisite
to market approval in the EU.
In July 1995, Viragen (Scotland) Limited ("VSL"), a company
incorporated under the laws of Scotland, entered into a License and
Manufacturing Agreement with the Common Services Agency of Scotland ("Agency").
To secure a sufficient source of needed raw materials as well as expertise in
the area of blood-derived products and the regulatory approval process. The
Agency is an adjunct of the Scottish Government which acts on behalf of the
National Health Service in Scotland and the Scottish National Blood Transfusion
Service ("SNBTS"). The Agency owns and operates a blood fractionation facility
in Edinburgh, Scotland, and has the physical and technical capacity to
manufacture alpha interferon from human leukocytes employing the Company's
processes. Securing a sufficient qualified source of blood-derived raw materials
within the EU was considered critical to enable the Company to conduct EU
clinical trials as well as providing a sufficient source of raw materials
necessary for subsequent commercial manufacturing.
Prior to the commencement of clinical trials, the Company's Scottish
manufacturing facility must be licensed by EU regulatory authorities to conduct
such trials. The Company has engaged professionally recognized consultants
familiar with the EU regulatory process to assist in the manufacturing and
product submissions prerequisite to EU approvals. In addition, the SNBTS has a
full-time regulatory department that has obtained approval in the EU of numerous
EU blood-derived products. The SNBTS will provide its best efforts, working in
conjunction with the Company, to obtain a manufacturing license and subsequent
product approvals at the conclusion of the EU clinical studies. At such time as
the SNBTS obtains a manufacturing license for Omniferon, Viragen intends to seek
FDA manufacturing approval of the Scottish manufacturing facility. There can be
no assurance that the EU regulatory authorities will approve the manufacturing
or permit clinical testing and distribution of Omniferon within the EU, or that
the FDA will license or approve the Scottish manufacturing facility or the
Company's Product for clinical trials and subsequent distribution in the United
States.
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VSL has been organized by the Company to manufacture and distribute Omniferon
and related products in the EU and other countries outside the United States.
Through Viragen Technology, Viragen has transferred patent and proprietary
rights associated with the production of its Product and related technology to
VSL. Under the grant of license, VSL has provided the Agency with an exclusive
license to use the proprietary rights covered by the License and Manufacturing
Agreement for the manufacture and distribution of Omniferon within the EU. The
Agency has committed to participate with the Company in the manufacture of
Omniferon in sufficient scale to accommodate the EU clinical trials. VSL may
engage in commercial sale in amounts to be agreed upon by the parties and the
European regulatory authorities. The Agency is also expected to conduct certain
studies relevant to the Product and cooperate with VSL and the Company in
complying with the laws and regulations of the EU in connection with the
production of Omniferon.
Pursuant to the License and Manufacturing Agreement, VSL, VEL and the
Company are providing the Agency with full access to the proprietary technology
and specialized equipment, providing suitable training as needed to the Agency's
personnel and defraying all costs associated with securing permits and
regulatory approvals, augmenting the Agency's facilities, if necessary, to
participate in the manufacture of Omniferon and securing documentation
substantiating compliance with EU regulatory requirements. The Agency will
receive compensation for Product manufactured for use in clinical trials in the
EU, for Product manufactured for sales prior to obtaining new drug application
approval, and for sales following such approval, at varying percentages in
relation to costs. Products manufactured and utilized for humanitarian purposes
or for medical use by patients of the Scottish National Health Services or the
United Kingdom National Health Services will involve either no payments to the
Agency or payments at substantially discounted prices.
The term of the License and Manufacturing Agreement is for a five-year
period with two additional five-year extension terms at the option of VSL. The
Agreement also contains provisions protecting proprietary rights to VSL, the
Company and the preclusion of certain competitive activities by the Agency.
As a result of the completion of the private placements undertaken in
March 1996, VEL received net proceeds of $5,102,000 which is being used for (i)
the leasing and improvement of production facilities in Edinburgh, Scotland, for
the manufacture of Omniferon; (ii) the purchase of equipment for use of VSL's
Scottish facilities; (iii) the payment of royalties to Viragen Technology
commenced in calendar 1997 and (iv) for working capital purposes. VSL will
require additional financing to engage in and complete clinical trials for the
purpose of obtaining EU approval for the Product. Clinical testing toward EU
approval is an expensive process which is expected to take several years to
accomplish with no assurance that such approval will eventually be obtained.
COMPETITION
Competition in the research, development and production of interferon,
and other immunological products is intense and involves major, well-established
and abundantly 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 recombinant DNA
technology. A number of large companies including Hoffman-LaRoche, Inc.,
Schering Plough Corporation, Glaxo-Wellcome, Biogen, Inc., Chiron Corp., and
Berlex Laboratories are producing, selling and conducting clinical trials with
recombinant interferons (alpha and beta) and other immunological products for
the treatment of cancer and viruses, including MS, HIV/AIDS, KS and Hepatitis.
In addition to the manufacturers of synthetic interferons, Interferon
Sciences, Inc., a domestic manufacturer of Natural Interferon, received FDA
approval in 1989 to sell, in injectable form, their natural interferon product
for genital warts. They continue to conduct FDA sanctioned clinical trials and
to market their product for their approved indication.
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The Company believes that competition is also based on production
ability, technological superiority and administrative and regulatory expertise
in obtaining governmental approvals for testing, manufacturing and marketing of
the product.
The timing of the entry of a new pharmaceutical product into the market
is an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. The
Company's ability to develop products, complete clinical studies and obtain
governmental approval in the past had been hampered by a lack of adequate
capital. The Company is not presently a competitive factor in revenue
participation in the biopharmaceutical industry.
EMPLOYEES
As of September 18, 1997, the Company has 33 employees, of which 20 are
Research and Development and Quality Assurance/Quality Control personnel. The
remaining 13 employees are management, regulatory and/or administrative.
ITEM 2. PROPERTIES
In November 1996, the Company entered into a ten year lease for 14,800
square feet in Plantation, Florida. This location houses the Company's
administrative and executive offices as well as potential laboratory expansion
space. The lease contains an option for up to two additional five year terms.
Lease payments on the facility total $15,700 per month.
The Company owns a 14,000 square foot building in Hialeah, Florida.
This facility includes a laboratory for biomedical research and development
activities. The Company refinanced its building through a $600,000 borrowing
with a Florida bank under a five year note and mortgage in August 1991. The loan
was reduced in equal monthly principal payments of $2,500 with interest at 2% in
excess of the prime rate. The mortgage was on the land, building and
improvements, equipment and fixtures used in connection with the realty. A
balloon payment of $450,000, due in August 1996, was paid-in-full at maturity.
In November 1996, the Company, through VSL, entered into a five year
lease agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility, comprised of approximately 10,000 sq. ft., contains the Company's
European laboratory and production facilities. This location will augment other
productive assets located with the SNBTS facility which are available to the
Company under the Scottish Agreement. The monthly rental for the facility is
7,109 UK pounds or approximately US$11,400 subject to adjustment for
common area maintenance charges. The Company has the right to renew the lease
for four additional five year terms.
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The Company considers that its properties are generally in good
condition, well-maintained and generally suitable and adequate to carry on the
Company's business. The Company further believes that it maintains sufficient
insurance coverage on the Company's real and personal property.
ITEM 3. LEGAL PROCEEDINGS
In May 1997, the Company, through its majority owned subsidiary
Viragen (Europe) Ltd. (formerly Sector Associates, Ltd - "Sector"), was named
as a defendant in an action brought in the United States Bankruptcy Court,
Southern District of Florida by the bankruptcy trustee. The suit alleges that
during the period from December 1993 to May 1994, prior to the Company's
reverse acquisition of Sector, Sector received preferential transfers of
approximately $2.1 million. The Company denies that such transfers were
preferential and will vigorously defend the claims. However, the Company
cannot predict the ultimate outcome of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 1997, a Special Meeting of Shareholders was held in Davie,
Florida to vote on: (1) ratification and confirmation of the issuance of the
Company's Series D Preferred Stock and related Common Stock Purchase Warrants
and Series E Preferred Stock for purposes of complying with Rule 4460 (i)(1)(D)
of the NASDAQ Stock Market; and (2) to consider and approve Amendments to the
Certificate of Incorporation (i) to provide that actions by stockholders may be
taken only at a duly called annual or special meeting and not by written consent
and (ii) to provide that the stockholders of the Company would have the right to
make, adopt, alter, amend, change or repeal the By-Laws only upon the
affirmative vote of not less than 66 2/3% of the outstanding capital stock of
the Company entitled to vote thereon (the "By-Law Amendment Provision"). With a
majority of the outstanding shares voting either by proxy or in person, the
proposals past with the following votes:
FOR AGAINST ABSTAIN
--- ------- -------
Proposal One
Preferred Stock Issuance's 19,090,735 1,783,181 99,718
Proposal Two
By-Law Amendment Provision 20,529,539 2,026,920 113,410
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ SmallCap
Market since June 4, 1996 and on the NASDAQ National Market since December 29,
1996 under the symbol "VRGN". Prior thereto, the Company's Common Stock was
traded on the OTC Bulletin Board. The following table sets forth the high and
low bid quotations for the Common Stock for the two years ended June 30, 1997.
High Low
---- ---
1995-1996
First Quarter ended 09/30/95 $ 1 1/16 $ 1/4
Second Quarter ended 12/31/95 15/16 1/8
Third Quarter ended 03/31/96 4 9/16 1/8
Fourth Quarter ended 06/30/96 9 5/8 3 3/4
1996-1997
First Quarter ended 09/30/96 5 7/8 3 1/2
Second Quarter ended 12/31/96 6 15/16 3 5/8
Third Quarter ended 03/31/97 5 9/16 2 1/4
Fourth Quarter ended 06/30/97 3 3/8 1 3/8
The above quotations represent prices between dealers, and do not
include retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
As of September 18, 1997 there were approximately 2,800 stockholders of
record.
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The Company has not paid any dividends on its common stock since its
incorporation in December 1980. Since the company had been in the development
stage, has experienced losses since inception (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"), has
significant capital requirements in the future, and presently intends to retain
future earnings, if any, to finance the expansion of its business, it is not
anticipated that any cash dividends will be paid in the foreseeable future.
Future dividend policy will depend on the Company's earnings, if any, capital
requirements, expansion plans, financial condition and other relevant factors.
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ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE
PERIOD BETWEEN
JANUARY 1,
YEAR ENDED JUNE 30, AND JUNE 30, YEAR ENDED
----------------------------------------------------------------- -------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Revenues .............. $ 1,404 $ 739 $ 722 $ 677 $ 53 $ 52
Net loss .............. (4,775) (4,672) (3,952) (1,083) (311) (563)
Loss attributable to
common stock ...... (14,674) (5,570) (3,955) (1,087) (313) (573)
Loss per average common
share ............. ( .37) (.15) (.12) (.06) (.02) (.05)
Weighted average shares
outstanding ....... 39,134,631 36,198,302 32,137,693 18,686,751 14,463,038 11,478,914
CONSOLIDATED BALANCE SHEET DATA
FOR THE
PERIOD BETWEEN
JANUARY 1,
YEAR ENDED JUNE 30, AND JUNE 30, YEAR ENDED
----------------------------------------------------------------- -------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Working capital
(deficit) $ 29,331 $ 18,266 $ 1,614 $ 795 $ 250 $ (942)
Total assets .......... 37,462 20,617 3,330 2,744 1,462 983
Long-term debt ........ 239 116 857 976 1,034 529
Stockholder's equity
(deficit) ......... 32,144 17,275 1,698 546 101 (588)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The statements contained in this report on Form 10-K that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected product clinical trial commencement dates, product
introductions, expected research and development expenditures and related
anticipated costs. All forward looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statement. It
is important to note the Company's actual results could differ materially from
those in such forward looking statements. Among the factors that could cause
actual results to differ materially are the factors detailed below and the risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement Form SB-2, as filed with the Securities and Exchange Commission
(effective on August 14, 1995 with related Post-Effective Amendment effective
May 30, 1996). You should also consult the risk factors listed from time to time
in the Company's Reports on Forms 10-Q, 8-K, S-3, 10-K and Annual Reports to the
Stockholders.
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The biopharmaceutical industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price and
timing of new product introductions. Increased competition from existing
biopharmaceutical companies as well as the entry into the market of new
competitors could adversely affect the Company's financial condition or results
of operations.
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing
technological innovation. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products. There can be no assurance that any current of future patent, if any,
owned by the Company will not be invalidated, circumvented or challenged, that
the rights granted thereunder will provide competitive advantages to the Company
or that any of the Company's future patent applications will be issued with the
scope of the claims sought by the Company, if at all. Furthermore, there can be
no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents, if any, owned by the Company.
The Company has incurred operational losses and operated with a
negative cash flows since its inception in December 1980. Losses have totaled
$4,775,245, $4,672,271 and $3,951,839 for the years ended June 30, 1997, 1996
and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $29,331,000 at June 30, 1997, an
increase of $11,065,000 from the prior year end balance. This increase was due
to various Convertible Preferred Stock issuances as follows: 5,000 shares of
Cumulative Convertible Preferred Stock, Series C, for $5,000,000 in December
1996; 15,000 shares and 5,000 shares of Cumulative Preferred Stock, Series D and
Series E, for $15,000,000 and $5,000,000, respectively in February 1997, and the
exercise of Common Stock Purchase Warrants of the Company and its majority owned
subsidiary, Viragen (Europe) Ltd. with such increases being offset by cash
redemption payments to various Convertible Preferred Stock holders totaling
$2,815,000, operational losses of approximately $4,775,000 and increases in
leasehold improvements, plant and equipment of approximately $4,482,000 during
the period.
In June 1996, the Company entered into a Securities Purchase Agreement
(the "Series B Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd.
and Proton Global Asset Management, LDC (collectively the "Series B Purchaser")
pursuant to which the Series B Purchaser acquired 15,000 shares of the Company's
then newly established 5% Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred Stock") for $15,000,000.
Under the terms of the Series B Preferred Stock, the Purchaser was
entitled to receive a cash dividend equal to 5% of the stated value of the
Series B Preferred Stock payable quarterly commencing September 7, 1996,
although the Company had the option to utilize shares of its Common Stock, under
certain conditions, to satisfy the dividend requirement. The Purchaser had the
right to convert the Series B Preferred Stock commencing August 21, 1996 into
shares of Common Stock of the Company at a conversion price equal to the lesser
of 85% of the average market price (reduced by an additional 2% per month
commencing the 90th day following the closing date, until the related
Registration Statement was declared effective by the SEC) for the Company's
Common Stock, as described in the Agreement, prior to the conversion date or
$8.74. The final conversion rate was set at 76.8% of the average market price.
The Company also had the right to require the Purchaser, under certain terms and
conditions, to convert the Series B Preferred Stock commencing 180 days
following the effective date of a Registration Statement registering the resale
of the shares of Common Stock of the Company underlying the Series B Preferred
Stock. The Series B Preferred Stock did not carry any voting rights except as
required under the Delaware General Corporation Law. Loss attributable to common
stock reflects adjustments for cumulative preferred dividends, and in 1996, was
restated to reflect embedded dividends arising from discounted conversion terms
on the Convertible Preferred Stock, Series B.
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In July 1997, the unconverted Series B Preferred Stock was exchanged
for a Promissory Note in the amount of $9,720,240. The Note bears interest at
10% per annum with principal and interest payable over nine monthly installments
commencing in October 1997. The Note may be prepaid without penalty and is not
convertible into common stock of the Company.
In December 1996, the Company issued 5,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in consideration
for $5,000,000. The purchases were made by Strome Hedgecap Limited, Strome
Offshore Limited, Strome Partners, L.P. and Strome Susskind Hedgecap, L.P.
(collectively the "Series C Purchasers"), pursuant to separate Securities
Purchase Agreements. In addition, warrants to purchase an aggregate of 214,593
shares of Common Stock, exercisable at $2.00 per share on or prior to December
9, 1999, were issued to the Series C Purchasers.
The Series C Purchases may convert up to 25% of the Series C Preferred
Stock into Common Stock of the Company on or after 10 days from the date the
registration statement registering the underlying shares is deemed effective by
the Securities and Exchange Commission thereafter 25% may be converted on or
after the 30th, 60th and 90th day on a cumulative basis. The Preferred Stock is
convertible into a number of Common Shares determined by dividing the stated
value of the Preferred Stock ($1,000 per share) by the closing price of the
Company's Common Stock over the five day period preceding notice of conversion
("conversion price"). The conversion price may not be less than $3.46 nor more
than $7.00. In the event the conversion price falls below $3.46, the difference
between $3.46 and the conversion price will be paid to the holder in cash. Any
shares of Series C Preferred Stock which are outstanding on December 5, 1997
will be automatically converted into shares of Common Stock based on the
conversion price at such time completed in accordance with the above procedures.
In July 1997, the holders of the Series C Preferred Stock agreed to
modify their conversion price and limit conversions of their remaining 974
shares ($1,000 face value per share) over a two month period. The modified
conversion price was the lower of (i) $2.20 per share or (ii) the average
closing price of the Company's Common Stock over the five day period ending the
day prior to the notice of conversion.
In February 1997, the Company issued 15,000 shares of its 6% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to P.R.I.F., L.P.
in consideration for $15,000,000. The funds and the certificates representing
the Series D Preferred Stock were placed in escrow pending approval by the
stockholders of the Company at the Annual Meeting of Stockholders on February
28, 1997, of the proposed Amendment to the Company's Certificate of
Incorporation to increase the authorized number of Common Stock shares from
fifty million to seventy five million shares. The shareholders approved the
Proposal. The Company had also placed in escrow a commitment fee of $300,000
which would be paid to P.R.I.F., L.P. in the event authorization is not obtained
by the specified date. Following shareholder approval the commitment fee was
returned to the Company.
The Series D Preferred Stock was convertible into a number of shares of
Common Stock of the Company determined by dividing the five day trading average
price of the Company's Common Stock prior to conversion, discounted by 18%, into
the stated value of the Preferred Shares being converted.
In connection with the issuance of the Series D Preferred Stock, the
Company also issued 375,000 Common Stock Purchase warrants, exercisable at $6.00
per share.
In February 1997, the Company also issued 5,000 shares of its 5% Series
E Convertible Preferred Stock (the "Series E Preferred Stock") in consideration
for $5,000,000. Dividends on the Series E Preferred accrued from the date of
issuance and were payable quarterly commencing April 1, 1997 and may have been
paid in cash or, at the Company's option and certain other conditions, in shares
of Common Stock of the Company. Upon liquidation, dissolution or winding-up of
the Company, no distribution may have been made to the holder of shares of
capital stock ranking junior to the Series E Preferred Stock unless, prior
thereto, the holder of the Series E Preferred Stock had received $1,000 per
share plus accrued dividends.
The Series E Preferred Stock was convertible into shares of Common
Stock of the Company commencing May 11, 1997 at a conversion price of the lesser
of (i) the Average Market Price for the five trading days prior to the Notice of
Conversion multiplied by 85%, subject to adjustment, or (ii) $7.00, subject to
adjustment.
In September 1997, the Company concluded two Exchange Agreements
whereby the terms of the Series D Preferred Stock and Series E Preferred Stock
were modified the remaining unconverted shares of Series D (7,950 Preferred
Shares) and Series E (4,000 Preferred Shares) being exchanged for a like number
of Series F and Series G Preferred Shares, respectively.
The Series F Preferred Stock provides for a limitation on the holder
limiting conversion during any two week period to 800 shares ($800,000). The
terms also provides the Company with a cash-out option at the face amount being
converted plus 12%. In consideration for the holder of the Series D Preferred
Stock agreeing to a limitation on future conversions, the Company agreed to
increase the dividend rate from 6% for the Series D Preferred Stock to 10% for
the Series F Preferred Stock.
Terms of the Series G Preferred Stock provide that commencing in
September 1997, the holder is limited to converting 667 shares ($667,000) per
month over a 6 month period. The provisions further prove that the Company will
be required to redeem 667 shares ($667,000) per month less the number of Series
G Preferred Stock converted during the proceeding calendar month. In addition,
the holder is restricted from converting into common stock if the market price
of the Company's common stock is less on $2.50, subject to adjustment, at the
date of the conversion notice. In consideration for the restrictions on
conversion, the Company agreed to increase the dividend rate from 5% for the
Series E Preferred Stock to 10% for the Series G Preferred Stock. No other
material changes have been made in the substantive terms from the previously
issued Series E Preferred Stock.
During July and August of 1997, the terms of the four series of
preferred stock were modified in order to limit or otherwise restrict the timing
or number of conversions of the preferred stock into common stock over a given
period. This restructuring was initiated in order to mitigate concerns of the
Company and the investment community concerning the "overhang" of the Company's
common stock represented by the potential conversion of these outstanding series
of preferred stock under their original terms.
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In September 1995, the Company entered into an Agreement and Plan
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"). Under the
terms of the Agreement, the Company acquired a 94% interest in Sector in a
reverse acquisition transaction. Sector was a publicly traded corporation which
contained net cash assets of $800,000 at the transaction closing date. This
transaction closed in December 6, 1995.
In December 1995, Sector completed a Private Placement, raising
approximately $750,000 through the sale of 336,000 units for a purchase price
of $2.23 per Unit. Each unit consists of 0.71 shares of common stock and 2.5
common stock purchase warrants having an exercise price of $6.00 per share,
representing a total of 240,000 common shares and 840,000 warrants. In March
1996, Sector completed two additional Private Placement Offerings,
issuing 768,000 shares of its Common Stock and 216,500 Common Stock purchase
Warrants having an exercise price of $12.00 per share. These two Offerings
yielded net proceeds of approximately $5,102,000 after related expenses of
$317,500. The company is using these proceeds to undertake European research and
clinical trial activities including the establishment of a laboratory and
manufacturing facility in Edinburgh, Scotland, now completed, the purchase of
laboratory equipment and related working capital. On May 2, 1996, Sector changed
its name to Viragen (Europe) Ltd.
In December 1994, the Company completed a private placement, solely to
accredited investors, of Common Stock at $.60 per share, realizing gross
proceeds of $2,056,000 in consideration for the issuance of 3,426,667 shares.
The proceeds were utilized for implementation of the initial phase of the
Company's European market strategy, which includes the establishment of a
research and manufacturing facility in Europe and working capital. In August
1994, the Company completed a $3.5 million private placement offering of its
Common Stock to accredited investors at $.40 per share, resulting in the
issuance of 8,919,000 shares. The net proceeds of the offering of approximately
$3,185,000 were utilized for the continued development of Omniferon, acquisition
of laboratory equipment, the purchase of a Company-wide computer system,
development of clinical study protocols, employment of additional operating and
administrative personnel and working capital.
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It is the Company's policy to invest its temporarily idle cash
exclusively in U.S. Treasury and Agency Securities which are relatively liquid,
providing market rates of return and are not intended to speculate in interest
rate movements. Depending upon short-term capital requirements, a portion of the
portfolio is held in a Money-Market Fund which invests exclusively in U.S.
Government obligations.
While subject to significant limitation, the Company at June 30, 1997
has available approximately $27.8 million in net tax operating loss
carryforwards expiring between 1999 and 2012, which may be used to offset
taxable income, if any, during those periods. The Company's ability to generate
revenues during future periods is dependent upon obtaining regulatory approvals
of the Product. As the Company cannot be assured as to its ultimate success in
obtaining the necessary regulatory approvals, the Company is unable to conclude
that realization of benefits from its deferred tax assets is more likely than
not, as prescribed by SFAS 109. Accordingly, the Company has recognized a
valuation allowance of offset 100% of the deferred tax assets related to these
carryforwards.
Management believes that the Company's Omniferon product currently
under development can be manufactured in sufficient quantity and will be priced
at a level to offer patients an attractive alternative treatment to the
Synthetic Interferons currently being marketed. Management further believes that
working capital currently on hand will provide the Company with the funds
necessary for the foreseeable future to continue its current level of
operations, focused on current research and development projects, the
establishment of a laboratory and manufacturing facility in Scotland an the
commencement of EU clinical trials. Additional funding would be required to
complete the clinical trial process both in the EU and domestically prior to
receiving regulatory approval to market the Product. Anticipated funding
requirements in the EU include: pre-clinical Phase I and Phase II trials --
$1.5-$2.0 million and Phase III studies -- $12-$14 million. In addition,
anticipated funding requirements for U.S. operations include: the establishment
of domestic manufacturing capacity -- $6 million; joint research and development
projects -- $4 million and commencement of domestic preclinical Phase I and
Phase II studies -- $1.5-2.0 million. Funding will also be utilized for
continued product development research, general working capital purposes
including administrative support functions and the possible acquisition of
businesses complementary to the Company's operations.
RESULTS OF OPERATIONS
No sales revenue or related cost of sales were recognized for the
fiscal year ended June 30, 1997. The termination of sales revenues was due to
patients previously enrolled under the Company's State of Florida HRS 499
Program completing their course of treatments in fiscal 1996. The Company
discontinued enrollment of new patients in its 499 Program (with the exception
of certain limited enrollments approved by HRS for humanitarian purposes
including an HIV/AIDS study conducted at no charge to patients) and all revenues
under this program ceased in March 1996. The Company has no other source of
revenues from the sale of its Products until it receives the necessary
regulatory approval from the U.S. Food and Drug Administration and/or comparable
European authorities. At the present time, the Company has no pending
application relative to Omniferon before the EU regulatory authorities or the
FDA for the treatment of any disease indications, although the Company intends
to commence clinical trials in the EU during calendar 1998 and eventually submit
an Investigational New Drug Application to the FDA. Such approvals cannot be
assured and are subject to the successful completion of clinical trials and the
Company's ability to raise significant additional investment capital to fund the
completion of such trials.
Interest and other income which totaled $1,404,000 for fiscal 1997
reflected a sharp increase over the prior year. This increase was attributable
to interest income earned on the net proceeds of a series of Convertible
Preferred Stock Offerings made during June 1996 and fiscal 1997. See "Liquidity
and Capital Resources" above.
Research and development costs totaled $2,168,914 during the year
compared to $1,503,434 for fiscal 1996. This increase of $665,480 (44%) reflects
an overall increase in research activities and was primarily attributable to
an increase in laboratory supplies expenses of approximately $326,000, an
increase in fees paid to SNBTS relating to contractual reimbursements of
$71,000, increased travel expenses associated with the transfer of technology
and process development between the Company's Florida and Scottish facilities
of $120,000, an increase in research related consulting fees and increased
salaries and related taxes for laboratory personnel.
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Selling general and administrative expenses totaled $3,938,323 in
fiscal 1997, an overall increase of approximately $438,000 from the prior year.
This increase reflects the net of changes in numerous components in general and
administrative expense items. Fiscal 1997 includes an increase in administrative
salaries and related taxes of approximately $351,500 due to the addition of
administrative staff in the Company's Scottish laboratory and manufacturing
facility, increased administrative staff in the Company's Miami facility and
domestic salary increases. During fiscal 1997, the Company also recognized
compensation expense of $450,000 associated with options granted during the
period compared to $426,000 in the previous year and recognized $288,000 in
expenses associated with the settlement, for treasury stock, of a potential
litigation claim. The Company also recognized increases in insurances expenses
associated with employee related insurances and increased liability coverages of
$128,000, increased travel related costs of $109,000, primarily attributable to
administrative support related to the establishment of the Company's Scottish
facility, increased building and equipment leasing costs of $105,000 and
additional fees associated with the Company's listing on the NASDAQ National
Market of approximately $73,000. These increases were offset by the reduction in
officer loans forgiven in the prior year of $282,000 and a loss recognized on
the valuation of the Company's Florida laboratory facilities of $316,000
pursuant to FAS 121 in fiscal 1996.
1996 COMPARED TO 1995
Losses from operations have been incurred since inception and totaled
$4,785,015 and $3,951,839 for the years ended June 30, 1996 and 1995,
respectively.
Sales revenues for the year ended June 30, 1996 totaled $230,000
compared to $574,000 for the previous year, and were derived from distribution
of the Company's Alpha Leukoferon product for the clinical study treatment of
multiple sclerosis. The decline in revenues was due to patients previously
enrolled under the 499 Program completing their course of treatment coupled with
the discontinuance of new enrollments as discussed above.
In March 1996, the Company received approval from the HRS under the 499
Program to conduct an investigational study in Florida, in collaboration with
Biodoron, of the Company's Alpha Leukoferon product for the treatment of
HIV/AIDS in hemophiliacs on a no charge basis. The Company subsequently entered
into an agreement with Quantum Health Resources, Inc., whereby they provided
$330,000 to the Company for the conduct of the study. Quantum Health Resources,
Inc., a subsidiary of Olsten Services Corp., is a national provider of alternate
site therapies and support services for patients afflicted by chronic disorders,
including hemophilia.
Costs of sales expense as a percentage of sales revenues totaled 78%
for the year ended June 30, 1996 compared to 61% for the preceding year. This
increase was due to a significant (44%) drop in the selling price of the
Company's Alpha Leukoferon product for patients enrolling during and subsequent
to fiscal 1994. A portion of the sales revenues recorded in fiscal 1995,
reflected shipments to patients enrolled prior to the reduction in sales price.
This sharp price reduction reflected the Company's efforts to make the Product
more price competitive with the synthetic interferons, and accordingly, a more
viable alternative patient treatment.
Research and development costs totaled $1,503,000 for fiscal 1996
compared to $605,000 for 1995. This sharp increase was attributable to
significantly expanded research efforts associated with the Company's
newly-developed Natural Interferon (alpha) product Omniferon. These costs can be
expected to continue to increase as the Company continues its process
development refinement efforts working towards regulatory submissions in the EU
relating to the commencement of clinical trials of Omniferon. The expanded
research efforts are focused on improved methods of manufacturing aimed at
maintaining or improving product quality, production yields and manufacturing
efficiencies. Components of the increases include the hiring of additional
research personnel with salaries and related taxed and benefits totaling
approximately $404,000 and an increase in research laboratory supplies expense
of approximately $256,000 representing 45% and 29%, respectively, of the overall
increase. Additionally, fiscal 1996 expenses reflected increases in travel,
equipment rentals and support functions associated with the overall increases in
the level of research and development activities.
Selling and general administrative expenses totaled $3,501,000 for
fiscal 1996 compared to $2,029,000 for the preceding year. Components of this
overall increase of approximately $1,472,000 including $298,000 in consulting
expense reflecting the issuance of 336,000 common stock purchase options,
$316,000 resulting from the write-down of the Company's South Florida laboratory
facility pursuant to Financial Accounting Standards Board Statement No. 121 and
an increase in administrative salaries with related taxes and benefits of
approximately
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$262,000. In addition, the Company recognized $243,000 in compensation expense
reflecting the issuance of 400,000 shares of Viragen (Europe) Ltd. to the
officer/directors of Viragen (Europe) Ltd. and one employee of the Company. The
increase also reflects the overall level of administrative activity including
European travel associated with the establishment of the European production
facility located in Edinburgh, Scotland and related corporate development
efforts.
In September 1995, the Board of Directors granted 2,935,000
non-statutory options to directors, officers and key employees of the Company
under the provisions of the 1995 Stock Option Plan. The options granted have an
exercise price of $.50 per share and are exercisable for a period of five years.
The Company recognized compensation expense of $183,144 as a result of these
options which has been included in general and administrative expenses.
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 DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED AS
OFFICER AND/OR
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
- ---- --- ------------------------- --------------
Gerald Smith .......... 67 Chairman of the Board and 1993
President 1995
Robert Zeiger ......... 53 Chief Executive Officer, and 1995
Director 1995
Dennis W. Healey ...... 49 Executive Vice President 1993
Chief Financial Officer, 1994
Treasurer 1980
Secretary and Director 1984
Charles F. Fistel ..... 36 Executive Vice President and 1994
Director 1996
Dr. Joseph P. Morris... 44 Vice President-Research
and Development 1995
Dr. Jay Sawardeker..... 59 Chief Operating Officer and
Executive Vice President-Technical
Affairs 1996
Robert C. Rech......... 33 Vice President 1997
Jose I. Ortega......... 25 Controller 1996
Peter D. Fischbein .... 57 Director 1981
Sidney Dworkin, Ph.D .. 76 Director 1994
Jay M. Haft ........... 61 Director 1994
William B. Saeger ..... 45 Director 1994
Fred D. Hirt .......... 54 Director 1996
Carl N. Singer ........ 79 Director 1997
GERALD SMITH, in accordance with February 1993 Stock Agreement, became
a Director on February 5, 1993, the date of the Initial Purchase by Cytoferon.
On May 12, 1993, Mr. Smith became President of the Company. In June 1994, Mr.
Healey relinquished his position as Chairman of the Board of Directors in favor
of Mr. Smith. Mr. Smith remains as Chairman of the Board and President of the
Company. Since 1982, he was a principal stockholder, President, Chief Executive
Officer and director of Business Development Corp. ("BDC"), which 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 is also the President, Chief
Executive Officer and a director of Cinescopic Corporation and International
Database Service, Inc., computer-oriented companies which developed database
technology using the personal computer for audio, video, animation and real time
communication. Mr. Smith has discontinued BDC's operations in order to devote
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all of his time to the Company. Mr. Smith is also Chairman of the Board and
President of VEL and VUSA.
ROBERT H. ZEIGER was appointed Chief Executive Officer and Chief
Operating Officer and was elected as a Director in May 1995. Mr. Zeiger is a
pharmaceutical executive. From 1985 to 1994, Mr. Zeiger was employed by Glaxo,
Inc., Research Triangle Park, North Carolina, serving as Vice President and
General Manager of their Dermatological Division from 1985 to 1988 and Vice
President and General Manager of Glaxo Pharmaceuticals from 1991 to 1994. Mr.
Zeiger also served as Vice President, Marketing and Sales with Stiefel
Laboratories, Inc., Coral Gables, Florida, from 1979 to 1985, and as National
Sales Manager to Knoll Pharmaceutical Company, Whipping, New Jersey from 1971
to 1979. Mr. Zeiger is also Chief Executive Officer and Director of VEL.
DENNIS W. HEALEY is a Certified Public Accountant and was appointed
Chairman of the Board and Chief Executive Officer on April 13, 1993. In June
1994, Mr. Healey relinquished that position as Chairman of the Board to Mr.
Smith and in July 1994, relinquished the position of Chief Executive Officer
upon the employment of Mr. Fistel. Upon Gerald Smith becoming President on May
12, 1993, Mr. Healey became Executive Vice President and has served as Chief
Financial Officer and Treasurer of the Company since 1980. Mr. Healey was
appointed Secretary in 1994. Until his resignation in July 1996, Mr. Healy
served as Senior Vice President, Principal Financial Officer and Treasurer of
Medicore, Inc. ("Medicore") and Executive Vice President of its Techdyne
affiliate. He also served as Treasurer of most of Medicore's subsidiaries and as
a Vice President of Dialysis Corporation of America ("DCA"), a subsidiary of
Medicore and Secretary, Treasurer and director of other DCA subsidiaries. Mr.
Healey joined Medicore in 1976 as its Controller. Mr. Healey is also Executive
Vice President, Treasurer, Secretary and a Director of VEL and VUSA.
CHARLES F. FISTEL was appointed Chief Executive Officer of the Company
upon his employment in July 1994, which position he relinquished to Mr. Robert
H. Zeiger in May 1995, becoming an Executive Vice President of the Company. Mr.
Fistel was elected a Director of the Company in June 1996. Mr. Fistel, prior to
joining the Company, served for two years as an independent financial advisor to
publicly-traded and privately held emerging growth companies. Prior thereto,
between 1986 to 1992, he served as Executive Vice President, Chief Financial
Officer and a director of Tiger Direct, Inc., a Miami, Florida-based
publicly-traded computer technology development, marketing and distribution
company. From 1981 to 1986, Mr. Fistel who is also a Certified Public
Accountant, actively practiced public accounting. Mr. Fistel is also Executive
Vice President and a Director of VUSA.
PETER D. FISCHBEIN is an attorney who has been practicing law for
approximately 32 years. Mr. Fischbein served as the Company's Secretary between
May and December 1994. His former firm on occasion represented the Company,
Medicore and the Viragen Research Associates Limited Partnership ("Limited
Partnership") which has certain contracts with the Company. Mr. Fischbein is
also a director of Medicore (since 1984) and Techdyne (since 1985). Mr.
Fischbein has been general partner of several limited partnerships engaged in
oil exploration and real estate development.
SIDNEY DWORKIN, PH.D., elected a Director in August 1994, was a
founder, former President, Chief Executive Officer and Chairman of Revco, Inc.
Between 1987 and the present, Dr. Dworkin has also served as Chief Executive
Officer of Stonegate Trading, Inc., an importer and exporter of various health,
beauty aids, groceries and sundries. Between 1988 and the present, Dr.Dworkin
has served as Chairman of the Board of Advanced Modular Systems, which is
engaged in the sale of modular buildings. Between June 1993 and the present, Dr.
Dworkin has also served as Chairman of Global International, Inc., which is
engaged in development and sale of programmable cash registers. Dr. Dworkin also
serves on the Board of Directors of CCA Industries, Inc., Interactive
Technologies, Inc. and Northern Technologies International Corporation, all of
which are publicly-traded companies.
JAY M. HAFT, elected a Director in August 1994, is an attorney and of
counsel to Parker Duryee Rosoff & Haft, New York, NY has been a practicing
lawyer since 1959. Mr. Haft has specialized in the representation of emerging
growth companies, and has participated in fund raising for a number of
leading-edge medical technology companies and is Managing General Partner of
Venture Capital Associates. Ltd. and GenAm "1" Venture Fund, a
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domestic and international venture capital fund, respectively. Mr. Haft is also
a Director of numerous public and private corporations.
WILLIAM B. SAEGER, elected a Director in August 1994, is a Certified
Public Accountant with eighteen years experience in corporate strategic
planning, financial and tax planning, acquisitions, corporate capitalizations,
analysis and management of financial assets. Mr. Saeger has served as a
portfolio manager and analyst for a number of funds and is a director of Telemac
Cellular Corp. Mr. Saeger has also written for financial publications on federal
taxation and investment portfolio management.
FRED D. HIRT, elected as Director in June 1996, is a health care
executive and serves as the President and Chief Executive Officer of Mount Sinai
Medical Center in Miami Beach, Florida. Mr. Hirt is active in numerous community
healthcare and charitable organizations and serves on many of their Board of
Directors.
CARL N. SINGER, elected as director in August 1997, is the Chairman of
Fundamental Management Corporation, a Florida-based institutional investment
fund. Mr. Singer has served as a director, President and CEO of Sealy, Inc.,
Scripto, Inc. and the BVD Company.
There is no family relationship between any of the officers and
directors.
The Company has constituted Audit, Executive and Compensation
Committees. The audit committee consists of Messrs. Healey, Dworkin, Saeger and
Singer. The Executive Committee consists of Messrs. Smith, Zeiger, Healey and
Fistel. The Compensation Committee consists of Messrs. Haft and Dworkin.
The Audit Committee oversees the Company's audit activities to protect
against improper and unsound practices and to furnish adequate protection to all
assets and records. The Audit Committee also acts as liaison to the Company's
independent certified public accountants, and conducts such work as is necessary
and receives written reports, supplemented by such oral reports as it deems
necessary, from the audit firm. The Executive Committee is empowered to act for
the full Board in intervals between Board meetings, with the exception of
certain matters which by law may not be delegated. The Executive Committee will
meet as necessary, and all actions by the Committee are to be reported at the
next Board of Directors meeting. The Compensation Committee provides overall
guidance for officer compensation programs, including salaries and other forms
of compensation. While the audit committee and the compensation committee has
met periodically on an informal basis, the Board of Directors has chosen to meet
as a full Board to evaluate audit and compensation matters.
As approved at a 1997 Special Meeting of Shareholders in June 1997, the
Board of Directors will be divided into three classes. At each Annual Meeting
commencing with the 1997 Annual Meeting, one class of directors will be elected
to succeed those whose terms expired, with each newly-elected director to serve
a three-year term. Prior thereto, the term of office for the Company's Directors
has been one year and they served until the following annual meeting of
stockholders. The Company anticipates holding its next annual meeting during the
fourth calendar quarter of 1997.
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ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth information concerning the compensation
and employment agreements of the Chief Executive Officers of the Company and two
other most highly compensated executive officers as of June 30, 1997.
OTHER ALL
NAME AND ANNUAL RESTRICTED OTHER
PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARDS SARS (#) PAYOUTS SATION
-------- ---- ------ ----- ------ -------- ------- ------- ------
Gerald Smith 1997 $175,885 1,050,000
Chairman of 1996 154,615 $7,500 $14,000 1,600,000
Board and 1995 70,000 9,317 50,000
President (1)
Robert H. Zeiger 1997 65,250 ----- 5,000 50,000
CEO, Director (2) 1996 66,653 100,000
1995 11,538 1,000,000
Dennis W. Healey 1997 163,345 350,000
Exec. V.P., 1996 78,653 1,250 8,500 500,000
Treas., CFO and 1995 75,000 0 10,167 50,000
Director (3)
Charles F. Fistel, 1997 138,886 300,000
Exec. V.P, 1996 110,000 6,000 110,000
Director (4) 1995 106,615 ----- 19,208 300,000
- ------------------
(1) Mr. Smith is Chairman of the Board, Chief Executive Officer and President
of Cytoferon, a former affiliate of the Company. Cytoferon previously had a
consulting and marketing agreement with the Company pursuant to which
Cytoferon was entitled to receive consulting fees, commissions, fees for
certain foreign transactions and foreign royalties.
In November 1993, as modified on December 15, 1994, Mr. Smith entered into
a two-year employment agreement expiring November 18, 1995, with the
Company at no salary. The agreement provided for the sale of 750,000 shares
of common stock at $.30 per share payable through the issuance of a
promissory note with the shares being issued into escrow pending cash
payments further providing the shares may be released from escrow in
increments of no less than $3,000. These shares were purchased through the
issuance of a note in the principal amount of $217,500 in April 1994 with
Mr. Smith receiving a bonus equal to the par value ($7,500) of shares
purchases. On May 15, 1995, the Company forgave Mr. Smith's note in lieu of
bonus for the 1995 fiscal year, following unanimous approval of the
independent members of the Board of Directors. The agreement also provided
for the issuance of 750,000 options to purchase common stock subject to
meeting certain production related or capital raising criteria. The
criteria were successfully met with the closing of the Company's $3.5
million Private Placement in August 1994 and, accordingly, these options
became exercisable.
Mr. Smith had an employment agreement with Cytoferon effective June 2,
1992, for a term ending June 30, 1995. He was provided with an annual
salary of $120,000 the first year, $130,000 the second year and $140,000
the third year. The salary for the period prior to May 12, 1993, the
completion of the Stock Agreement, was accrued and was payable from
available cash. Mr. Smith was entitled to participate in any Cytoferon
benefit plans of which there were none. The Cytoferon employment agreement
further provided Mr. Smith with certain severance arrangements if there was
a change in control of Cytoferon or the Company. In August 1994, the Board
of Directors of the Company voted to terminate the Management and Marketing
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Services Agreement with Cytoferon, terminating all fees payable thereunder,
concurrent with the issuance of the 1,750,000 contingently issuable shares
subject to receipt of a fairness opinion which was subsequently received.
In connection with this transaction, the Company agreed to assume the
obligations of Mr. Smith's employment agreement with Cytoferon through
November 8, 1995. The Company entered into a two-year employment agreement
with Mr. Smith, effective October 6, 1995, under terms similar to his
previous employment agreement, modified to increase his salary by $20,000
and $10,000 for the first and second years, respectively. In January 1996,
Mr. Smith exercised options to purchase 750,000 shares of common stock
through the issuance of a note in the principal amount of $217,500 with the
shares being issued into escrow pending cash payments further providing the
shares may be released from escrow in increments of no less than $3,000.
Mr. Smith received a bonus equal to the par value ($7,500) of the shares
purchased. On June 6, 1996, the Company forgave Mr. Smith's note in lieu of
bonus for the 1996 fiscal year, following unanimous approval of the
independent members of the Board of Directors. On March 1, 1997 Mr. Smith
entered into a two-year employment agreement, superceding all previous
agreements, under terms similar to his previous employment agreement. The
agreement provided for a salary of $190,000 and $200,000 for the first and
second years, respectively, and further provided for options to purchase
1,000,000 shares of common stock at $3.22 per share, exercisable over five
years. See Item 13, "Certain Relationships and Related Transactions."
(2) On May 9, 1995, the Company entered into a two-year employment agreement
expiring May 1, 1997, with Robert H. Zeiger to serve as Chief Executive
Officer and Chief Operating Officer of the Company at an annual salary of
$120,000. The agreement provided for health, life and similar employee
benefits generally made available to other employees of the Company, use of
an automobile and related maintenance expenses and reimbursement for
expenses incurred in fulfilling his normal responsibilities to the Company.
The agreement provided for the issuance of options to purchase the
aggregate of 1,000,000 shares of Common Stock of the Company at an exercise
price of $.96 per share, exercisable with respect to 500,000 shares
commencing May 8, 1996 through May 8, 2000 and exercisable for the
remaining 500,000 shares commencing May 8, 1997 through May 8, 2001. The
right to exercise such options may be accelerated upon the occurrence of
certain material corporate transactions. The options are terminable prior
to the lapse of their respective terms only if Mr. Zeiger's employment
should be terminated for cause, and, in that event, the options must be
exercised to the extent that they have vested within 90 days of such
termination. On August 1, 1997 Mr. Zeiger entered into a one year
employment agreement under terms similar to his previous agreement except
for certain notice of termination provisions. This agreement provides for a
salary of $120,000 per year with an additional $5,000 per month, payable
monthly, for the first six months of the contract term.
(3) In April 1994, as modified on December 15, 1994, Mr. Healey entered into an
employment agreement expiring November 18, 1995, with the Company at an
annual salary of $75,000. The agreement provided for health, life and
similar employee benefits generally made available to other employees of
the Company, an automobile and related expenses. The agreement further
provided for the sale of 125,000 shares of common stock at $.30 per share
payable through the issuance of a promissory note with the shares being
issued into escrow pending cash payments further providing the shares may
be released from escrow in increments of no less than $3,000. These shares
were purchased in June 1994 through the issuance of a note in the principal
amount of $36,250, with Mr. Healey receiving a bonus equal to the par value
($1,250) of the shares purchased. On May 15, 1995, the Company forgave Mr.
Healey's note in lieu of bonus for the 1995 fiscal year, following
unanimous approval of the independent members of the Board of Directors.
The agreement also provided for the issuance of 125,000 options to purchase
common shares at $.30 per share subject to the Company reaching certain
production levels or raising certain minimums in capital during the
employment contract period, consistent with similar provisions contained in
Mr. Smith's November 1993 employment agreement. These criteria were met in
August 1994 and, accordingly, these options became exercisable. The Company
entered into a two-year employment agreement with Mr. Healey, effective
October 6, 1995, under terms similar to his previous employment agreement,
modified to increase his salary by $5,000 and $5,000 for the first and
second years, respectively. In July 1996, Mr. Healey resigned all positions
he held with Medicore and its subsidiaries and entered into an employment
agreement with Viragen (Europe) Ltd. This agreement provided for a salary
of $85,000 per year and expire in September 1997. In January 1996, Mr.
Healey exercised options to purchase 125,000 shares of common stock though
the issuance of a note in the principal amount of $36,250 with the
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shares being issued into escrow pending cash payments reelecting the
shares to be released from escrow in increments of no less than $3,000.
Mr. Healey received a bonus equal to the par value ($1,250) of the
shares purchased. On June 6, 1996, the Company forgave Mr. Healey's
note in lieu of bonus for the 1996 fiscal year, following unanimous
approval of the independent members of the Board of Directors. On March
1, 1997 Mr. Healey entered into two-year employment agreement,
superceding all previous agreements, under terms similar to his
previous employment agreements. The agreement as amended July 1, 1997,
provided for a salary $190,000 and $195,000 for the first and second
years, respectively, and further provided for options to purchase
300,000 shares of common stock at $3.22 per share, exercisable over
five years.
(4) On July 1, 1994, as modified on December 15, 1994, the Company entered
into a two-year employment agreement expiring July 1, 1996, with
Charles Fistel to serve as Chief Executive Officer (which position he
relinquished to Mr. Zeiger in May 1995, assuming the position of
Executive Vice President) at an annual salary of $110,000. The
agreement provided for health, life, and similar employee benefits
generally made available to other employees of the Company, use of an
automobile and related expenses. The agreement provided for the
issuance of options to purchase the aggregate of 300,000 shares of
common stock at an exercise price of $.30 per share, exercisable with
respect to 150,000 shares commencing June 30, 1995, through July 1,
1999, and exercisable for the remaining 150,000 shares commencing June
30, 1996, through July 1, 2000. The right to exercise such options was
accelerated based on the Company having raised certain minimums in
capital. On July 1, 1996, upon the expiration of Mr. Fistel's 1994
employment agreement, Mr. Fistel entered into a two-year employment
under terms similar to his previous employment agreement modified to
increase his salary $30,000 and $10,000 in the first and second years,
respectively.
In November 1995, VSL, a wholly-owned subsidiary of VEL issued an
aggregate of 7.144 shares of VSL common stock at $56.00 per share to
individuals serving as officers and directors of VEL and one employee of the
Company. Pursuant to the Agreement and Plan of Reorganization, these shares
were exchangeable into an aggregate of 400,000 shares of VEL. Of these options,
100,000 were granted each to (i) Mr. Gerald Smith, (ii) Mr. Robert H. Zeiger,
and (iii) Mr. Dennis W. Healey, all serving as officers and directors of VEL.
All options on VSL were exercised and the related shares exchanged for VEL
common stock.
The Company recognized $243,000 in compensation expense as a result of
the issuance of these shares.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1997 to each person named in the Summary Compensation Table.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE
- ---- ----------- ----------- ---------- ----
Gerald Smith ........ 1,050,000 35.5% $ 3.22 02-27-02
Robert H. Zeiger .... 50,000 1.7 3.22 02-27-02
Dennis W. Healey .... 350,000 11.8 3.22 02-27-02
Charles F. Fistel ... 300,000 10.1 3.22 02-27-02
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended June
30, 1997 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1997 fiscal year.
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27
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1997 FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED
VALUE REALIZED IN THE MONEY OPTIONS AT
MARKET PRICE NUMBER OF UNEXERCISED FY-END (BASED ON FY-
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $2.69 END/SHARE)
ACQUIRED LESS PRICE ------------------------- -------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Gerald Smith ...... -- $ -- 2,700,000 $3,588,500
Robert H. Zeiger .. 25,000 90,625 1,050,000 1,730,000
Dennis W. Healey .. -- -- 900,000 1,179,500
Charles F. Fistel . -- -- 710,000 957,900
1997 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
(collectively the "95 Plan") to define certain terms and clarify the minimum
exercise price of the Non-Qualified Options, described herein, as not less than
55% of the fair market value. The 95 Plan was submitted to the stockholders of
the Company at the Annual Meeting of Stockholders held on December 15, 1995, and
the Stockholders ratified the Plan at that time.
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 "97 Plan"), containing terms and provisions similar to the 95 Plan. The 97
Plan was submitted to the Stockholders for approval at the Annual Meeting of
Stockholders held on February 28, 1997 at which time the Plan was ratified.
Under both the 95 Plan and the 97 Plan (collectively the "Plans"), the
Company has reserved 7,000 shares (4,000,000 shares - 95 Plan and 3,000,000
shares - 97 Plan) of Common Stock for issuance pursuant to options granted under
the Plans ("Plan Options"). The full Board of Directors or the Compensation
Committee of the Board of Directors (the "Committee") administers the Plans
including, without limitation, the selection of the persons who will be granted
Plan Options under the Plans, the type of Plan Options to be granted, the number
of shares subject to each Plan Options and the Plan Options price.
Plan Options granted under the Plans may either be options qualifying
as incentive stock options ("Incentive Options") under Section 422 of the
Internal Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plans also allow for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the 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, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
Directors or the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, nor more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Compensation Committee.
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The per share purchase price of shares subject to Plan Options granted
under the Plans may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plans.
Officers, directors, key employees and consultants of the Company and
its subsidiaries are eligible to receive Non-Qualified Options under the Plans.
Only officers, directors and employees of the Company who are employed by the
Company or by any subsidiary thereof are eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company'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 shall
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 shall 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 within the meaning of Section 22(c) (3) of the Internal Revenue
Code of 1986, 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 such disability.
The Board of Directors or Committee may amend, suspend or terminate the
Plans at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plans. Unless the Plans shall
theretofore have been suspended or terminated by the Board of Directors, the 95
Plan shall terminate on May 15, 2005 and the 97 Plan shall terminate on January
27, 2007. Any such termination of either Plan shall not affect the validity of
any Plan Options previously granted thereunder.
As of September 18, 1997, 3,996,500 options have been issued under the
1995 Amended Stock Option Plan and 2,614,500 options have been issued under the
1997 Stock Option Plan.
ADDITIONAL STOCK OPTIONS
In February 1997, the Board of Directors awarded options to purchase
1,750,000 shares of Common Stock to officers and directors of the Company
exercisable over five years at an exercise price of $3.22 per share. The options
were granted to the following individuals: Gerald Smith (1,050,000), Robert H.
Zeiger (50,000), Dennis W. Healey (350,000), Charles F. Fistel (50,000), Peter
D. Fischbein (50,000), Sidney Dworkin (50,000), Jay Haft (50,000), William B.
Saeger (50,000) and Fred D. Hirt (50,000). In addition, between August 1996 and
June 1997, the Company awarded options to purchase up to 459,500 shares of
Common Stock to other employees of the Company (inclusive of 250,000 of Charles
F. Fistel), which options are exercisable at prices ranging from $1.97 to $3.69
per share during the five year term of the options.
In October 1995, the Board of Directors awarded options to purchase
2,935,000 shares of Common Stock to the officers, directors and key employees of
the Company exercisable of $0.50 per share at any time on or prior to October 6,
2000. The options were granted to the following individuals: Gerald Smith
(1,600,000), Robert H. Zeiger (100,000), Dennis W. Healey (500,000), Charles F.
Fistel (110,000), Peter D. Fischbein (225,000), Sidney Dworkin (100,000), Jay W.
Haft (100,000), William B. Saeger (100,000) and to key employees (100,000). In
addition, between October 1995 and June 1996, the Company awarded options to
purchase up to 500,500 shares of Common Stock to other employees of the Company,
which options are exercisable at prices ranging from $0.50 to $5.90 per share
during the five-year term of the options.
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In June 1995, the Company issued 33,000 Incentive Stock Options to
non-executive employees under the 95 Plan. The options granted vest over
different periods not exceeding two years.
In May 1995, the Company issued 1,000,000 Common Stock purchase options
to Mr. Robert H. Zeiger, Chief Executive Officer, Chief Operating Officer and a
director, pursuant to an Employment Agreement. Under the terms of the Agreement,
500,000 op