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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-26549
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1993
---------------------
ADVANCED VIRAL RESEARCH CORP.
(Exact Name of Registrant as Specified in Its Charter)
---------------------
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<C> <C> <C>
DELAWARE 5129 59-2646820
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1250 EAST HALLANDALE BEACH BLVD.
SUITE 501
HALLANDALE, FL 33009
(954) 458-7636
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
SHALOM Z. HIRSCHMAN, M.D., PRESIDENT
ADVANCED VIRAL RESEARCH CORP.
1250 EAST HALLANDALE BEACH BOULEVARD
SUITE 501
HALLANDALE, FL 33009
(954) 458-7636
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
(Copies of all communications and notices to:)
CHARLES J. RENNERT
BERMAN WOLFE & RENNERT, P.A.
100 SOUTHEAST SECOND STREET, SUITE 3500
MIAMI, FLORIDA 33131
(305) 577-4171
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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(Continued from previous page)
CALCULATION OF REGISTRATION FEES
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PROPOSED
MAXIMUM
AGGREGATE
TITLE OF EACH CLASS OF AMOUNT OFFERING AMOUNT OF
SECURITIES REGISTERED TO BE REGISTERED PRICE REGISTRATION FEE(1)
---------------------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Common Shares $.00001 par value................. 39,000,067(2)
---------- ---------- ---------
Total................................. $9,750,017 $2,718.19*
========== ========== =========
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- ---------------
* All of which has been previously paid.
(1) Estimated solely for the purposes of calculating the registration fee on the
basis of the average of the high and low bid prices of the Common Stock on
September 2, 1997, as reported on the OTC Electronic Bulletin Board.
(2) Represents (a) 4,099,500 Shares issuable upon exercise of Options by Selling
Stockholders at $.11 per Share; (b) 1,178,300 Shares issuable upon exercise
of Options by Selling Stockholders at $.12 per Share; (c) 1,700,000 Shares
issuable upon exercise of Options by Selling Stockholders at $.13 per Share;
(d) 858,100 Shares issuable upon exercise of Options by Selling Stockholders
at $.14 per Share; (e) 4,100,000 Shares issuable upon exercise of Options by
Selling Stockholders at $.18 per Share; (f) 4,500,000 Shares issuable upon
exercise of Options by Selling Stockholders at $.19 per Share; (g) 1,546,500
Shares issuable upon exercise of Options by Selling Stockholders at $.20 per
Share; (h) 3,000,000 Shares issuable upon exercise of Options by Selling
Stockholders at $.25 per Share; (i) 5,000,000 Shares issuable upon exercise
of Options by Selling Stockholders at $.27 per Share; (j) 5,000,000 Shares
issuable upon exercise of Options by Selling Stockholders at $.36 per Share;
and (k) up to 8,017,667 Shares to be sold for the account of Selling
Stockholders.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM SB-2 RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 12, 1997
PROSPECTUS
ADVANCED VIRAL RESEARCH CORP.
39,000,067 SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale, from time to time and in one
or more transactions of up to 39,000,067 shares (the "Shares") of Common Stock,
par value $.00001 (the "Common Stock") of Advanced Viral Research Corp. (the
"Company"). The Shares consist of 30,982,400 shares (the "Option Shares")
issuable upon exercise by certain persons of certain Common Stock Purchase
Options (the "Options") of the Company at exercise prices ranging from $.11 to
$.36 per Option Share, and 8,017,667 other shares (the "Sale Shares"). The
holders of the Sale Shares and the Option Shares are referenced in this
Prospectus collectively as the "Selling Stockholders." See "SELLING
STOCKHOLDERS", and "DESCRIPTION OF SECURITIES -- PLAN OF DISTRIBUTION."
On September 3, 1997 the low and high bid prices for the Common Stock in
the over-the-counter market as reported on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board (the "Bulletin Board") were $.22
and $.24, respectively.
The Shares will be offered from time to time by Selling Stockholders in the
public market. The Company will receive proceeds upon the exercise of the
Options, as set forth below, but will not receive any proceeds of the public
sale of the Shares, including the Option Shares.
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
ASSOCIATED WITH THE COMPANY'S LIMITED OPERATING HISTORY, AND SHOULD BE
CONSIDERED ONLY BY THOSE WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT (SEE
"HIGH RISK FACTORS" ON PAGE OF THIS PROSPECTUS).
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<CAPTION>
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UNDERWRITING DISCOUNTS
EXERCISE PRICE(1) AND COMMISSIONS(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (upon exercise of Options)..... $.11 - $.36 $.00 $6,735,775(3)
==============================================================================================================
</TABLE>
(1) See "PLAN OF DISTRIBUTION" for pricing and selling arrangements. The Options
are exercisable to acquire Option Shares at a price range from $.11 to $.36
per Option Share.
(2) Expenses of the offering, estimated to be $75,265, shall be paid by the
Company.
(3) Represents proceeds to the Company assuming exercise of all of the Options.
Does not include proceeds from the sale of the Option Shares, which will be
offered from time to time by the Selling Stockholders in the public
marketplace, and which proceeds will be paid to the Selling Stockholders and
not to the Company.
The date of this Prospectus is ________ __ , 1997
<PAGE> 4
AVAILABLE INFORMATION
This Prospectus, which constitutes part of a Registration Statement on Form
SB-2 (the "Registration Statement") filed by the Company with the U.S.
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, which the Company
has filed with the Commission in Washington, D.C. Reference is hereby made to
the Registration Statement and to the exhibits thereto for further information
with respect to the Company and securities offered hereby. Statements contained
herein concerning the provisions of documents filed as exhibits to the
Registration Statement are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. Copies of the information and
exhibits as well as other information and documents filed by the Company with
the Commission may be examined at the Commission's principal office, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, the Northeast
Regional Office of the Commission at 7 World Trade Center, Suite 1300, New York,
New York 10048; and the Midwest Regional Office of the Commission, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, where
copies may be obtained upon payment of the fees prescribed by the Commission. In
addition, copies of the Registration Statement and related documents may be
obtained from the Commission's web site at http://www.sec.gov.
No person has been authorized to give any information or to make any
representations in connection with the offering described herein other than
those contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of any securities other
than those to which it relates or an offer to sell or a solicitation of an offer
to buy by anyone in any jurisdiction in which such offer or solicitation is not
qualified to do so or to any person to whom it is not lawful to make such offer
or solicitation in such jurisdiction. The information contained in this
Prospectus is given as of the date hereof, except where otherwise indicated and
neither a delivery of this Prospectus, nor any sale made hereunder, shall, under
any circumstances create any implications that there has been no change in the
facts set forth herein or in the affairs of the Company since the date hereof.
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PROSPECTUS SUMMARY
This Prospectus, which constitutes part of Registration Statement filed
with the Company with the Commission under the Act, omits certain of the
information contained in the Registration Statement. Reference is hereby made to
the Registration Statement and to the exhibits for further information with
respect to the Company and the securities offered hereby. Statements contained
herein concerning provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information and
financial statements and notes appearing elsewhere in this Prospectus and
particularly in the section entitled "HIGH RISK FACTORS."
THE COMPANY
Advanced Viral Research Corp. (the "Company") was incorporated on July 31,
1985, under the laws of the State of Delaware, to engage in the production and
marketing, promotion and sale of the pharmaceutical product with the trade name
RETICULOSE, an anti-viral peptide-nucleic acid complex preparation. RETICULOSE
has not been approved for sale or use. See "BUSINESS -- GOVERNMENT REGULATION,"
"-- MARKETING AND SALES," and "EXCLUSIVE DISTRIBUTION AGREEMENTS." Accordingly,
unless and until such approval is granted in the United States or another
"developed or developing country," sales of RETICULOSE will not be significant,
and there can be no assurance that they will be significant even if approval is
granted. The Company is in the developmental stage, and has not yet commenced
any commercial operations.
RETICULOSE, the rights to which were acquired by the Company in 1986, was
marketed and used in the United States and elsewhere in the world during the
1940's through the early 1960's. See "BUSINESS -- BACKGROUND OF RETICULOSE," and
"EXCLUSIVE RIGHTS OF THE COMPANY TO RETICULOSE AND PRODUCTION ARRANGEMENTS." In
1962 RETICULOSE was classified as a "new drug" by the Food and Drug
Administration of the United States Department of Health and Human Services
("FDA"), requiring FDA approval for sale in the United States. Legal action by
the FDA resulted in RETICULOSE being withdrawn from the United States market.
See "BUSINESS -- BACKGROUND OF RETICULOSE." In 1967 and 1968, two applications
for approval of RETICULOSE, one for sale and the other for human clinical
research in the United States, were filed and withdrawn without prejudice on
indications from the FDA that the applications would not be approved. See
"BUSINESS -- BACKGROUND OF RETICULOSE" and "THE INVESTIGATIONAL NEW DRUG
APPLICATION PROCESS." See generally, "GLOSSARY", "HIGH RISK FACTORS" and
"SOURCES." (All references in this Prospectus to the reports listed under
"SOURCES", and the reports themselves, should be read in conjunction with the
portions of this Prospectus which discuss the negative results of certain
studies.) OTHER THAN A REPORT PUBLISHED BY SHALOM Z. HIRSCHMAN, THEN CONSULTANT
NOW PRESIDENT, CHIEF EXECUTIVE OFFICER AND A DIRECTOR OF THE COMPANY, PUBLISHED
IN AUGUST 1996, NONE OF THE REPORTS IS MORE RECENT THAN 1969. THE COMPANY
BELIEVES THAT NONE OF THE REPORTS IS MORE RECENT THAN 1969 BECAUSE OF A GENERAL
LACK OF RESEARCH INTEREST IN RETICULOSE. THE FDA HAS REQUESTED THAT THE COMPANY
DEMONSTRATE THAT THE COMPANY'S CURRENT FORMULATION OF RETICULOSE IS IDENTICAL TO
THE FORMULATION REPORTED IN THE REPORTS.
Bernard Friedland, former President and current Chairman of the Board of
the Company, as sponsor, submitted to the FDA on September 20, 1984 an
application for a study, on human subjects, of the efficacy of RETICULOSE upon
AIDS: the Notice of Claimed Investigational Exemption for a New Drug ("IND").
Under FDA regulations, the Company is not permitted to engage in or authorize
human studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction," until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory."
In response to two deficiency letters from the FDA, the Company, on March
6, 1992, submitted to the FDA additional information, including findings from
independent research laboratories, intending, among other things, to procure the
FDA's approval to conduct human clinical trials for RETICULOSE (the "March 1992
FDA
3
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Submission"). On July 31, 1992, the Company received a third deficiency letter
from the FDA, dated July 27, 1992 (the "July 1992 Deficiency Letter"), which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and actions on the part of the
Company. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM
THE FDA, WHICH STATED, AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR
SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER
REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS
"INACTIVATED." The Company believes that the use of the term "inactivated"
indicates, the FDA's position that the Company did not comply with the FDA's
written requests articulated in several deficiency letters within a reasonable
time. Accordingly, the Company believes it must refile or amend the IND in order
for the IND to be continued to be reviewed by the FDA. The Company has not
formally responded to the July 1992 Deficiency Letter or the 1995 deficiency
letter. No assurances can be given that the Company's IND will ever be approved
by the FDA or that results of any testing will demonstrate that RETICULOSE is
safe or effective in the treatment of disease. The Company is currently in the
preliminary stage of preparing a new IND for filing with the FDA (the "New
IND"), although there can be no assurances as to the costs or the timing of the
filing of the New IND, if at all. Even if the New IND is filed, the Company
currently does not believe it has the resources to complete the FDA approval
process. The Company intends to allocate certain funds from the exercise of
Options, provided at least 25% of the Options are exercised, for the purpose of
filing the New IND with the FDA. No assurance can be given, however, that any
Options will be exercised, that the New IND will be accepted by the FDA or that
any tests previously conducted or to be conducted will satisfy FDA requirements.
See "BUSINESS -- THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS" and
"-- TESTING AGREEMENTS -- Testing in the United States of America."
Open label clinical trials of RETICULOSE on Human Papilloma Virus (HPV) at
two separate hospitals located in Buenos Aires, Argentina (the "HPV Clinical
Trial") indicated clinical improvement in half, and adverse side effects in
none, of the 20 patients tested. See "BUSINESS -- TESTING AGREEMENTS --
Argentina Agreements."
Laboratory tests of RETICULOSE (the "Hirschman Study") at the Mount Sinai
School of Medicine, New York, New York under the supervision of Shalom Z.
Hirschman, M.D., then Professor of Medicine and Director of the Division of
Infectious Diseases of the Mount Sinai School of Medicine, currently the
Company's President and Chief Executive Officer, demonstrate that RETICULOSE
stimulates the production of a unique set of chemokines, including Interleukin 1
(IL-1), Interleukin 6 (IL-6) and Gamma Interferon, and inhibits the replication
of HIV in cell cultures.
The first stage of a double-blind, randomized, placebo-controlled clinical
trial using RETICULOSE in the treatment of AIDS was completed in late November
1996 (the "AIDS Clinical Trial"). The AIDS Clinical Trial is being conducted at
the Queen Elizabeth Hospital, Bridgetown, Barbados. Other than the AIDS Clinical
Trial, no controlled double-blind clinical trials of RETICULOSE have commenced.
The Company believes, however, based on certain prior history and the published
data for the years 1951 until 1962, largely anecdotal, that RETICULOSE is an
anti-viral pharmaceutical product which is safe and effective in treating a
number of interferon related viruses such as Asian Influenza, Viral Pneumonia,
Virus Infectious Hepatitis, Mumps, Encephalitis, Herpes Simplex and Herpes
Zoster. However, two articles published in 1962 in recognized medical journals
questioned the efficacy of RETICULOSE on certain viral diseases in laboratory
tests. There can be no assurance of the success of such testing or whether such
testing or any other potential testing that may be commenced will result in FDA
approval. See "HIGH RISK FACTORS -- RETICULOSE -- Limited Medical Acceptance and
No Assurance of Effectiveness" and "BUSINESS -- BACKGROUND OF RETICULOSE."
In March 1997, the Company entered into a Material Transfer
Agreement -- Cooperative Research and Development Agreement (the "NCI
Agreement") with certain governmental agencies (including the FDA) represented
by The National Cancer Institute (collectively, the "Government Agencies"). The
purpose of the NCI Agreement is for Dr. Howard Young, Section Chief, Laboratory
of Experimental Immunology, Division of Basic Sciences, The National Cancer
Institute, "to determine the molecular mechanism by which RETICULOSE may
specifically enhance transcription of the [gamma interferon] gene." The Company
intends to supply RETICULOSE to the Government Agencies for the purpose of
research by the Government Agencies in accordance with a research plan attached
to the NCI Agreement, subject to the conditions stated in the NCI Agreement. The
NCI
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Agreement provides for non-disclosure by the Government Agencies and an
understanding that the Company and the Government Agencies will enter into
licenses to one another on terms to be negotiated in the future, in the event
the research produces an invention. Either the Company or the Government
Agencies may terminate the NCI Agreement upon 30 days prior written notice to
the other. See "BUSINESS -- TESTING AGREEMENTS -- National Cancer Institute
Study."
Four researchers are currently engaged in research regarding Reticulose,
all of whom are performing services in connection with the AIDS Clinical Trial
and the NCI Study.
The Company currently maintains offices at 1250 East Hallandale Beach
Boulevard, Suite 501, Hallandale, Florida 33009 and 200 Corporate Boulevard
South, Yonkers, New York. Its telephone number in Hallandale, Florida is (954)
458-7636 and its telephone number in Yonkers, New York is (914) 376-7383. See
"BUSINESS -- PROPERTY."
THE OFFERING
Common Stock being
offered.................... 39,000,067 shares
Common Stock to be
Outstanding
After the Offering(1)....
308,172,773 shares
Use of Proceeds............ The Company will receive $6,735,775, assuming all
Options are exercised. The Company intends to apply
such proceeds to pay for continued research and
development and clinical trials regarding
RETICULOSE, establishing a new or enhancing the
existing production facility, and general and
administrative expenses among other uses. See "USE
OF PROCEEDS" below.
High Risk Factors.......... Prospective purchasers should consider carefully
certain risks concerning the Company and its
business, including those described under "HIGH
RISK FACTORS -- Limited Operations; No Present
Source of Revenues; No Record of Earnings and
Accumulated Deficit"; "Qualification Regarding
Going Concern"; "Risks Associated with Outstanding
Convertible Debenture"; Elimination of Liability
for Directors"; Failure of RETICULOSE to be
Approved for Sale by the FDA"; "Single
Product -- Very Limited Sales"; and
"RETICULOSE -- Limited Medical Acceptance and No
Assurance of Effectiveness," among other factors.
- ---------------
(1) Based on 277,190,373 shares of Common Stock outstanding as of September 2,
1997 plus 30,982,400 Option Shares, consisting of the aggregate number of
shares issuable upon exercise of the Options, excluding 535,134 shares
issuable upon exercise of the Warrants described under "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
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HIGH RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE
A HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD
TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE PURCHASER SHOULD,
PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL
AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY
THE INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS HEREIN.
1. Limited Operations; No Present Source of Revenues; No Record of Earnings
and Accumulated Deficit. The Company was incorporated under the laws of the
State of Delaware on July 31, 1985, has a very limited operating history, has
only insignificant operating revenues and must be considered promotional and
still in its early developmental stage. From inception through June 30, 1997,
the Company had an accumulated deficit of $5,823,866. The Company is dependent
upon approval of RETICULOSE for sale before it can begin any significant
commercial operations.
No applications for approval have been filed in any country, except for the
IND submitted to the FDA on September 20, 1984 by Bernard Friedland, former
President and current Chairman of the Board of the Company, as sponsor. Under
FDA regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company has received and responded to two deficiency
letters from the FDA, which responses were not deemed adequate. BEFORE SEPTEMBER
1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE FDA, WHICH STATED,
AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT
PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED." The Company has
not formally responded to a third deficiency letter (i.e., the July 1992
Deficiency Letter) or the 1995 deficiency letter. See "BUSINESS -- THE
INVESTIGATIONAL NEW DRUG APPLICATION PROCESS." No assurances can be given that
the Company's IND will ever be approved by the FDA or that results of any future
testing will demonstrate that RETICULOSE is safe or effective in the treatment
of disease. See "BUSINESS -- TESTING AGREEMENTS -- Argentina Agreements,"
"-- GOVERNMENT REGULATION," "-- MARKETING AND SALES," and "-- EXCLUSIVE
DISTRIBUTION AGREEMENTS." See also the discussion of the Hirschman Study and the
AIDS Clinical Trial under "BUSINESS -- BACKGROUND OF RETICULOSE." There can be
no assurance, however, that the HPV Clinical Trial, the AIDS Clinical Trial or
any other potential testing that may be commenced will prove successful.
The Company's cash position, from time to time, has been the result of the
proceeds from the Company's initial public offering on May 16, 1986; the
exercise of warrants issued in connection with the initial public offering; the
exercise of Options; the sale of a convertible debenture in 1997; fees paid for
distribution rights by the Company's exclusive distributors which fees also
included deposits on purchases of RETICULOSE by a distributor; and limited sales
of RETICULOSE for testing purposes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -- CAPITAL RESOURCES." The Company's current cash position of
approximately $1,750,000 as of June 30, 1997, is largely due to Options being
exercised as a result of recently prevailing prices of the shares of the Common
Stock and the sale of the Debenture in February 1997. Such funds will not be
adequate to pay all the costs associated with the full range of continued
research and development and testing, as well as the clinical trials that may be
required by the FDA, in order to obtain approval for the IND to test RETICULOSE
in the United States, which is a prerequisite for being able to market and sell
RETICULOSE in the United States. However, the Company's cash position is
sufficient to fund the ongoing AIDS Clinical Trial, which costs not yet expended
are estimated at $75,000. Unless and until RETICULOSE is approved for sale in
the United States or in another developed or developing country, or one or more
of the Company's distributors obtains approval for the sale of RETICULOSE in any
of their respective territories, the Company will be dependent upon the
continued sale of its securities and/or the exercise of Options for funds to
meet its continued cash requirements. In such event, the Company may be
dependent on the willingness of third parties to accept shares of the Common
Stock or options to acquire shares of the Common Stock as compensation to
conduct tests or provide other services to the Company. No assurance can be
given that such financing or
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services, if and when required, will be available, or if available, will be at
terms acceptable to the Company. Any issuance of a substantial number of
additional shares of Common Stock would also dilute the ownership of present
stockholders.
Potential investors should be made aware of the difficulties encountered by
any business enterprise in its development stage, especially in view of the
intense competition from existing and more established businesses in the
medical/pharmaceutical fields, most of which have substantial capital assets and
income to fund any research, development, promotional and marketing programs and
regulatory protocols that are necessary in connection with
medical/pharmaceutical products. See "BUSINESS -- COMPETITION." There is nothing
at this time upon which to base any assumption that the Company will either
generate operating revenues or will ever be able to operate on a profitable
basis. If the Company's plans prove to be unsuccessful, its stockholders and
holders of Options may lose all or a substantial portion of their investment.
See "BUSINESS -- TESTING AGREEMENTS" and "-- EXCLUSIVE DISTRIBUTION AGREEMENTS."
2. Qualification Regarding Going Concern. The Company's independent
accountants' report on the Company's consolidated financial statements for the
fiscal year ended December 31, 1996, includes an explanatory paragraph in Note 2
to the Consolidated Financial Statements stating that the Company's ability to
continue operations is dependent upon its continued sale of its securities for
funds to meet its cash requirements, which factors raise substantial doubt about
the Company's ability to continue as a going concern. Further, the accountant's
report does not include any adjustments that might result from the outcome of
this uncertainty. The Company has no immediate plan to issue any securities,
otherwise than upon the possible exercise of Common Stock Purchase Options or
the Warrants, or the possible conversion of the Debenture, described under
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." The Company has
suffered losses from operations during its limited operating history.
The Company is dependent upon registration of RETICULOSE for sale in the
United States or in another developed or developing country before it can begin
commercial operations. The Company's cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical trials required
by the FDA. Management does not anticipate registration or other approval of
RETICULOSE in an industrially developed or developing country in the immediate
future. Unless and until RETICULOSE is approved for sale in the United States or
another such country or unless RETICULOSE is approved for sale in one or more of
its distributors' territories with both a material population and healthy
profile, the Company may be dependent upon the continued sale of its securities
or the exercise of its options or Warrants for funds to meet its cash
requirements. In addition, the Company may seek debt financing, but no
agreements have been entered into or identified with regard to any financing
except the Debenture described under "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -- CAPITAL RESOURCES." In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. No assurances can be given that other debt
financing will be readily obtainable on favorable terms, that the Company will
be able to sustain its operations until approval for sale of RETICULOSE is
granted or that any such approval will be granted. The Consolidated Financial
Statements do not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities that might
be necessary should the Company be unable to continue in existence. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" and "Notes to
Consolidated Financial Statements."
3. Elimination of Liability for Directors. The Company's Certificate of
Incorporation was amended on December 30, 1987, to limit or eliminate director
liability by incorporating new Article Eleventh, which provides: "A director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of laws, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit."
4. Failure of RETICULOSE to be Approved for Sale by the FDA. Management of
the Company believes that the United States constitutes one of the major and
most profitable pharmaceutical markets in the world. Since 1962, when
RETICULOSE, among many other drugs, was reclassified as a "new drug" by the FDA,
the
7
<PAGE> 10
Company has not been able to market RETICULOSE in the United States. This has
been the direct result of its inability to satisfy the regulatory protocols and
the substantial preapproval requirements imposed by the FDA upon the
introduction of any new or unapproved drug product, which include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time consuming procedures. There is no assurance that FDA
approval for the sale of RETICULOSE in the United States will ever be obtained
or that the results of the current AIDS Clinical Trial or any other clinical
studies and tests will be sufficient to lead to FDA approval of an IND for
clinical testing of RETICULOSE on humans in the United States. Further, there
can be no assurance that RETICULOSE will ever be approved by any developed or
developing country, without which no significant revenues will ever be generated
by the Company from the sale of RETICULOSE.
5. Single Product -- Very Limited Sales. There have been no sales by the
Company of RETICULOSE, except for insignificant revenues related to distribution
of the drug for testing purposes. RETICULOSE is not currently marketed or
approved for sale or use, and there can be no assurance that it will be approved
for sale or use in the future. The Company has currently in effect exclusive
distribution agreements with distributors to market and sell RETICULOSE, subject
to each distributor obtaining regulatory approval, in the following countries:
China, Japan, Hong Kong, Macao, and Taiwan (AVIX International Pharmaceutical
Corp., a New York corporation ("AVIX")); Mexico (AVIX); Channel Islands, Isle of
Man, British West Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia
(Commonwealth Pharmaceuticals, a corporation organized under the laws of Cayman
Islands, British West Indies ("Commonwealth")); and Argentina, Bolivia,
Paraguay, Uruguay, Brazil, and Chile (DCT S.R.L., an Argentine corporation
("DCT")). The Company is dependent upon obtaining regulatory approval of
RETICULOSE for sale and use in the United States, in other developed countries,
or alternatively in one or more of its distributors' territories in order to
have the potential for significant distribution and sales of RETICULOSE. There
can be no assurance that any significant sales will be generated by the
Company's distribution agreements, and further, there can be no assurance that
any such distributors will receive timely, if ever, necessary approvals to
market RETICULOSE in their respective territories. See "BUSINESS -- EXCLUSIVE
DISTRIBUTION AGREEMENTS."
6. RETICULOSE -- Limited Medical Acceptance and No Assurance of
Effectiveness. RETICULOSE is neither widely known nor accepted by the medical
community nor approved for use in the United States for any purpose by the FDA.
Two articles published in 1962 in recognized medical journals have
questioned the anti-viral effect of RETICULOSE on Mumps, Encephalitis and Herpes
Simplex utilizing tissue culture; on Herpes Simplex in students; and on Lansing
Polio and mouse adapted and egg adapted Influenza: A. C. Kempe, "Failure to
Demonstrate Antiviral Activity of Reticulose," American Journal of Diseases of
Children, Vol. 103, May 1962, and Behbehani, "The Effect of Reticulose on Viral
Infections of Experimental Animals," Southern Medical Journal, Vol. 55, February
1962. The only "double blind" study of RETICULOSE completed by or for the
Company is the AIDS Clinical Trial.
Although the Company has filed the IND with the FDA, it must first satisfy
the FDA that the current formulation of RETICULOSE is identical to the
formulation reported on in the prior anecdotal history and studies. In the
opinion of Mr. Friedland, a peptide study conducted by the University of
Wisconsin Biotechnology Center in 1987 and 1988 exclusively for the Company (the
"Wisconsin Study") has shown as follows: "The peptide analyses of four
[RETICULOSE] samples, two of which were 16 years old and manufactured by Key
Pharmaceuticals [Limited], and two of which were one year old and manufactured
by Advance Viral Research [Limited], indicated that all four product samples
were essentially the same product as demonstrated by reverse phase high
performance liquid chromatography. Additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition. These analyses validate both stability and identical structure of
the [RETICULOSE] product represented by aged and new samples." Should the
Wisconsin Study not satisfy the FDA, and should the FDA not consider such prior
anecdotal history, RETICULOSE will continue to be considered as a new drug. In
such event, the uncertain amount of time and costs required for IND approval as
a result of the FDA not accepting the prior history of the drug can be expected
to be financially burdensome and have a material adverse effect on the Company
and its likelihood of ever obtaining any requisite approval in the United
States. The Company is dependent on the AIDS Clinical Trial and
8
<PAGE> 11
other tests and trials that may be commenced in the future, the results of
which, if successful, may assist the Company in receiving an IND for testing on
humans in the United States.
The March 1992 FDA Submission included, among other things, findings from
certain independent research laboratories, including the Wisconsin Study. The
purpose of the March 1992 FDA Submission was to obtain FDA approval for the
Company to conduct human clinical trials regarding the efficacy of RETICULOSE
upon AIDS. The FDA responded with the July 1992 Deficiency Letter and additional
correspondence in September 1995. The Company has not formally responded and
does not anticipate that it will be capable of responding to the FDA in the
immediate future. The Company lacks the financial resources to fund all the
tests and full clinical trials necessary to permit it to resubmit to the FDA the
information required for approval.
There can be no assurance that the FDA will approve the sale or even the
testing on humans of RETICULOSE in the United States, or that RETICULOSE will be
effective in treating viruses of any variety on a wide scale or any other basis.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION",
"BUSINESS -- THE INVESTIGATIONAL NEW DRUG PROCESS" and "TESTING AGREEMENTS."
7. Additional Financing Necessary. There can be no assurance that the
Options, at prices ranging from $.11 to $.36 per Option Share, which Option
Shares are registered for sale under the Registration Statement, will be
exercised in their entirety if at all. Management believes that its current
liquid assets without giving effect to the proceeds which may be derived from
the exercise of all the Options and the three currently exercisable Warrants
described under "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,"
each warrant entitling the holder to purchase 178,378 shares of Common Stock,
should be sufficient to enable the Company to conduct its contemplated
activities for at least 12 months and conduct day to day operations at present
levels, based upon currently monthly operating expenses of approximately
$150,000. See "USE OF PROCEEDS." The exercise prices of certain of the Options
are significantly below the prevailing market price of the Company's Common
Stock. The exercise prices of the Warrants are $0.288, $0.576 and $0.864 per
share. The Company may require additional equity and/or debt financing in the
future to meet the considerable costs of human clinical trials, should the FDA
grant permission for such trials. Such costs have not been ascertained by the
Company. If no Options are exercised, management believes that the Company will
be able to continue its business, which remains in the development stage, at
current levels for approximately 12 months. There can be no assurance that any
additional financing will be available or, if available, that it can be obtained
on terms satisfactory to management. If the Company does not obtain material
proceeds from the exercise of Options, the Company could be dependent upon joint
ventures with, or the sale of certain rights regarding RETICULOSE to, third
parties, the terms of which might not be advantageous to the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" and
"BUSINESS -- EXCLUSIVE DISTRIBUTION AGREEMENTS."
8. Potential Loss of Bahamian Rights. RETICULOSE has been manufactured
only in limited quantities, by the Company's Bahamian subsidiary, Advance Viral
Research Limited ("LTD"), in its facility located in Freeport, Grand Bahama
Island, and RETICULOSE is currently being produced at the Bahamas facility in
limited quantities for preliminary testing and potential submission to
regulatory authorities. There can be no assurance that this facility will have
sufficient capacity, in the event that demand should develop for RETICULOSE. LTD
has a license from The Grand Bahama Port Authority, Limited (the "Port
Authority"), a private company incorporated under the laws of The Bahamas, to
manufacture ethical pharmaceutical products, including RETICULOSE, for export
and sale. LTD's counsel was advised in August 1988, by the Ministry of Health of
the Government of the Bahamas that a license from the Ministry of Health is
required for the manufacture of pharmaceuticals in the Freeport area of Grand
Bahama Island. No proceedings have been instituted or threatened by the Ministry
of Health. If such proceedings are instituted, LTD intends to defend them
vigorously. No assurance can be given that the Company could successfully defend
and would indeed prevail if such a proceeding were commenced. In the event the
Company is required to move its manufacturing facility, it would have a material
adverse effect on the Company. See "LITIGATION."
9. Lack of Product Liability Insurance. The Company, like any
pharmaceutical manufacturer, could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is
9
<PAGE> 12
unaware of any such claims or threatened claims since RETICULOSE was initially
marketed in the 1940's, one study noted adverse reactions in guinea pigs. In the
event any claims for substantial amounts were successful, they could have a
material adverse effect on the Company's financial condition and on the
marketability of RETICULOSE. As of the date hereof, the Company does not have
product liability insurance. The Company has not allocated any portion of the
proceeds that it may receive upon the exercise of any Options, of which there
can be no assurance, to the cost of product liability insurance. There can be no
assurance that the Company would be able to secure such insurance in adequate
amounts, at reasonable premiums, if it determined to do so. Should the Company
be unable to secure product liability insurance, the risk of loss to the Company
in the event of claims would be greatly increased and could materially adversely
affect the Company.
10. Lack of Patent Protection. The Company does not have a patent for
RETICULOSE, although two applications for United States patents have been filed
on behalf of the Company and others are contemplated to be filed. There can be
no assurance that other companies, having greater economic resources, will not
be successful in developing a similar product using processes similar to those
of the Company. There can be no assurance that the Company will obtain such a
patent or, if obtained, that it will be enforceable. The Company has retained
patent counsel for the purpose pursuing additional patent protection for
RETICULOSE. However, there is no certainty that, patents will be granted, or if
granted, that the patents will be sustained if judicially attacked, and, if
declared valid, that the patents, in fact, will operate to protect the Company
from others copying RETICULOSE. The Company has relied upon laws protecting
proprietary information and trade secrets and upon confidentiality agreements to
protect its rights to RETICULOSE and the processes for its manufacture, but
there can be no assurance that such efforts and procedures will continue to be
successful and protect the Company from any competition in the future. See
"BUSINESS -- TESTING AGREEMENTS -- National Cancer Institute Study."
11. Potential Claim for Royalties. If the Company were successful in
selling RETICULOSE, the Company could be subject to claims from the heirs and
the Estate of Mr. Biagio E. LaPenta in connection with royalty payments on the
sale of RETICULOSE. Baguio LaPenta, the heir of Dr. Vincent LaPenta and then
owner of the rights to RETICULOSE transferred such rights in 1965 to Key Inc.,
subject to an alleged royalty arrangement ("Alleged Contract") whereby Key Inc.
was allegedly obligated to deliver royalties to Biagio LaPenta on sales of
RETICULOSE. The Company is aware of litigation commenced by Biagio LaPenta
against Key Inc., the purpose of which was to cause Key Inc., to pay to Biagio
LaPenta royalties as per the Alleged Contract (the "LaPenta Suit"). The Company
believes the LaPenta Suit was unsuccessful and dismissed with no liability on
the part of Key. In February 1973, Cepher Chen Yan-Sun purchased all of the
outstanding shares of Key Inc., among other things, thereby acquiring the rights
to RETICULOSE. Mr. Chen was declared bankrupt by a Hong Kong Bankruptcy Court.
In 1984, Messrs. Bregman and Friedland purchased from the Hong Kong Bankruptcy
Court Receiver, among other things, the rights to RETICULOSE. Based on verbal
legal advice received by Messrs. Bregman and Friedland, Messrs. Bregman and
Friedland believe that any royalty claims were barred as a result of the
purchase from the Hong Kong Bankruptcy Court. Mr. Biagio E. LaPenta died in
1976. The Company would vigorously contest any royalty claim. See
"BUSINESS -- BACKGROUND OF RETICULOSE."
12. Limited Staff for Operations -- Reliance Upon Officers and Key
Personnel. The Company is currently wholly dependent upon the personal efforts
and abilities of its three full-time, executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. See "MANAGEMENT -- EXECUTIVE OFFICERS AND DIRECTORS"
for further information concerning the extent, nature and scope of its officers'
business experience. The loss or unavailability to the Company of the services
of Bernard Friedland or President and Chief Executive Officer Shalom Z.
Hirschman, M.D. could have a material adverse effect on the Company's business
prospects and any potential earning capacity, and, therefore, the Company has
obtained "key-man" insurance on the lives of Mr. Friedland and Dr. Hirschman in
the amounts of $400,000 and $1,000,000, respectively. See "USE OF PROCEEDS." In
the event the Company's level of operations shall significantly increase, the
business may depend upon its abilities to attract and hire additional management
and staff employees. There can be no assurance that the Company will be able to
secure such additional management and staff, if necessary.
13. Government Regulation. The FDA and comparable regulatory agencies in
foreign countries impose substantial requirements upon the introduction of
therapeutic drug products including lengthy and detailed
10
<PAGE> 13
laboratory and clinical testing procedures, sampling activities and other costly
and time consuming procedures. There is no assurance that FDA approval for the
sale of RETICULOSE in the United States will ever be obtained or that the
Company will have adequate funds to finance the necessary clinical studies and
related costs. A New Drug Application ("NDA") was filed with the FDA for
RETICULOSE by Key Pharmaceuticals Limited ("Key"), a subsidiary of Key
Pharmaceuticals Inc. ("Key Inc.") in May 1967 and subsequently withdrawn without
prejudice. Key filed an IND in November 1968 and withdrew it without prejudice
in 1972, shortly before RETICULOSE was sold to Mr. Cepher Chen Yan-Sun of
Singapore. Mr. Chen subsequently was declared bankrupt. See
"BUSINESS -- BACKGROUND OF RETICULOSE." In 1984, Bernard Friedland filed an IND
regarding which the FDA has issued four letters of deficiency and which in 1995
was declared "inactivated". The effect of the FDA and foreign government
regulation will be to delay marketing of RETICULOSE for a considerable period of
time, to impose costly procedures upon the Company's activities and to impede
and/or prevent the Company's ability to compete with larger companies in its
industry. The extent of potentially adverse government regulations which might
arise from future legislation or administrative action cannot be predicted. In
recent years, developing "Third World" countries have become increasingly
thorough in the registration and licensing of pharmaceutical products.
Registration or approval of a pharmaceutical product in one or more other
countries is a prerequisite to obtaining registration for sale in many Third
World countries. In any event, there can be no assurance that sales in Third
World countries may produce significant revenue for the Company.
14. Dilution. Purchasers of the 30,982,400 Option Shares underlying the
Options will realize dilution of $.205, $.200 and $.189 per share, assuming
exercise of 25%, 50% and 100% of the Options at an average exercise price of
$.217 per Option Share and assuming no other issuance of shares of Common Stock.
See "DILUTION."
15. Intense Competition. There are inherent difficulties for any
development stage company, such as the Company, seeking to enter an established
field, particularly a field as capital intensive as the manufacture and sale of
pharmaceuticals. The Company can expect to encounter intense competition from
well known pharmaceutical companies and chemical companies engaged in the
development and marketing of therapeutic drug products. Almost all of such
companies are substantially larger, possessing far greater capital resources,
more substantial operating histories and records of successful operations,
greater personnel and other resources, and more extensive facilities than the
Company now has or will have in the foreseeable future. Accordingly, such
companies are and probably will continue to remain in a far better position to
compete in this industry than the Company. Such companies may succeed in
discovering, developing and marketing products that are either as effective or
more effective than RETICULOSE, which has not yet been established or proven to
be safe or effective as an anti-viral agent to the FDA's or any other regulatory
agency's standards. The Company is not currently, and there can be no assurances
that in the foreseeable future the Company will be, a significant factor in the
pharmaceutical field. Additionally, small development stage entities, such as
the Company, with very limited resources, are at a very serious disadvantage in
attempting to operate in a market against established competitors. See
"BUSINESS -- COMPETITION."
16. Voting Control by Present Management. As of September 2, 1997, the
current officers and directors of the Company beneficially owned 89,160,133
shares of Common Stock of the Company or approximately 30.7% of the 290,290,373
shares of Common Stock deemed outstanding on that date for the purposes of the
percentage calculation, including 13,100,000 of the Option Shares beneficially
owned by Shalom Z. Hirschman, M.D. Assuming the acquisition of all of the Option
Shares pursuant to the exercise of all of the Options, of which there can be no
assurance, the current officers and directors of the Company will own 28.9% of
the outstanding Common Stock. As there are no cumulative voting rights, current
members of management, by virtue of their stock ownership, can be expected to
influence substantially the election of all of the directors of the Company and
thereby continue to impact substantially the Company's business, affairs and
policies. See "PRINCIPAL STOCKHOLDERS" and "DESCRIPTION OF SECURITIES."
17. No Dividends and None Anticipated. The Company has not paid any
dividends upon its Common Stock since its inception and it does not currently
anticipate paying any dividends upon its Common Stock in the foreseeable future.
See "DIVIDEND POLICY", and "DESCRIPTION OF SECURITIES."
18. Lack of Underwriter. The Shares offered hereby will be sold directly
by the Selling Stockholders, from time to time in the market, without an
underwriter. Because an underwriter is not involved in this offering,
11
<PAGE> 14
the services that an underwriter typically would render will not be available to
purchasers of the Shares. Such services typically include, among others,
confirmation of the representations and warranties of the material facts
contained in the prospectus. There has been no independent confirmation or due
diligence investigation undertaken by any third party of any of the
representations made in this Prospectus, which is normally an obligation
undertaken by an underwriter.
19. Benefit to Certain Officers and Directors. Upon completion of the
Company's initial public offering on May 16, 1986, the Company paid $50,000 to
its affiliate LTD in consideration for the acquisition of exclusive rights to
manufacture and market RETICULOSE. In addition, the Company purchased
approximately 15,000 ampules of RETICULOSE from LTD for $45,000 and was
obligated to pay LTD $3.00 per ampule of RETICULOSE for the initial 100,000
ampules (including these 15,000 ampules) purchased the first year and $2.00 per
ampule purchased thereafter. The Company, on December 16, 1987, acquired LTD.
See "BUSINESS -- EXCLUSIVE RIGHTS OF THE COMPANY TO RETICULOSE AND PRODUCTION
ARRANGEMENTS." Such $95,000 was used to prepare LTD's manufacturing facility
based upon what the Company believed was required for the production of
RETICULOSE. Bernard Friedland, then President and a director of the Company, and
William Bregman, Secretary-Treasurer and a director of the Company, were also
officers and directors and owner of 99.6% of the LTD. stock. Messrs. Friedland
and Bregman continue to hold such LTD Stock as trustees for the Company.
20. Broker-Dealer Sales of the Company's Common Stock. The Common Stock is
subject to the Securities Enforcement and Penny Stock Reform Act of 1990, which
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, because the Company's securities do not meet the exceptions to
the penny stock regulations cited above, trading in the Company's securities is
covered by Rule 15g-9 promulgated under the Exchange Act for securities that are
not listed on The Nasdaq Stock Market or any national securities exchange. Under
such rule, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities also are exempt from this
rule if the market price is at least $5.00 per share.
Because the Company's securities are subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities may be
adversely affected. The regulations on penny stocks limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.
In addition, certain states may have rules and regulations that impose
additional sales practice requirements on broker-dealers who sell the Common
Stock.
DILUTION
As of June 30, 1997, the Company had 272,957,269 shares of Common Stock
outstanding, which were issued for an aggregate cash consideration of
approximately $4.2 million. Assuming the exercise of 25%, 50%, and 100% of the
Options at an average exercise price of $.217 per Option Share, a total of
7,745,600, 15,491,200 and 30,982,400 additional shares of Common Stock,
respectively, will be issued, in which event the holders of the Option Shares
will have purchased approximately 2.8%, 5.7%, or 11.4% respectively, of the
Company's then issued and outstanding shares of Common Stock.
Dilution is a reduction in the value of a purchaser's investment measured
by the difference between the purchase price and the net tangible book value of
the shares after purchase. The net tangible book value per share is equal to
stockholders' equity, as shown on the Company's balance sheet, less intangible
assets, divided by the number of shares outstanding. As of June 30, 1997, the
net tangible book value per share of the Company was
12
<PAGE> 15
$.006 per share. Assuming the exercise of 25%, 50% and 100% of the Options, the
net tangible book value per share would be $.012, $.017, and $.028,
respectively, reflecting an increase of $.006, $.011, and $.022 per share,
respectively. Such increase would be derived from the proceeds of exercise of
Options and would inure to the benefit of the Company's current stockholders and
be at the expense of the persons exercising Options at an average price of $.217
per Option Share, who would sustain an immediate dilution to the extent of
approximately $.205, $.200, and $.189 per share, respectively, the difference
between such net tangible book value per share and the average exercise price of
$.217 per share, if no shares of Common Stock were issued other than upon
exercise of the Options.
The following table compares the total number of shares of Common Stock
purchased from the Company. The total cash consideration and the price per share
paid and to be paid by the holders of Options assuming exercise of 25%, 50% and
100% of the Options.
<TABLE>
<CAPTION>
25% OF 50% OF 100% OF
OPTIONS OPTIONS OPTIONS
EXERCISED EXERCISED EXERCISED
--------- --------- ---------
<S> <C> <C> <C>
Net tangible book value per Share before exercise of
Options................................................... $.006 $.006 $.006
Increase per Share attributable to exercise of Options...... $.006 $.011 $.022
Net tangible book value after exercise of Options........... $.012 $.017 $.028
Dilution of book value per Option Share..................... $.205 $.200 $.189
</TABLE>
- ---------------
(1) For the purpose of the table, it is assumed that the 30,982,400 Options will
be exercised at an average exercise price of $.217 per Option Share.
MARKET INFORMATION
The principal United States market in which the Common Stock is traded is
the over-the-counter market. The following table shows the range of reported low
bid and high bid quotations for the Common Stock for each full quarterly period
during the Company's two most recent fiscal years ended December 31, 1995 and
1996, and for the first and second quarters ended March 31, 1997 and June 30,
1997, as reported on the Bulletin Board. The high and low bid prices for the
periods indicated reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
LOW BID (PER SHARE) HIGH BID (PER SHARE)
------------------- --------------------
<S> <C> <C>
Quarter Ending March 31, 1995.............................. $0.08 0.44
Quarter Ending June 30, 1995............................... 0.08 0.19
Quarter Ending September 30, 1995.......................... 0.08 0.305
Quarter Ending December 31, 1995........................... 0.1 0.2875
Quarter Ending March 31, 1996.............................. $0.15 $0.19
Quarter Ending June 30, 1996............................... 0.35 0.8125
Quarter Ending September 30, 1996.......................... 0.44 0.75
Quarter Ending December 31, 1996........................... 0.26 0.62
Quarter Ending March 31, 1997.............................. 0.26 0.47
Quarter Ending June 30, 1997............................... 0.31 0.16
</TABLE>
The approximate number of holders of record of the Common Stock, as of
September 2, 1997 is 2,598 inclusive of those brokerage firms and/or clearing
houses holding the shares of Common Stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
The Company has not declared or paid any dividends on its shares of Common
Stock.
13
<PAGE> 16
DIVIDEND POLICY
The Company has not paid or declared any dividends upon its Common Stock
since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate paying any dividends
upon its Common Stock in the foreseeable future.
USE OF PROCEEDS
The net proceeds to be received by the Company, assuming the exercise of
all the Options, are estimated to be $6,660,510. If 25% of all Options are
exercised at an average exercise price of $.217 per Option Share, the net
proceeds are estimated to be $1,608,679. THERE IS NO ASSURANCE THAT ANY OPTIONS
WILL BE EXERCISED AND ACCORDINGLY THERE IS NO ASSURANCE THAT THE COMPANY WILL
RECEIVE ANY PROCEEDS FROM THIS OFFERING.
<TABLE>
<CAPTION>
ASSUMING EXERCISE OF
---------------------------------
100% OF OPTIONS 25% OF OPTIONS
--------------- --------------
APPROXIMATE APPROXIMATE
USE AMOUNT AMOUNT
- --- --------------- --------------
<S> <C> <C>
Research and Development.................................... $ 666,000 $ 160,000
Clinical Trials and Testing................................. 1,666,500 400,000
Production Facility or Enhancement.......................... 1,533,180 368,000
Production Raw Materials and Supplies....................... 666,000 160,000
General and Administrative, including rent, salaries,
supplies, insurance....................................... 1,000,000 240,000
Bahamian Facility Costs..................................... 333,000 80,000
Professional Fees, Licenses and Permits..................... 333,000 80,000
Working Capital............................................. $ 795,497 $ 120,679
---------- ----------
$6,660,510 $1,608,679
========== ==========
</TABLE>
If substantially fewer than 100% of the Options are exercised, the
Company's priority of its Use of Proceeds shall be as follows: Research and
Development and Clinical Trials and Testing have a priority because they are
essential to the Company's obtaining approval to market RETICULOSE in any
country where it or its distributors are currently seeking such approval;
General and Administrative will increase as a result of the possibility of the
Company determining to engage the services of scientific and pharmaceutical
specialists, if available at satisfactory terms; Professional Fees, Licenses and
Permits are essential in order for the Company to commence the regulatory
approval process and potential for patents; Production Facility or Enhancement
will have reduced priority but remains important to assure the Company's ability
to produce RETICULOSE for all Clinical Trials and Testing. If substantial
revenues are generated from sales of RETICULOSE, through the Company's
distributors or as a result of approvals from one or more countries, of which
there can be no assurance whatsoever, together with the proceeds from exercise
of 100% of the Options, the Company may determine to build a new production
facility. No feasibility study or actual cost estimate of a new production
facility has been prepared but the Company believes that, if substantial
revenues are generated from sales of RETICULOSE, it will have the required
resources if it has received approvals and generated sales. The Company will
also allocate funds from Working Capital, if 100% of the Options are exercised,
as required to increase its administrative staff, and will begin hiring
scientific personnel to assist in Research and Development. There can be no
assurance that qualified personnel will be available at terms satisfactory to
the Company, in light of its limited operations to date.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the exercise of the Options, based on both the expected
utilization of funds necessary to finance the Company's existing research and
development activities and the Company's current objectives, as well as current
regulatory conditions. The Company may reallocate funds from time to time among
the categories shown above or to new categories if it believes reallocation to
be in its best interests. The above does not include the revenues that the
Company may receive, if any, from its Exclusive Distribution Agreements with its
distributors. Prior to application of the net
14
<PAGE> 17
proceeds of from the exercise of Options, if any, to the purposes discussed
above, the Company may invest these proceeds in short-term money market
instruments and government securities.
The Company believes that the net proceeds from the exercise of all of the
Options, together with existing working capital, will be adequate to sustain
continued operations for approximately an 56 month period assuming the Company's
current monthly operating expenditures of approximately $150,000. If only 25% of
the Options are exercised, at an average exercise price of $.217 per Option
Share, the Company will lack funds to build a new production facility but will
be able to enhance its present production capacity, unless revenues are
generated from the arrangements with AVIX, DCT, Commonwealth or from some other
presently unidentified sources, of which there can be no assurance. There can be
no assurance that any Options will be exercised.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997.
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, 1997(1)
----------------
<S> <C>
Convertible Debenture(1).................................... $ 500,000
Stockholders' Equity:
Common Stock, $.00001 par value; 1,000,000,000 shares
authorized; 272,957,269 shares outstanding as of June 30,
1997(1)................................................... $ 2,729
----------
Additional paid-in-capital.................................. $7,772,701
Subscription Receivable..................................... (19,000)
----------
Deficit accumulated in the Development Stage................ (5,823,866)
Deferred Compensation Costs................................. (280,881)
----------
Total Stockholders' Equity........................ $1,651,683
==========
</TABLE>
- ---------------
(1) Subsequent to June 30, 1997, the holder of the Convertible Debenture
exercised its right to convert the entire outstanding principal amount of
the Convertible Debenture into 6,675,982 shares of the Company's Common
Stock.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
During the six month periods ended June 30, 1997 and June 30, 1996, the
Company incurred losses of $972,329 ($.00 per share) and $237,346 ($.00 per
share), respectively. The increased losses were attributable to (i) increased
general and administrative expenses (approximately $189,000 for the six month
period ended June 30, 1996 compared to $752,161 for the six month period ended
June 30, 1997) primarily related to salary and related expenses of Dr. Hirschman
and increased rental expenses for the Company's offices in Yonkers, New York;
and (ii) increased research and development expenses (approximately $74,000 for
the six month period ended June 30, 1996 compared to $195,000 for the six month
period ended June 30, 1997). During the year ended December 31, 1996, the
Company incurred a loss of $1,154,740 ($.00 per Share) compared to $401,884
($.00 per Share) in 1995. The Company's increased losses for the year ended
December 31, 1996 as compared with the year ended December 31, 1995 were
attributable primarily to the employment of Shalom Z. Hirschman, M.D. as
President and Chief Executive Officer of the Company ($0 for the year ended
December 31, 1995 compared to approximately $80,000 for the year ended December
31, 1996), increased research and development expenses (approximately $35,000
for the year ended December 31, 1995 compared to approximately $250,000 for the
year ended December 31, 1996), and the amortization of deferred compensation
costs under Statement of Financial Accounting Standards Board (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which accounts for Options granted in
1996 ($0 for the year ended December 31, 1995 compared to approximately $287,000
for the year ended December 31, 1996). Prior to 1996 the Company did not record,
as an expense, the amortization of deferred compensation costs associated with
the grant of stock options. Administrative expenses and the lack of sales
revenues also contribute to the Company's losses.
For the six month period ended June 30, 1997, the Company derived $2,278 in
sales revenue compared to $15,269 in sales revenue for the six month period
ended June 30, 1996. There were $24,111 in sales revenues in 1996 compared to
$27,328 in sales revenues for 1995. All sales revenues resulted from
distributors purchasing RETICULOSE for testing purposes. All RETICULOSE sold has
been from new production. The Company produces RETICULOSE as needed for testing
purposes, and maintains an inventory of approximately 20,000 ampules. Interest
income was $34,979 for the six month period ended June 30, 1997 as compared to
$18,949 for the six month period ended June 30, 1996. For the year ended
December 31, 1996 and December 31, 1995 interest income was $46,796 in 1996 and
$16,155 in 1995. In 1996, the Company collected $40,000 for the sale of
territorial rights compared to $25,000 for the sale of territorial rights in
1995.
LIQUIDITY
As of June 30, 1997 the Company had current liquid assets of $1,745,443 and
total assets of $2,272,604. As of December 31, 1996, the Company had current
liquid assets of $1,476,047 and total assets of $1,716,800. For the six month
period ended June 30, 1997 the Company (i) obtained $1,000,000 from the proceeds
of the sale of the Debenture (as defined below) and approximately $267,000 from
the exercise of Options.
Until RETICULOSE is registered for sale in a developed or developing
country or in one or more of its distributors territories, sales of RETICULOSE
are not expected to generate significant revenues. There can be no assurances
that RETICULOSE will be available for sale in any developed or developing
country or, even if available, that it would generate significant revenues. FDA
approval to begin human clinical trials will require significant cash
expenditures, the amount of which is not currently determinable. BEFORE
SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM THE FDA, WHICH STATED,
AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT
PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED." As of the date
of this Prospectus, the Company has taken no action with regard to the July 1992
Deficiency Letter or the 1995 deficiency letter because it lacked the resources
to adequately satisfy the FDA concerns. The Company believes
16
<PAGE> 19
this inaction has materially adversely affected the Company's ability to develop
RETICULOSE into a commercially viable product. See "BUSINESS -- THE
INVESTIGATIONAL NEW DRUG APPLICATION PROCESS."
The Company presently intends to prepare and file new Investigational New
Drug Applications with the FDA (the "New IND"). In addition, the Company is
currently pursuing the ongoing Aids Clinical Trial and the NCI Study (the
"Ongoing Studies") both of which studies are contemplated to produce data which
may be usable by Company in connection with the New IND. Because the Company is
only at the preliminary stages of its efforts with regard to the New IND, it is
impossible to determine whether the data from the Ongoing Studies will be able
to be used by the Company in connection with the New IND or if the New IND will
ever be approved by the FDA.
In the event the Ministry of Health of the Government of the Bahamas
attempts to prevent the manufacture of RETICULOSE by LTD for export from
Freeport under its license from the Port Authority, LTD may be required to
relocate the manufacturing facility. Should such relocation become necessary,
the Company currently anticipates being able to obtain a suitable site. The cost
of such relocation, depending upon the site of such relocation, will in any
event be material. See "USE OF PROCEEDS" and "LITIGATION".
The Company's independent accountants' report on the Company's Consolidated
Financial Statements included in this Prospectus includes an explanatory
paragraph in Note 2 to the Consolidated Financial Statements stating that the
Company's ability to continue operations is dependent upon its continued sale of
its securities for funds to meet its cash requirements, WHICH FACTORS RAISE
SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.
Further, the accountant's report does not include any adjustment that might
result from the outcome of this uncertainty. The Company has no immediate plan
to issue any securities.
If the Company does not begin to generate revenues from the sale of
RETICULOSE, and if the Company does not receive significant funds from the
exercise of additional options, it shall be dependent upon additional debt
and/or equity financing, of which there can be no assurance, or it must reduce
expenses or further limit operations.
To the extent any proceeds are derived by the Company from the exercise of
Options, the Company intends to use approximately 35% of such proceeds for
clinical trials, testing and research and development, including the
preparation, filing and processing with the FDA, of the New IND.
CAPITAL RESOURCES
The Company in the past has been dependent upon sales of shares of its
Common Stock and upon the exercise of its warrants issued in the Company's
initial public offering in 1986, all of which have expired and, since the
expiration of the warrants, the Company has been dependent upon the proceeds
from the continued exercise of outstanding options for the funds required to
continue operations at present levels and to fund the planned Research and
Development and Clinical Trials and Testing of RETICULOSE.
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture due February 28, 2007 (the "Debenture"), to RBB Bank
Aktiengesellschaft ("RBB") in an offshore transaction pursuant to Regulation S
under the Act. Pursuant to the terms of the Debenture, as of August 22, 1997,
RBB exercised its right to convert the entire principal amount of the Debenture
into an aggregate of 6,675,982 shares of the Company's Common Stock.
In connection with the issuance of the Debenture, the Company issued to RBB
three warrants (the "Warrants") to purchase Common Stock, each such Warrant
entitling the holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of the Common Stock. The exercise prices of the three
Warrants are $0.288, $0.576 and $0.864 per Warrant share, respectively. Each
Warrant provides that the holder may elect to receive a reduced number of shares
of Common Stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that Warrant as
the excess of the market value of shares of Common Stock over the warrant
exercise price bears to that market value. Each Warrant contains anti-dilution
provisions which provide for the adjustment of Warrant price and Warrant shares
as more particularly set forth therein.
17
<PAGE> 20
Under an agreement approved by the Board of Directors of the Company in
December 1996, the Company retained Interfi Capital Group, Inc. ("Interfi"), a
firm unaffiliated with the Company, to arrange financing for the Company for a
fee. In connection with issuance by the Company of the Debenture, the Company
paid to Interfi the sum of $70,000.
If the FDA or other approvals are obtained, of which there can be no
assurance, funds must to be budgeted by the Company from the exercise of options
and the Warrants, potential grants and/or additional equity, which there is no
assurance will be available.
The Company is currently expending approximately $150,000 per month, which
expenses include salaries, rent, professional fees, license fees and taxes, and
travel, principally between Company's headquarters and its Bahamian facility,
and anticipates that it can continue operations for at least 12 months with its
current liquid assets, if no Options or Warrants are exercised. If all of the
outstanding Options are exercised, the Company will receive net proceeds of
approximately $6,660,510. Those proceeds will contribute to general and
administrative and working capital and will permit the Company to substantially
increase its budget for research and development and clinical trials and testing
and to operate at significantly increased levels of operation, assuming
RETICULOSE receives approvals and prospects for sales increase to justify such
increased levels of operation, of which there can be no assurance. See "USE OF
PROCEEDS" with respect to the uses of such proceeds. However, there can be no
assurance that any additional Options will be exercised. The recent prevailing
market price for shares of Common Stock has been above the exercise prices of
certain of the Options. However, there can be no assurance that the recent
trading levels will be sustained or that any additional Options will be
exercised. In the event that less than 25% or no Options are exercised, and no
other additional financing is obtained by the Company, in order for the Company
to achieve the level of operations contemplated under "USE OF PROCEEDS,"
management anticipates that it will have to limit intentions to expand
operations beyond current levels which involve expenditures of $150,000 per
month. In addition, the Company has in the past sought debt financing, licensing
agreements, joint ventures and other sources of financing, but no such financing
except the Debenture is in place or identified or currently under discussion.
There can be no assurance that any of the Company's distributors will ever
obtain regulatory approvals to test or market RETICULOSE in any territory. In
the event that financing is not available, in order to continue operations,
management anticipates that they will have to defer their salaries. Management
does not believe that, at present, debt or equity financing will be readily
obtainable on favorable terms unless and until FDA approval for Phase I clinical
testing is granted or comparable approval is obtained from another developed or
developing country. Because of the uncertainties involved in the process of
gaining approval for commercial drug use on humans, no assurance can be given
that the Company will be able to sell RETICULOSE. See "BUSINESS -- THE
INVESTIGATIONAL NEW DRUG APPLICATION PROCESS." For a discussion of the risk of
relocation of LTD's manufacturing facility, see "-- LIQUIDITY."
18
<PAGE> 21
BUSINESS
The Company was incorporated under the laws of the State of Delaware on
July 31, 1985, to engage in the production and marketing, promotion and sale of
an anti-viral peptide-nucleic acid complex preparation with the trade name
RETICULOSE. RETICULOSE has not been approved for sale or use, nor are
applications pending for approval for sale or use by the FDA or anywhere in the
world. The Company is in the developmental stage, and has not as yet commenced
any commercial operations. The Company is dependent on registration and/or
approval by applicable regulatory authorities of RETICULOSE in a developed or
developing country, of which there can be no assurance, in order to commence
commercial operations, which shall include the production, marketing, promotion
and sale of RETICULOSE in each jurisdiction where the product becomes
registered. During 1995, 1996 and for the six months ended June 30, 1997 the
Company expended approximately $34,931, $255,660 and $194,673 for research and
development, including expenses related to testing of RETICULOSE.
BACKGROUND OF RETICULOSE
RETICULOSE had been marketed in the United States during the 1940's through
the early 1960's. Under the Federal Food, Drug, and Cosmetic Act, as amended in
1962 (the "1962 Act"), RETICULOSE, among other drugs, was classified by the FDA
as a "new drug" requiring FDA approval prior to any sale in the United States.
Management of the Company believes that, since the 1962 Act, RETICULOSE has not
been marketed for commercial sale. See "-- GOVERNMENT REGULATION" and "-- THE
INVESTIGATIONAL NEW DRUG APPLICATION PROCESS." Although the AIDS Clinical Trial
has been the only controlled clinical trial of RETICULOSE, the published data
for the years 1951 through 1962, largely anecdotal (that is, information
obtained not through double blind studies), indicates that RETICULOSE is an
anti-viral pharmaceutical product which is safe and effective in treating a
number of interferon related viruses such as Asian Influenza, Viral Pneumonia,
Virus Infectious Hepatitis, Mumps, Encephalitis, Herpes Simplex and Herpes
Zoster. There is no published data that confirms that any double blind testing
has been completed which demonstrates that RETICULOSE is safe and effective
against the treatment of any disease.
The open label HPV Clinical Trial at two separate hospitals located in
Buenos Aires, Argentina indicated clinical improvement in half, and adverse side
effects in none of the 20 patients tested. The HPV Clinical Trial was not
conducted nor monitored by the Company.
The Company received information from Shalom Z. Hirschman, M.D., then
Professor of Medicine and Director of the Division of Infectious Diseases of the
Mount Sinai School of Medicine, New York, New York, which information resulted
from the Hirschman Study, which demonstrates that RETICULOSE stimulates the
production of a unique set of chemokines, including Interleukin 1 (IL-1),
Interleukin 6 (IL-6) and Gamma Interferon, and inhibits the replication of HIV
in cell cultures. Dr. Hirschman currently is President and Chief Executive
Officer and a director of the Company.
The Company also has received a letter, dated November 26, 1996, from one
of the scientists conducting the AIDS Clinical Trial, which states as follows:
"The first stage of a double-blind, randomized, placebo-controlled
clinical trial using [RETICULOSE] in the treatment of patients with AIDS,
has been completed. The study protocol received ethical approval from the
Chief Medical Officer's committee."
"Forty-three patients, who had never previously received any
anti-retroviral therapy, were enrolled into the study. Twenty-one patients
received [RETICULOSE] and twenty-two patients received placebo,
administered daily, every other week, for a sixty day period. [P]atients
were observed for a further sixty days after the cessation of therapy."
"Assays for viral load were performed using PCR by LabCorp, and CD(4)
counts were performed by SmithKline Beecham Clinical Laboratories [firms
unaffiliated with the Company]."
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<PAGE> 22
"At the end of the sixty day treatment period, the key results of this
first preliminary stage of the clinical trial were:
"1. A 37% increase in the mean CD(4)-positive T-cell lymphocytes in
the group of patients that received [RETICULOSE], as compared to a 7%
decrease in the group of patients that received placebo, and
"2. A 21% average decrease in HIV viral load, as measured by
quantitative RNA PCR, in the [RETICULOSE]-treated group of patients, in
contrast to a 33% increase in HIV viral load in the group of patients
that received placebo.
"At the end of the sixty-day observation period following cessation of
treatment, the mean viral load of the [RETICULOSE]-treated group was less
than half (42%) of the group given placebo.
"Of the patients who received [RETICULOSE], 83% had a rise in blood
hemoglobin and 61% had a rise in hemoglobin equal to, or greater than, 1
(one) gram per deciliter (g/dl). In contrast, 44% of patients who received
placebo had a rise in blood hemoglobin during the study period, and in only
25% was the increase equal to or greater than 1 g/dl.
"Clinically, 72% of patients who received [RETICULOSE] maintained or
increased their body weight, while this occurred in only 30% of the
placebo-treated patients.
"There were no (zero) toxic side effects observed by physicians or
reported by patients receiving [RETICULOSE] therapy."
The Company is dependent upon the success of studies and tests of
RETICULOSE, of which there can be no assurance, if it is ever to receive
regulatory approval in the United States or developed or developing countries to
market RETICULOSE and generate material operating revenues. See "-- TESTING
AGREEMENTS."
The concept of an anti-viral agent composed of peptones, peptides,
lipoproteins and nucleic acid was an original idea of Vincent M. LaPenta, M.D.
In 1934, Dr. LaPenta produced a product utilizing horse serum albumen, peptones
and ribonucleic acid which had anti-viral properties and evidenced no toxicity.
The product was later modified to substitute bovine serum albumen for horse
serum albumen and was named RETICULOSE. From 1951 through 1962, data was
collected and reported concerning the safety and scope of the use of RETICULOSE.
Much of the data was anecdotal in nature, such as reports by physicians and
pharmacists of results from the use of RETICULOSE, some of which were published
in recognized medical journals. No controlled "double blind" studied were
undertaken during this period. A study of Robert H. Anderson, M.D. and Ralph M.
Thompson, M.D. published in the Virginia Medical Monthly in July 1957, reported
as follows regarding RETICULOSE:
"The exact method of action of this pharmaceutical product, on the
virus, is not fully understood. Since its therapeutic response is so rapid,
its action may be considered a direct one. It either alters the action of
the virus or inhibits the host cells to prevent virus duplication, or it
may do both. In addition, the antigenic properties of the
lipo-protein-nucleic acid complex definitely initiates and promotes
antibody formation and phagocytosis."
In the early 1940's, Chemico Laboratories, Inc. ("Chemico"), a Florida
corporation controlled by Biagio E. LaPenta, the son of Vincent M. LaPenta,
M.D., was established to manufacture RETICULOSE. The Company has been advised
that Chemico, directly and through a distributor, distributed the product for
the treatment of viral diseases in the midwest and southern United States until
the early 1960's.
Two reports in recognized medical journals questioned the efficacy of
RETICULOSE, in tests, respectively, in vitro (i.e., eggs) and in mice by
intracerebral and intraperitoneal injection. The two reports are A.C. Kempe,
"Failure to Demonstrate Antiviral Activity of Reticulose," American Journal of
Diseases of Children, Vol. 103, May 1962, and Behbehani, "The Effect of
Reticulose on Viral Infections of Experimental Animals," Southern Medical
Journal, Vol. 55, February 1962.
Under the 1962 Act, RETICULOSE, among other drugs, was classified as a "new
drug" requiring FDA approval prior to any sale in the United States. A
forfeiture action was instituted in 1962 by the FDA against
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<PAGE> 23
RETICULOSE. The FDA was successful in its litigation and RETICULOSE was
withdrawn from the United States market. The injunction obtained by the FDA
prohibits, among other things, any shipment of RETICULOSE until a New Drug
Application ("NDA") for RETICULOSE is approved by the FDA.
In August 1965, the rights to manufacture and market RETICULOSE were sold,
under a royalty agreement (the "Chemico Agreement"), by Chemico and Biagio E.
LaPenta to Key Inc. through its subsidiary, Key, which, on June 1, 1968,
obtained a license to produce ethical pharmaceutical products, including
RETICULOSE, for export and sale from the Port Authority. Key Inc. entered into
an employment agreement with Biagio E. LaPenta in August 1968. Key proceeded to
construct a manufacturing facility in Freeport, Bahamas, and produce RETICULOSE
strictly for sale in certain foreign markets. An NDA for RETICULOSE was filed
with the FDA by Key in May 1967. After review by the FDA, the NDA was withdrawn
without prejudice when the FDA advised Key that the NDA would not be approved.
Key then filed an IND in November 1968 with the FDA, which IND was pending for
more than four years without favorable action by the FDA and was withdrawn in
1972 without prejudice.
On February 8, 1973, Key Inc. sold all of the shares of Key, its Bahamian
manufacturing facilities, its interest under the Chemico Agreement and the
trademark RETICULOSE, as well as rights to the services of Biagio E. LaPenta, to
Mr. Cepher Chen Yan-Sun. Mr. Chen distributed the existing inventory of
RETICULOSE for a number of years but the product was not manufactured after
Biagio E. LaPenta died in 1976. Mr. Chen was then declared bankrupt.
In 1984, Bernard Friedland and William Bregman purchased from the Hong Kong
Bankruptcy Court Receiver all of the outstanding shares of Key, all rights to
RETICULOSE, including existing inventory of the product, and the license from
the Port Authority. Messrs. Friedland and Bregman then changed the name of Key
to Advance Viral Research Limited (i.e., LTD), and assigned all the rights which
they had acquired individually to LTD.
In 1985, Messrs. Friedland and Bregman organized the Company for the
purpose of producing RETICULOSE, seeking approvals for marketing it world-wide,
and causing rights to RETICULOSE to be assigned in May 1986 from LTD to the
Company as part of the Exclusive Rights and Production Agreement, dated January
3, 1986, between the Company and LTD. For a discussion of the ownership of
rights of RETICULOSE, see "EXCLUSIVE RIGHTS OF THE COMPANY TO RETICULOSE AND
PRODUCTION ARRANGEMENTS."
Laboratory analysis of RETICULOSE by the University of Wisconsin
Biotechnology Center, based on the Wisconsin Study conducted exclusively for the
Company from December 1987 to September 1988, indicated that RETICULOSE contains
both medium and short chain length amino acid link peptides. Mr. Friedland was
of the following opinion regarding the Wisconsin Study:
"The peptide analyses of four [RETICULOSE] samples, two of which were
16 years old and manufactured by [Key], and two of which were one year old
and manufactured by [LTD], indicated that all four product samples were
essentially the same product as demonstrated by reverse phase high
performance liquid chromatography. Additional analyses conducted by gel
cell electrophoresis demonstrated that all four samples were essentially of
the same composition. These analyses validate both stability and identical
structure of the [RETICULOSE] product represented by aged and new samples."
The IND was submitted to the FDA on September 20, 1984. Under FDA
regulations, the Company is not permitted to engage in or authorize human
studies regarding RETICULOSE if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction," until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." Since October 9, 1984, the date of receipt by the FDA of the
IND, the FDA has issued four letters of deficiency with regard to the IND. In a
letter dated November 29, 1984, the FDA indicated, among other deficiencies
noted, that the publications submitted with the IND and relating to the
effectiveness of RETICULOSE on virus related diseases will not be accepted in
support of the safety of RETICULOSE unless the Company can establish that the
proposed formulation of RETICULOSE is the same as the formulation of RETICULOSE
referenced in those publications. In addition, the FDA required, among other
things, that an IND application include relevant information on the chemistry,
laboratory and animal controls to assure the integrity
21
<PAGE> 24
of the dosage from and that safety information be provided for the initial study
proposed to be conducted on humans. The FDA also required that the information
assure the proper identification, quality, purity and strength of the
investigational drug and a description of the drug substance, including its
physical, chemical and microbiological characteristics. On September 11, 1987,
the Company received a further deficiency letter from the FDA, stating that no
data had been submitted supporting in vitro (i.e., eggs) anti-HIV activity or
any criterion for a biological response modifier. See "-- THE INVESTIGATIONAL
NEW DRUG APPLICATION PROCESS."
The March 1992 FDA Submission included, among other things, findings from
certain independent research laboratories. The purpose of the March 1992 FDA
Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the effectiveness of RETICULOSE on AIDS. However, no assurance
can be given as to the time required for the completion of such tests or the
time required for FDA approval, if ever, for commencement of human clinical
trials.
In response to the March 1992 FDA Submission, the Company received from the
FDA the July 1992 Deficiency Letter providing detailed comments with respect to
chemistry, toxicology, microbiology, and clinical areas regarding further
studies and actions on the part of the Company. Following receipt of the July
1992 Deficiency Letter, the Company has made no further submission or response
to the FDA, nor does the Company have any present intention to respond to the
FDA. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED FURTHER CORRESPONDENCE FROM THE
FDA, WHICH STATED, AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO
THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR
PRECLINICAL INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED."
No assurance can be given that any new IND for clinical tests on humans
will be approved by the FDA for human clinical trials on AIDS or other diseases,
or that the results of such human clinical trials will prove that RETICULOSE is
safe or effective in the treatment of AIDS, or other diseases, or that the FDA
would approve the sale of RETICULOSE in the United States if any application
were to be made by the Company. See "-- THE INVESTIGATIONAL NEW DRUG APPLICATION
PROCESS."
Because the FDA has not approved human clinical trials for RETICULOSE in
the United States, the Company has not made arrangements for the preparation of
the protocol necessary for conducting such clinical trials in the United States,
or for a principal investigator for the Phase I human clinical trials, if such
trials are approved by the FDA. The Company may be required, in the absence of
grants or other subsidies, to bear the expenses of the Phase I human clinical
trials. The Company does not know what the actual cost of such trials would be,
but has allocated an amount for this purpose under "USE OF PROCEEDS." If the
Company needs additional financing to fund such Phase I human clinical trials,
there can be no assurance that additional financing will be available to the
Company.
EXCLUSIVE RIGHTS OF THE COMPANY TO RETICULOSE AND PRODUCTION ARRANGEMENTS
On January 3, 1986, the Company and LTD entered into the Exclusive Rights
and Production Agreement pursuant to which the Company purchased the rights to
manufacture and market RETICULOSE worldwide, except the right of LTD to
manufacture, produce and sell for its own account to physicians, clinics and
distribution within the Bahamas, effective upon payment to LTD of $50,000. That
payment was made shortly after consummation of the Company's initial public
offering of securities on May 14, 1986.
The agreement further provided that LTD would produce and sell RETICULOSE
to the Company until the Company's purchase of rights was effective. In
addition, pursuant to this agreement, the Company purchased from LTD at $3.00
per ampule, approximately 15,000 ampules of RETICULOSE for $45,000. The Company
used these 15,000 ampules for testing and promotional inventory. The Company
also was obligated under the agreement to pay LTD $3.00 per ampule of RETICULOSE
for the initial 100,000 ampules (including these 15,000 ampules) purchased the
first year and $2.00 per ampule purchased thereafter. The Company purchased
15,000 ampules, all of which were purchased by the Company for testing and
promotional activity. None of these 100,000 ampules remain in inventory.
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<PAGE> 25
LTD (then known as Key) received a license from the Port Authority to
manufacture pharmaceutical products for export and leased the former Key plant
in Freeport, Grand Bahama Island, consisting of an approximately 29,100 square
foot site containing a one-story concrete block building of approximately 7,100
square feet, which facility is equipped for the testing, production, processing
and packaging of chemical products in tablet and ampule form, including
RETICULOSE.
Historically, this plant had a production capacity of 40,000 ampules per
week and management believes such capacity should support the Company's
requirements for the foreseeable future. Due to the lack of demand for the
Company's product, the production facility was not operating continuously over
the last year. Accordingly, the approximate weekly average production of
RETICULOSE over the last year has been 1,500 ampules per week. The facility is
not used for any purpose other than the production of RETICULOSE. However, if
RETICULOSE should be approved for sale in the United States or any other market
with material demand for its products, of which there can be no assurance, there
can be no assurance that this facility will be sufficient to produce adequate
quantities of RETICULOSE. If and when the Company's business requires a higher
level of production of RETICULOSE that such level of sales will generate
sufficient revenues to permit construction of another production facility.
LTD's counsel was advised in August 1988, by the Ministry of Health of the
Government of the Bahamas that a license from the Ministry of Health is required
for the manufacture of pharmaceuticals in the Freeport area of Grand Bahama
Island. The Ministry's position was confirmed by correspondence dated November
30, 1989. LTD has received an opinion of its counsel in the Bahamas that its
license from the Port Authority is valid for the manufacture, export and sale of
ethical pharmaceutical products in the Freeport area of Grand Bahama Island. No
proceedings have been instituted or threatened by the Ministry of Health. If
such proceedings are instituted, LTD intends to defend them vigorously. However,
there can be no assurance that the Company would be successful in contesting any
action by the government of the Bahamas.
The lease on the Grand Bahama facility expired by its terms in July 1987.
Prior to such time, the landlord advised LTD that he would sell to LTD the then
80-year residue of the 99-year land lease by the Port Authority, dated June 10,
1968, of the property in the Bahamas for a purchase price of $250,000.
Management secured an appraisal from a real estate appraiser in the Bahamas
which indicated that the total value (based upon a depreciated replacement cost
approach) of the property (described in that appraisal as a single-story CBS
building on 29,242.20 square feet of land) and the incorporation of LTD and its
licenses and right to manufacture RETICULOSE (separately valued at B$40,000)
was, as at June 17, 1986, US$580,170. Management secured a later appraisal from
another Bahamian Registered Appraiser which stated that, as of July 24, 1987,
the "property," which consists of the land-lease from the Port Authority (which
has a residue of 80 years to run), the 7,300 sq. feet one-story building thereon
and the plant and equipment contained therein was valued at B$450,000 or
US$459,000.
In November 1987, the Company's stockholders approved the acquisition by
the Company of LTD, the purchase by LTD of the Bahamian manufacturing facility
and the advance by the Company to LTD of the $250,000 purchase price for that
facility, and LTD purchased the facility. On December 16, 1987, management of
the Company, through a Declaration of Trust satisfactory to the Bahamian
Government, completed the acquisition of LTD, as a 99.6% owned subsidiary of the
Company, and paid approximately $29,000 of closing costs. The acquisition was
followed by termination of the Exclusive Rights and Production Agreement.
Management is aware that Bahamian legal restrictions relating to the
purchase of real property interests in the Bahamas by persons not Bahamian
citizens and not owned or controlled by Bahamian citizens might have impacted
the Company's ability to acquire the real property. Inasmuch as LTD was a
pre-existing Bahamian corporation, had secured and maintained the appropriate
licenses and had Bahamian citizens owning 0.4% of the outstanding Ordinary
Shares of LTD, and Messrs. Friedland and Bregman, the Company's principals, had
been approved by the Central Bank of the Bahamas, the Company believes based on
advice of Bahamian legal counsel that LTD's purchase of the property was lawful.
The acquisition of LTD by the Company involved an immediate transfer to the
Company of approximately $46,000 in cash, and of all of Messrs. Friedland's, and
Bregman's beneficial interest in all of the 996 shares of the Ordinary Shares,
B$1.00 par value per share, registered in their names, representing 99.6% of all
of the outstanding Ordinary Shares of LTD. Messrs. Friedland and Bregman agreed
to make a contribution to the capital
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of LTD of approximately $86,000 by forgiveness of indebtedness of LTD to them.
Messrs. Friedland and Bregman also agreed that payment to them for their shares
in LTD would be made from refund of the security deposit by the landlord of the
property, which security deposit was originally paid by Messrs. Friedland and
Bregman.
The Company has not taken any action to seek to cause the Bahamian
Government to approve the formal transfer of the 996 Ordinary Shares of LTD to
the Company. Messrs. Friedland and Bregman have agreed, by virtue of their
execution and delivery of the 996 Ordinary Declaration of Trust, that they
shall, without remuneration, hold their shares "in trust" for the Company,
delineated in such Declaration of Trust as the owner of the beneficial interest
in such shares, and will vote all such shares and transfer the record ownership
thereof as directed by the Company. The Bahamian Government has not acted to
permit the transfer of the shares to the Company.
Management of the Company does not believe that it will be adversely
effected by such lack of formal approval and believes it can operate
indefinitely under its present arrangement. Messrs. Friedland and Bregman
continue to hold the Company's shares of LTD as trustees for the Company and no
royalties or other payments are or shall become due to LTD under this
arrangement.
By letter dated February 13, 1996, LTD was notified that the National
Economic Council of the Bahamas had refused LTD's request for a Free Sales
Certificate for RETICULOSE. As a result of this refusal, the Company has
commenced discussions with the Bahamian governmental authorities for the purpose
of obtaining a Free Sales Certificate, of which there can be no assurance.
Although two applications for United States patents have been filed on
behalf of the Company and others are contemplated to be filed, there can be no
assurance that other companies, having greater economic resources, will not be
successful in developing a similar product using processes similar to those of
the Company. There can be no assurance that the Company will obtain such a
patent or, if obtained, that it will be enforceable.
GOVERNMENT REGULATION
The FDA and regulatory agencies in foreign countries impose substantial
requirements upon and conditions precedent to the introduction of therapeutic
drug products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time consuming procedures.
There is no assurance that FDA approval for the sale of RETICULOSE in the United
States will be obtained. If human clinical trials of RETICULOSE are successful,
of which there can be no assurance, the Company will endeavor to raise the
required capital for the purpose of furthering the FDA process. There can be no
assurance that the Company will ever have available sufficient funds nor is
there any assurance that the Company could satisfy FDA regulatory protocol to
gain approval for RETICULOSE in the United States.
The effect of government regulation in certain countries may be to delay
marketing of RETICULOSE for a considerable period of time to impose costly
procedures upon the Company's activities and to furnish a competitive advantage
to the larger companies which compete with the Company in the field of
anti-viral drugs. The extent of potentially adverse government regulations which
might arise from future legislation or administrative action cannot be
predicted.
Third World countries have become increasingly more thorough in the
registration and licensing of pharmaceutical products and require new products
to prove their non toxicity, stability, safety, efficacy and to maintain records
concerning same in many of the Third World countries. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, it is not expected that the Company will be able to generate
material sales revenues. See "-- MARKETING AND SALES" and "-- EXCLUSIVE
DISTRIBUTION AGREEMENTS."
The Company received from the Port Authority a copy of a grant of authority
confirming the right of LTD to manufacture for export pharmaceutical products.
LTD's counsel was advised in August 1988, by the Ministry of Health of the
Government of the Bahamas that a license from the Ministry of Health (the
"Ministry of Health License") is required for the manufacture of pharmaceuticals
in the Freeport area of Grand Bahama Island. LTD does not currently nor has it
ever had a Ministry of Health License. No proceedings have been instituted or
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<PAGE> 27
threatened by the Ministry of Health. If such proceedings are instituted, LTD
intends to defend them vigorously. In the event the Company is unable to obtain
the Ministry of Health License to the extent it is required to do so, the
Company's ability to manufacture RETICULOSE in the Bahamas could be halted.
Accordingly the Company would have to expend considerable resources to seek out
other possible manufacturing sites. There can be no assurances that the Company
will be successful in locating a new manufacturing facility. The Company is
currently manufacturing RETICULOSE in its Freeport, Bahama facility. No ampules
of RETICULOSE in inventory at the time of the Company's acquisition of Ltd. are
available for sale by the Company. See "LITIGATION."
THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS
The IND process in the United States is governed by regulations established
by the FDA which strictly control the use and distribution of investigational
drugs in the United States. The guidelines require that an application contain
sufficient information to justify administering the drug to humans, that the
application include relevant information on the chemistry, pharmacology and
toxicology of the drug derived from chemical, laboratory and animal or in vitro
testing, and that a protocol be provided for the initial study of the new drug
to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. Under FDA regulations,
the Company is not permitted to engage in or authorize human studies regarding
RETICULOSE in the United States if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company's understanding is that it is rare for a new drug
sponsor to obtain approval of an IND on the basis of an initial submission, as
the FDA almost always requests additional information. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase I, in which the pharmacological effects and possible
toxicity are evaluated in a small number of volunteers or patients; Phase II, in
which the drug is carefully evaluated in a small population of patients for the
effectiveness of the drug and short-term side effects in controlled clinical
trials; and Phase III, in which greater numbers of patients are employed and
broader information is gathered to provide the basis for the drug's proper use
by physicians. The initial IND may cover only Phase I.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included. Sufficient
information is required to be submitted to assure the proper identification,
quality, purity and strength of the investigational drug. A description of the
drug substance, including its physical, chemical, and biological
characteristics, must also be included in the IND. The general method of
preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well documented clinical experience in place of some other pre-clinical work.
After the FDA approves the IND or allows it to become effective, the
investigation is permitted to proceed, during which the sponsor must keep the
FDA informed of new studies, including animal studies, make progress reports on
the study or studies covered by the IND, and also be responsible for alerting
FDA and clinical investigators immediately of unforeseen serious side effects or
injuries.
When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and other information
required to be in an NDA is available to the manufacturer, a manufacturer may
submit an NDA to the FDA. An NDA must be approved by the FDA covering the drug
before its manufacturer can commence commercial distribution of the drug. The
NDA contains a section describing the clinical investigations of the drug which
section includes, among other things, the following: a description and analysis
of
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<PAGE> 28
each clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs, and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the human pharmacokinetic data and
human bioavailability data (or information supporting a waiver of the submission
of in vivo bioavailability data). Also included in the NDA is a section
describing the composition, manufacture and specification of the drug substance
including the following: a full description of the drug substance, its physical
and chemical characteristics; its stability; the process controls used during
manufacture and packaging; and such specifications and analytical methods as are
necessary to assure the identity, strength, quality and purity of the drug
substance as well as the bioavailability of the drug products made from the
substance. NDA's contain lists of all components used in the manufacture of the
drug product and a statement of the specifications and analytical methods for
each component. Also included are studies of the toxicological actions of the
drug as they relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be safe
for use under its proposed labeling conditions and that there is substantial
evidence that the drug is effective for its proposed use(s). Substantial
evidence is defined by statute and FDA regulation to mean evidence consisting of
adequate and well-controlled investigations, including clinical investigations
by experts qualified by scientific training and experience, to evaluate the
effectiveness of the drug involved.
It is not known at this time how extensive the Phase II and Phase III
clinical trials will be, if they are conducted. There can be no assurances that
the data generated will show that the drug RETICULOSE is safe and effective as
described above and even if the data shows that RETICULOSE, is safe and
effective, obtaining approval of the NDA could take years and require financing
of amounts not presently available to the Company.
Management of the Company believed that there was sufficient data available
on RETICULOSE to file an IND with the FDA to investigate the possible effects of
the drug for the treatment of patients with AIDS as well as other interferon
related viruses. This belief was based upon the belief of management of the
Company that RETICULOSE was distributed in the United States and used regionally
from the late 1940's through the 1960's, and upon recent studies. See
"-- BACKGROUND OF RETICULOSE."
Nevertheless, the FDA, in a letter dated November 29, 1984 to Bernard
Friedland, as the sponsor of the IND, stated:
"We have completed our review of your application and find that the
information presented is inadequate and does not allow us to conclude that
it is reasonably safe to initiate clinical trials. The deficiencies are
summarized as follows:
"Regarding manufacturing and controls:
"1. You have not provided an acceptable definition of the drug
moiety. If you propose a lipid-protein-nucleic acid complex, then the
lipid, protein and nucleic acid must be characterized and their
interactions defined.
"2. After the moiety has been acceptably defined, its quantitative
composition in the vehicle must be stated.
"3. You should include appropriate chemical, physical and
microbiological controls to assure the integrity of the dosage form as
well as data from stability studies using these controls.
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"4. Please provide complete information on the composition, size
and dimensions of the container-closure system to be used.
"5. Please include a complete description of the manufacturing and
packaging procedures and the name and address of the producing facility.
An FDA inspection will be required.
"6. Labeling is inadequate until the drug moiety is characterized
and a quantitative composition is proposed. The drug must be labeled
sterile.
"Regarding the clinical and preclinical portions of your submission:
"1. Please provide data that show that your [RETICULOSE]
formulation is the same as the [RETICULOSE] formulation that is the
subject of the articles you have provided. The articles cannot be used
in support of the safety of your product if the formulations are
different. If the formulations are not the same, you must provide
complete pharmacology/toxicology information for your formulation.
"2. Please provide clinical and preclinical data to support the
statement that [RETICULOSE] is either an anti-viral or a biological
response modifier, or both.
"3. We are reserving full comment on your clinical protocol until
you have provided the necessary safety information. However, we have
these preliminary comments.
"a. The study objectives are not stated clearly.
"b. [Some of the raw materials used in RETICULOSE] are animal
antigens capable of inducing adverse reactions in humans. What
precautions will be taken with regard to this possibility?
"c. You have not submitted a patient consent form."
On March 27, 1987, the Company advised the FDA that the Freeport, Grand
Bahama manufacturing facility for RETICULOSE had been put into "good
manufacturing process" condition and requested an FDA inspection. The Company
advised the FDA that stability data and other requested information would be
forwarded by the Company as a separate submission in conjunction with this
inspection.
On May 22, 1987, the Company submitted to the FDA what the Company
considered to be the requested information for the completion of the submission
of the IND for RETICULOSE.
On September 11, 1987, the FDA responded to the Company's May 22, 1987
submission, stating the FDA finding that "essentially no new information has
been provided," and further that "they were unable to conclude that it is
sufficiently safe to initiate clinical trials."
The deficiencies noted in the September 11, 1987 letter from the FDA were
as follows:
"There is no scientific rationale provided for the use of [RETICULOSE]
in patients with HIV infections. Please submit data which support in vitro
anti-HIV activity. There are no data submitted which support any criterion
for a biological response modifier. Without a scientific rationale and
supporting in vitro data there is no basis for allowing your study to
proceed. Once a rationale for use of the drug has been established, the
following should be addressed:
"1. There are no data provided that show that the product you
intend to manufacture is the same [RETICULOSE] formulation that is the
subject of the articles cited in support of safety. As acknowledged in
the application, the formulation of [RETICULOSE] has changed over the
years. It appears from our records that there have been at least three
formulations. We are unable to determine from the submission exactly
when the formulation changes took place or specifically which
formulation was used in each of the various animal and human studies.
"The assertion that 'the sponsor was trained by the original
manufacturer of RETICULOSE and is utilizing the same formulation with
identical raw materials, in the same facility with the same equipment as
was utilized for the RETICULOSE described in the animal safety studies
submitted with this application, and in the published human clinical data'
is not sufficient. Please provide data that characterize the present
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<PAGE> 30
formulation and its relationship to previous formulations. If possible,
please submit a letter of authorization from the original manufacturer to
allow us to refer to their data in order to make the comparison. We may not
refer to another manufacturer's data on file with us on your behalf without
specific written authorization.
"2. We have concerns regarding the allergenic potential of
[RETICULOSE]. Please refer to the referenced study reported in 1968 by
Kozima et al. of Nikken Chemicals Co. Ltd. In that study, [RETICULOSE]
was administered intraperitoneally to guinea pigs and the animals were
subsequently rechallenged 3 weeks later. "Shock symptoms" were observed
in 7 of the 10 animals. These studies should be repeated with the
currently proposed formulation and a detailed report on all animals,
including necropsy findings, should be submitted.
"3. The manufacturing and controls information requested in our
November 29, 1984 letter have not been adequately addressed:
"a. Please provide a complete characterization of the raw
materials used for the drug substance.
"b. Provide a complete characterization of the nucleic
acid/lipoprotein complex.
"c. After the above characterizations have been completed, set
specifications for the final drug substance and for stability
profiles.
"d. Provide comparative stability data for all formulations.
"e. Specifications and methods must be submitted for the dosage
form which assure reproducible chemical, physical, and
microbiological attributes.
"f. Complete manufacturing details for the drug substance and
dosage form must be submitted with clear descriptions of conditions,
in-process controls and facilities.
"g. Labeling must define quantities of each ingredient and state
that the product is sterile.
"4. We will not conduct an inspection of the manufacturing facility
until the application is complete in other respects.
"5. Comments on the clinical protocol will not be made until the
necessary safety information has been submitted."
On February 28, 1992, the Company submitted an amendment to the IND,
including the following:
"1. Scientific Rationale for use of RETICULOSE in patients with HIV
infection.
"2. Additional data to support the antiviral activity of
[RETICULOSE] with in vitro and in vivo studies against the Influenza A
virus, and the Hepatitis A and B viruses.
"3. Product [reproductibility] comparison with earlier formula, and
comparative stability.
"4. Current toxicity/safety data and discussion concerning
allergenic potential plus earlier toxicity studies.
"5. Manufacturing and controls information, including facility
description, the Master Formula and product specifications for release,
and clinical research labeling.
"6. Revised Clinical Protocol and Patient forms.
"7. Clinical Reports from 1988-1989 and prior to 1984."
The March 1992 FDA Submission included, among other things, findings from
certain independent research laboratories. The purpose of the March 1992 FDA
Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the efficacy of RETICULOSE on AIDS.
On July 31, 1992, the Company received from the FDA the July 1992
Deficiency Letter stating, among other things, that the Company's resubmitted
IND application, dated February 28, 1992, "does not adequately respond
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to the concerns listed in [the FDA's] letter of Company dated September 11,
1987." The July 1992 Deficiency Letter further states that the following
deficiencies must be addressed prior to initiation of clinical studies:
"Chemistry
"1. Please provide the supplier, biological source and method of
preparation for . . . either directly or by cross-reference to the
appropriate Drug Master Files(s). Also, please submit a certificate of
analysis and acceptance specifications for each of these substances as well
as for the inactive ingredients.
"2. Please revise the manufacturing process to use one of the
USP-recommended waters . . .
"3. Please submit documentation concerning the controls and
verification of sterility along the entire aseptic processing pathway,
including sampling points. Also, please state the final temperature
obtained in the autoclave during the reaction step of the manufacturing
process and during sterilization of the ampules.
"4. Please describe the chemical tests used to determine the dilution
factor during manufacturing. Also, please provide sample calculations.
"5. Please describe in detail the analytical methods, including
sterility and LAL test, used for drug product release specifications.
"6. Please submit batch analyses on all available preclinical and
clinical lots of the drug product.
"7. Please establish a complete stability protocol describing test
parameters, testing stations and storage conditions, which include room
temperature, elevated temperature, elevated humidity and light exposure.
"8. Please revise the labeling on individual ampules and ampule
shipping cartons to be in accordance with FDA Guideline, "Compilation of
Regulatory Labeling Requirements for Human Drug Products," pages 40-44
(copy enclosed). Please include the following information on the label: a)
"Reticulose For Injection; b) "CAUTION: New Drug. Limited by Federal law to
investigational use" in accordance with 21 CFR 312.6 (copy enclosed); c)
the potency, i.e. mg/ml of the active ingredient(s) in the drug product; d)
an identifying lot or control number from which the manufacturing history
can be determined; e) the name or code number of the patient; f) the name
and address of the investigator; g) the expiration date of the drug; and h)
the study and/or protocol designation.
"Toxicology
"9. Please perform 4-week repeat dose toxicity studies in two species,
one being a non-rodent, with the proposed investigational article in a
manner consistent with Good Laboratory Practices. Studies should include
hematologic and clinical chemistry measurements and complete
histopathologic evaluation of all animals. Doses selected should include
some clearly toxic doses, if feasible.
"Microbiology
"10. Please perform in vitro studies to determine what effect, if any,
[RETICULOSE] has on HIV replication in models of both acute and chronic
(i.e., low persistent) infections. Studies have indicated that agents which
modulate macrophage and T-cell functions such as IL-2 and TNF-[alpha], may
modulate viral expression and/or release of HIV from infected cells. The
potential for drug-associated up-regulation of virus production is an
important consideration in the analysis of risk/benefit. At a minimum,
activation potential should be evaluated in the following human cell types:
"(a) Freshly isolated peripheral blood mononuclear cells;
"(b) At least one established T-cell line (e.g., H9, MT4, MT2 or
MOLT4); and
"(c) One line representative of the monocyte/macrophage lineage
(e.g., U937, U1 or OM10.1).
"Studies employing a variety of different human cell cultures and HIV
strains are encouraged.
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"Clinical
"11. Please submit the name and address and a statement of the
qualifications (curriculum vitae or other statement of qualifications) of
the principal investigator.
"12. Please define inclusion and exclusion criteria according to
current standard terminology and practice. For example, the confirmatory
test for HIV infection is the Western Blot, not the ELISA test for HIV
antibody.
"13. Please provide an initial proposed dosage based on preclinical
safety information. Please also refer to the comment under "Toxicology" in
developing preclinical safety data.
"14. Please provide a rationale for the proposed study parameters, for
laboratory monitoring, and for toxicity evaluation. In addition, please
define endpoints which are measurable and can be quantified and which may
be subject to statistical analysis. For example, please specify what
constitutes a "significant and consistent increase" in CD4 lymphocyte
count. Please provide safety monitoring which is appropriate for the
preclinical safety data. In particular, please provide monitoring for the
potential for anaphylaxis, as seen in the preclinical repeat dose study in
guinea pigs.
"15. Please revise the informed consent document to reflect the
preclinical safety and effectiveness data.
"16. Please provide a concise rationale for the proposed sample size
and define the proposed statistical methodology. In general, interim
analyses are not appropriate for a 12 week phase 1 study.
"Until you have submitted the above required information for items 1-16,
and we notify you that if it is safe to initiate the studies, you may not
proceed with the proposed study.
"We also have the following advice which we believe would improve your IND:
"Chemistry
"The following chemistry issues must be addressed prior to studies beyond
initial phase [1 and 2] studies:
"17. Please establish the identity(ies) and structure(s) of the active
component(s).
"18. Please identify the impurities contained in the drug substance(s)
and drug product and establish individual limits for the impurities.
"19. Please incorporate into the drug product specifications and
identification test(s) and an assay for the active ingredient(s) using
properly validated analytical methods.
"20. Please identify the supplier and composition of the ampules.
"Microbiology
"21. Please clarify the following with respect to the data submitted
in the submission:
"(a) Please specify whether the peptide nucleic acid solution and
the [RETICULOSE] preparation used by Dr. Lionel Resnick are the same or
a different preparation.
"(b) Please provide the units of p24 and RT activity and explain
whether the results represent percent inhibition or activity. In
addition, please clarify the discrepancy in the numbers shown in the
submission and in the published report (table 3).
"The following microbiology issues should be addressed concurrent with
phase [1 and 2] studies:
"22. Please use pre-clinical studies in appropriate animal models
of retrovirus infection to define and characterize the activity of
[RETICULOSE].
"23. Please perform studies to investigate whether [RETICULOSE] can
induce an antibody response which might inhibit its activity against
HIV.
"24. We encourage you to investigate the mechanism by which
[RETICULOSE] inhibits HIV."
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BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED FURTHER DEFICIENCY
CORRESPONDENCE FROM THE FDA, DATED JUNE 1, 1995, WHICH STATED, IN ADDITION TO
THE COMMENTS STATED BELOW, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID
NOT PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED":
"1. The protocol lacks sufficient description of many basic clinical
trial elements, such as randomization, blinding and a well defined control
group.
"2. A rationale for the proposed sample size of "two to ten" patients
is not provided.
"3. The rationale for the dose, dosing frequency and duration of
therapy is not provided.
"4. The eligible patient population is inadequately defined. In
particular, the CD4 count range for patient eligibility should be
specified.
"5. The primary efficacy assessment of the study (reduction in viral
load) is not consistent with the following statement in section F.O.
Biostatistical Considerations:
"The estimated number of patients eligible for entry into this
trial who will experience an adverse event as defined as an
opportunistic infection or development of another neoplasm at 90 days is
2% or less. We wish to detect such a patient in the group of up to 5 and
provide him/her with whatever alternative therapy is deemed advisable."
"This statement suggests that there is confusion around the objective
of this study and how a sample size can be estimated based on the desired
objective.
"6. The statement "Patients experiencing an adverse event within the
first 7 days of treatment will be considered evaluable for toxicity but not
for efficacy" is unacceptable because all enrolled patients should be
evaluated for both safety and efficacy.
"7. The protocol indicates (section M.2.1) that "elimination of
culturable virus, based on Viral Load assays" is one of two laboratory
parameters of interest, however, nowhere else are viral cultures discussed.
Similarly, "restoration of immune function by tests of delayed
hypersensitivity and optional functional assays" is mentioned in section
M.3.2.2 as an additional laboratory endpoint, however it is not further
described.
"8. The principle [sic.] investigator is not identified.
"9. An informed consent document is not provided."
No assurances can be given that the Company's IND will ever be approved by
the FDA or that results of any testing will demonstrate that RETICULOSE is safe
or effective in the treatment of disease. The Company has not formally responded
to the July 1992 Deficiency Letter or the 1995 deficiency letter, nor have any
of the studies cited in those letters been undertaken. The Company currently
contemplates that it may file a new IND. There can be no assurances as to the
costs or the timing of the refiling of a new IND. The Company does not currently
have the resources to complete the FDA approval process. The Company intends to
allocate certain funds from the exercise of Options, provided at least 25% of
the Options are exercised, for the purpose of filing a new IND with the FDA. No
assurance can be given, however, that any Options will be exercised, that a new
IND will be accepted by the FDA or that any tests previously conducted or to be
conducted will satisfy FDA requirements.
TESTING AGREEMENTS
For the period January 1, 1995 through June 30, 1997 the Company expended
approximately $500,000 cash on testing and research and development activities,
exclusive of securities transferred to induce persons to engage in testing
RETICULOSE.
Testing in the United States
On September 20, 1984, the IND was submitted for a Phase I type study to
determine if there was any pharmacological activity in humans against HIV. See
"-- THE INVESTIGATIONAL NEW DRUG APPLICA-
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TION PROCESS." In response to the FDA deficiency letters in 1984 and 1987
regarding the IND, the Company undertook the Wisconsin Study, a series of
protein tests for product control and protein fragment identification which were
conducted by the University of Wisconsin's Biotechnology Center. See
"-- BACKGROUND OF RETICULOSE." Prior to the completion phase of the Hirschman
Study, the rationale for trial of RETICULOSE in humans was based upon in vitro
studies which the Company believed had demonstrated at least partial activity
against HIV. In October 1989 and December 1989, respectively, Southern Research
Institute, Birmingham, Alabama and Vironc Laboratories, North Miami Beach,
Florida conducted in vitro screenings of RETICULOSE against the HIV virus in two
separately conducted independent laboratory screenings. In these screenings,
RETICULOSE was shown to be either partially or significantly active against HIV
at specific dilutions and was non-cytotoxic. In addition, a historical search is
being conducted and the time line is being developed to connect the current
RETICULOSE product and its manufacturer with the original product and its
manufacturer. This search is being documented for eventual submission to the FDA
to further substantiate the identity of the current product which is the subject
of the IND. In October 1989, International Diagnostics Ltd. Inc., Dania,
Florida, an independent testing laboratory, undertook standard mouse toxicity
assays to demonstrate toxicity of RETICULOSE. Results indicated no apparent
signs of toxicity in RETICULOSE treated animals at specific doses. Management of
the Company originally believed that due to the early safety record and
published reports of human use that the FDA would permit the initial Phase I
trials in humans after approximately six months. If sufficient funds are
available from the exercise of Options or other sources, the Company will
consider taking the requisite scientific steps to satisfy the FDA that the
formulation of RETICULOSE is identical to the formulation reported in the prior
anecdotal history and studies. The time and costs required for IND approval as a
result of the FDA not accepting the prior history of the drug is currently not
known to the Company but could be considerable. Certain of the foregoing
studies, excluding, among others, the Hirschman Study and the AIDS Clinical
Trial, were submitted to the FDA as part of the March 1992 FDA Submission, but
were not deemed sufficient by the FDA.
Canadian Contract
The Company, during the period from 1992 to 1995, had been seeking approval
in Canada for controlled distribution of RETICULOSE. It submitted an application
for a limited study on 24 patients with Kaposi's Sarcoma, a condition associated
with AIDS, the approval of which application was pending in 1995. However, due
to delay in obtaining the approval for this study and after receiving deficiency
letters from the Health Protection Branch of the Health and Welfare Department
of Canada, the Company had withdrawn the application to have that study
commence.
Pursuant to an agreement, dated June 5, 1993 with Richard Morisset, M.D., a
Canadian physician (the "Canadian Agreement"), the Company granted Dr. Morisset
up to $90,000 for Dr. Morisset's undertaking a Compassionate Treatment of ten
HIV-positive patients treated with RETICULOSE and ten HIV-positive persons not
treated with RETICULOSE (the "Canadian Compassionate Treatment"). Although the
Company advanced $72,000 under this agreement, the Company does not currently
intend to advance any further monies for the Canadian Compassionate Treatment.
Further, due to the delays in obtaining information and guidance from Dr.
Morisset regarding the Canadian Compassionate Treatment, the Company believes
that no further efforts are being employed by Dr. Morisset in connection with
the Canadian Compassionate Treatment. The Company currently believes that no
further work will be performed by Dr. Morisset and anticipates formally
terminating this agreement in the near future.
TRM Management Corp.
Pursuant to an agreement dated August 20, 1991 between the Company and TRM
Management Corp. ("TRM"), a Florida corporation unaffiliated with the Company
(the "TRM Agreement"), TRM performed, at the Company's expense, a controlled
open clinical trial test in Haiti during a period of 30 days, on 53 patients
with early onset Hepatitis "A" or Hepatitis "B", approximately one-half of whom
were treated with RETICULOSE and approximately one quarter of whom were
untreated for each of these two diseases, to assess the effectiveness of
RETICULOSE against the Hepatitis "A" virus and Hepatitis "B" virus in accordance
and in compliance with
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<PAGE> 35
the Hepatitis Open Label Clinical Trial Protocol developed by TRM, which
involved diagnosis otherwise than by the positive method of liver biopsy (the
"Haiti Tests").
In accordance with the TRM Agreement, Matthew Cohen prepared a paper which
describes the methods and results of the Haiti Tests (the "Results Paper"). The
Results Paper was published in the Journal of the Royal Society of Health,
December 1992 issue (the "Journal"). Matthew Cohen is not affiliated with or
related to Leonard Cohen, who acted as a consultant to the Company.
The Results Paper states, among other things, that the Haiti Tests resulted
in certain "positive clinical and laboratory effects" regarding the use of
RETICULOSE against the Hepatitis "A" virus and Hepatitis "B" virus, especially
against Hepatitis "B." The Company believes, however, that the Haiti Tests may
have been limited in terms of its methodology and results. The Company is
considering such factors relative to future testing. In accordance with the
terms of the TRM Agreement, the Company has issued to the stockholders and
certain associated persons of TRM (i) an aggregate amount of 10,000,000 shares
of the Common Stock (the "TRM Shares") and (ii) an option to acquire, at one
time, during a period that subsequently was extended until March 15, 1997,
10,000,000 shares of the Common Stock at a purchase price of $.05 per share (the
"TRM Options"). Through December 31, 1996, the Company has received $333,333
pursuant to the issuance of 6,666,666 Shares in connection with the exercise of
TRM Options by David Sass, as an assignee of Troy Posner, and by Richard
Waldman, two of the three original TRM stockholders. Messrs. Waldman, Sass and
Matthew Cohen are Selling Stockholders under the Registration Statement.
Pursuant to an amendment, the TRM Options were exercisable through March 15,
1997 at an exercise price of $.08. See "SELLING STOCKHOLDERS" below.
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata"), a Michigan limited partnership
unaffiliated with the company (the "Plata Agreement"), pursuant to which Plata
agreed at its expense, to perform a demonstration on ten patients of both sexes
from 18 to 45 years of age for 45 days, without control group, at Campus #1
University C.B.E.P., University of Santo Domingo, Santo Domingo, Dominican
Republic in accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in the Protocol
against AIDS (the "Demonstration"). The Protocol provides, among other things,
that the treatment consists of RETICULOSE along with vitamin and protein
supplements.
The preliminary and final results of the Demonstration were previously
reported by the Company in its Reports on Form 8-K filed with the Commission on
July 10, 1992 and November 6, 1992.
The Demonstration was conducted on the patients from May 1992 through July
1992. The Demonstration was supervised by Angelo A. Chinnici, M.D., of New
Jersey, and administered by medical doctors certified to practice in the
Dominican Republic. A videotape has been produced by Plata memorializing the
Demonstration, which videotape was delivered to the Company in August, 1992. In
August 12, 1992 the Company received from Plata a translated written transcript
of a press conference (the "Press Conference") called and conducted by Plata in
Santo Domingo, Dominican Republic on August 7, 1992 (the "Transcript"). The
Press Conference was held by Plata following the completion and the release of
preliminary results of the Demonstration.
The Transcript, a copy of which has been filed with the Company's Report on
Form 8-K with the Commission on August 13, 1992, provides, among other things,
statements from Dr. Joaquin Perez-Mendez, the Director of the Program for
Control of Sexually Transmitted Diseases (Procets) a governmental organization
in the Dominican Republic, who participated in the administration of the
Demonstration, Dr. Charles Dunlop, the Surgeon General of the Dominican
Republic, Dr. Norman de Castro and Dr. Rafael Alcantara, who is associated with
the Center for Sexually Transmitted Diseases in the Dominican Republic.
Generally, the Transcript states that the Doctors expressed "optimism and
hopefulness" and encouraged further testing of the efficacy of RETICULOSE
against AIDS. Further, the Transcript notes that Dr. Dunlop stated that "my job
from the point of view of the government has been to help to register the
medicine. And we are doing all the studies possible with the Public Health
Center and Drug Administration to see that this
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<PAGE> 36
happens." As of the date hereof, the Company has not independently verified or
otherwise substantiated the accuracy or completeness of the Transcript or the
Press Articles. The Demonstration conducted by Plata was not a double-blind
study. However, as of the date of this Prospectus, no registration certificate
has been granted by the Dominican Republic, and there can be no assurance that
such certificate will be issued. The Company is currently not pursuing the
registration certificate in the Dominican Republic.
The Company has also been made aware that newspaper articles appeared in
Spanish language newspapers (published in the Dominican Republic) regarding the
Press Conference (the "Press Articles") and interviews with Drs. Perez-Mendez
and Alcantara. Certain of the Press Articles report that the preliminary results
of the Demonstration were "very encouraging" and that the "laboratory results
subsequent to the treatment, reveal a more than 50 percent reconversion of the
cell immunological system in almost all of the patients being maintained with
relatively little favorable change in the only patient who did not complete the
treatment." According to certain of the Press Articles, certain of the doctors
attending the Demonstration stated: "Although it [(the Demonstration)] does not
have the representativeness which a study of this caliber requires, precisely
due to the small number of patients involved in the same, and above all due to
the fact that it did not rely on a control group which permits us to make some
significant comparisons, basically it is a good job of research and the results
[are] clearly excellent."
The Company received from Plata certain written information, certain copies
of which are incorporated by reference into the Company's Reports on Form 8-K
delivered for filing to the Commission on July 10, and July 23, 1992 (the "Plata
Statement"). The Plata Statement reports, among other things, certain positive
preliminary results of the Demonstration (the "Results"). The Plata Statement
advised the Company of preliminary improvement of the patients participating in
the Demonstration. Specifically, according to the Plata Statement, "all patients
showed weight gain, as well as resolution of malaise, joint pain, and diarrhea
and that those patients "initially presented with herpetic lesions (i.e.,
shingles) showed clearing and well healed vesicles. There was a decrease in
lymphotenopathy in the majority of patients, and their oral thrush was greatly
improved."
In August 1992, the Company received from Lionel Resnick, M.D., F.A.A.D.,
F.A.C.P., then Chief, Retrovirology Laboratories, Departments of Dermatology and
Pathology, Mount Sinai Medical Center of Greater Miami, in Miami, Florida,
written correspondence relating to the Demonstration stating that, based upon
Dr. Resnick's review of the results of the Demonstration, a "dramatic" clinical
improvement was documented over the forty-five day period of the study [and]
there were significant changes in laboratory surrogate markers consistent with
beneficial drug effects" although "a high-level of enthusiasm is tempered by the
lack of 1) a homogeneous study population and 2) defined clinical endpoints."
In October 1992, the Company received from Anthony J. Mangia, M.D.,
certified by Plata to be an expert in the area of AIDS research, further written
correspondence relating to the Demonstration (the "Mangia Correspondence"). As
an independent observer, Dr. Mangia visited the Demonstration site, reviewed
scientific data regarding the in vitro activity of RETICULOSE against various
viruses, interviewed the study physicians, examined some of the patients, and
reviewed the written results of the Demonstration. The Mangia Correspondence
provides, "Review of the data submitted indicates that RETICULOSE may be an
effective alternative treatment for AIDS patients" and concludes that the
results of the Demonstration appear to indicate that RETICULOSE is "well
tolerated, with no significant adverse reactions to the drug."
The Mangia Correspondence also indicates that the patients he examined had
experienced an "amelioration in symptoms and a sense of well being" by the time
the Demonstration had concluded. The Mangia Correspondence does, however,
contain several criticisms of the Demonstration, including, among other things,
the brevity of the Demonstration, the lack of stratification according to CD4
count, the small number of subjects, the inclusion of nutritional supplements
along with the RETICULOSE, and the lack of pre- and post-treatment weights and
performance status evaluation of the subjects. The Mangia Correspondence
concluded that the results of the Demonstration appear to indicate that further
studies in animals and humans appear to be warranted. The Mangia Correspondence
suggested that such further studies need to be better controlled and performed
on a larger scale with more sophisticated methods, including the monitoring of
endogenous interferons, other cytokines and "surrogate markers" for HIV
activity, than the Demonstration.
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<PAGE> 37
The Company received from Plata a copy of a report dated September 30,
1992, from Angelo A. Chinnici, M.D. regarding the Demonstration (the "Chinnici
Report"). The Chinnici Report stated the hypothesis, objectives, methodology,
clinical tracking and procedures involved in the Demonstration. The Chinnici
Report comments that the majority of the subjects involved experienced "a
dramatic clinical improvement, i.e., reduction in oral thrush, reduction in
herpetic lesions, and improvement in certain dermatological conditions, such as
seborrheic dermatitis and eczema. The most dramatic change was observed in the
number of CD 4 and CD 8 lymphocytes, as well as in the CD 4 and CD 8 ratio. Nine
of the ten patients experienced an increase in the CD 4 cells, the most dramatic
being that of an initial count of 27 at the initial phase of treatment, which
rose to 193." The Chinnici Report further noted that "the administration of
RETICULOSE [,among other things,] produced no adverse side affects. . . [nor
caused] significant anemia [nor any] decrease in the [subjects'] white blood
cell count." Further, the Chinnici Report states that RETICULOSE may cause a
halt to viral replication and may produce endogenous interferon, which
ameliorates a patient's condition. The Chinnici Correspondence also indicated,
among other things, however, that the Demonstration was limited in that the
subjects were treated for a short period of time and there was no control group.
The Company has not independently verified any of the statements contained in
either the Mangia Correspondence or the Chinnici Correspondence.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares and options to purchase an additional 5,000,000 shares
at $.08 per option share through July 9, 1994 (the "Plata Options") and
5,000,000 option shares at $.10 per option share through July 9, 1994 (the
"Additional Plata Options"). Pursuant to several amendments, the Plata Options
and the Additional Plata Options were exercisable through April 30, 1996. Under
another amendment, as of December 31, 1996, there were outstanding Plata Options
to acquire 813,000 shares at $.11 per share and Additional Plata Options to
acquire 858,100 shares at $.13 per share. The Company offered and the holders of
the Plata Options and the Additional Plata Options accepted offers to further
extend the exercise date of the Plata Options and the Additional Plata Options
through April 30, 1997 in consideration for an increase in the exercise price to
$.12 per option share as to the Plata Options and $.14 per option share as to
the Additional Plata Options.
The Company believes the Demonstration will not significantly impact the
FDA's decision to (i) approve the pending IND filed with the FDA or (ii) approve
of the marketing, sales or distribution of RETICULOSE within the United States.
Further, the Company believes the Demonstration will not significantly impact
the Company's ability to obtain approval for the marketing, sales or
distribution of RETICULOSE anywhere in the world.
Argentina Agreements
On December 27, 1993, the Company entered into an agreement with Juan
Carlos Flichman, M.D., Permanent Advisor to the Argentine Association Against
Sexually Transmitted Diseases, whereby Dr. Flichman agreed to conduct a double
blind study of RETICULOSE in Argentina of (i) 40 patients who have been
diagnosed with acute Hepatitis "B" and (ii) 20 patients diagnosed with Hepatitis
"C" (the "Argentina Study"). The treatment of acute Hepatitis "B" patients was
expected to last for approximately 20 days, followed by a 60/90 day observation
period and of Hepatitis "C" patients was expected to last for 180 days, also
followed by a 60/90 day observation period. Dr. Flichman, however, indicated to
the Company that the Argentina Study was delayed because of the Argentina Health
Ministry.
In April, 1996, the Company entered into a new agreement (the "1996
Argentina Agreement") with DCT, pursuant to which DCT and Dr. Flichman each
agreed to conduct the HPV Clinical Trial. In June, 1994, the Company entered
into an exclusive distribution agreement with DCT, whereby the Company granted
to DCT, subject to certain conditions precedent, the exclusive right to market
and sell RETICULOSE in certain South American countries, including Argentina and
other MERCOSUR States; this agreement was superseded by another exclusive
distribution agreement as of April 1, 1996. Pursuant to the 1996 Argentina
Agreement, the HPV Clinical Trial commenced and is being conducted pursuant to a
protocol developed by Dr. Flichman. The purpose of the HPV Clinical Trial is to
assess the efficacy of RETICULOSE on HPV. The protocol calls for, among other
things, a study to be performed with clinical and laboratory follow-up on 20
patients between the ages of 18 and 50 years of age. The HPV Clinical Trial is
not a double-blind study and will not include a placebo control group or
reference to any other anti-viral drug.
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<PAGE> 38
Pursuant to the 1996 Argentina Agreement, the Company paid approximately
$34,000 to DCT to cover out of pocket expenses associated with the HPV Clinical
Trial. The 1996 Argentina Agreement further provides that, at the conclusion of
the HPV Clinical Trial, DCT shall cause Dr. Flichman to prepare and deliver a
written report to the Company regarding the methodology and results of the HPV
Clinical Trial (the "HPV Written Report"). On April 22, 1996, the Company was
informed by DCT that the HPV Clinical Trial had commenced on April 15, 1996. In
September 1996, the Company received from Dr. Flichman the HPV Written Report.
The HPV Written Report stated that, when RETICULOSE was applied topically to 20
patients (six males and 14 females) diagnosed to be infected with HPV, two of
the 20 patients had total remissions and eight of the 20 patients experienced
clinical improvement ranging from a reduction in color intensity, size and
texture. Further, the HPV Written Report provides that no adverse side effects
were observed in any of the 20 patients and only one patient experienced redness
of the skin that disappeared spontaneously within 24 hours. Upon delivery of the
HPV Written Report to the Company, the Company delivered to the principals of
DCT Options to acquire 2,000,000 shares of the Common Stock for a period of one
year from the date of the delivery of the HPV Written Report, at an exercise
price of $.20 per Option Share, all of which are included for registration under
the Registration Statement. As of December 31, 1996, 473,500 shares of Common
Stock were issued pursuant to the exercise of these Options for an aggregate
exercise price of $94,700. The HPV Clinical Trial was funded by the Company. See
"-- EXCLUSIVE DISTRIBUTION AGREEMENTS -- Agreement with DCT S.R.L."
Hirschman Study
The Company in late 1995 issued a grant of $30,188 to The Mount Sinai
School of Medicine, New York City, New York, for the purpose of studying the
mechanism, if any, by which RETICULOSE inhibits replication of HIV. The study
was conducted by Shalom Z. Hirschman, M.D., then Professor of Medicine and
Director of the Division of Infectious Diseases of The Mount Sinai School of
Medicine. The results of this research were presented by Dr. Hirschman at
Biomedicine '96, the annual meeting (sponsored by Science, a journal of the
American Association for the Advancement of Science) of the Association of
American Physicians, American Society for Clinical Investigation, and American
Federation for Clinical Research (associations of medical honor societies), held
May 4-6, 1996, in Washington, D.C. The manuscript of Drs. Hirschman and Chey Wei
Chen, entitled "Peptide Nucleic Acids Stimulate Gamma Interferon and Inhibit the
Replication of the Human Immunodeficiency Virus," was published in Clinical
Research (the official compendium of the proceedings of the meeting) in the
August 1996 issue of Journal of Investigative Medicine, a publication of the
American Federation for Clinical Research. Dr. Hirschman's report of the result
of the Hirschman Study is set forth under "-- BACKGROUND OF RETICULOSE."
AIDS Clinical Trial
The first stage of the AIDS Clinical Trial, conducted at the Queen
Elizabeth Hospital, Bridgetown, Barbados, was completed in late November 1996.
The report of the result of that stage is set forth under "-- BACKGROUND OF
RETICULOSE." As of September 2, 1997, the Company had expended approximately
$250,000 to cover the costs of the AIDS Clinical Trial and anticipates that at
least an additional $75,000 will be expended on the AIDS Clinical Trial.
National Cancer Institute Study
In March 1997, the Company entered into the NCI Agreement. See "THE
COMPANY." The NCI Agreement states that the Government Agencies "[do] not
directly or indirectly endorse any product or service provided, or to be
provided, whether directly or indirectly related to either this [agreement] or
to any patent or other intellectual property license or agreement which
implements this [agreement] by its successors, assignees, or licensees. The
[Company] shall not in any way state or imply that this [agreement] is an
endorsement of any such product or service by the U.S. Government or any of its
organizational units or employees."
MARKETING AND SALES
RETICULOSE is not being sold commercially anywhere in the world. As of the
date hereof, the efforts of the Company or any of its representatives have
produced no material benefits to the Company regarding the
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<PAGE> 39
Company's ability to have RETICULOSE sold commercially anywhere in the world.
The Company has entered into Exclusive Distribution Agreements with five
separate entities whereby the Company has granted exclusive rights to distribute
RETICULOSE in the countries of China, Japan, Hong Kong, Macao, Taiwan, Mexico,
Channel Islands, Isle of Man, British West Indies, Jamaica, Haiti, Bermuda,
Belize, Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile.
Pursuant to these agreements, the distributors are obligated to cause RETICULOSE
to be approved for commercial sale in such countries and upon such approval, to
purchase from the Company certain minimum quantities of RETICULOSE to maintain
the exclusive distribution rights. Leonard Cohen, a former consultant to the
Company, has informed the Company that he is an affiliate of two of these
entities. See "-- EXCLUSIVE DISTRIBUTION AGREEMENTS." The marketing plans of the
Company for RETICULOSE are still dependent upon registration of RETICULOSE for
sale in the various jurisdictions where its distributors are seeking approvals.
There can be no assurance that the Company or any distributor will ever
secure registration of RETICULOSE and the Company to date has received no
information that would lead it to believe that it will be positioned to sell
RETICULOSE commercially anywhere in the world in the immediate future. The
Company initially targeted its sales and marketing efforts to those countries
where RETICULOSE was previously marketed by its prior owners for a number of
years as an anti-viral agent in the treatment of Asian Influenza, Viral
Pneumonia, Virus Infectious Hepatitis, Mumps, Encephalitis, Herpes Simplex and
Herpes Zoster. Those countries included Singapore, Hong Kong, Malaysia, Taiwan,
the Philippines and Malta. Registration of RETICULOSE will be required in such
countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. Efforts to register
RETICULOSE for sale in these countries has been met with significant resistance
by the regulatory authorities. Until RETICULOSE is registered and approved for
sale in the United States, in another developed country or in the other
countries included in the distributors' territories, there can be no assurance
that the Company will generate significant sales of RETICULOSE. If at least 25%
of the Options are exercised, the Company may file a new IND for RETICULOSE with
the FDA. For the years ended December 31, 1996, 1995 and 1994, the Company
reported no commercial sales except limited sales for testing purposes ($24,111,
$27,328 and $22,402, respectively). RETICULOSE is not legally available for use
anywhere in the world, except for testing purposes. See "-- TESTING AGREEMENTS."
COMPETITION
There are inherent difficulties for any development stage company seeking
to enter an established field, particularly in a field so capital intensive as
the manufacture and sale of pharmaceuticals. The Company, if it is ever
successful in securing FDA and other regulatory approvals, will encounter
intense competition engaged in the development and marketing of drug products,
all of which are substantially larger, possess far greater capital assets, have
substantial operating histories and records of successful operations, greater
financial and other resources, more employees and far more extensive facilities
than the Company now has or will have in the foreseeable future. Accordingly,
such companies are in a far better position to compete than the Company.
Moreover, such companies may succeed in discovering, developing and marketing
anti-viral products that are more effective than RETICULOSE. The Company at
present is not, and there can be no assurances that the Company will become in
the foreseeable future, a significant factor in the field in which it proposes
to engage. Additionally, small "start-up" firms, such as the Company, with very
limited resources, are at a very serious competitive disadvantage against
established companies. The Company hopes to compete, however, based on cost and
the effectiveness of RETICULOSE.
EMPLOYEES
The Company has four full-time employees, including its three executive
officers and an administrative employee. Shalom Z. Hirschman, M.D., President
and Chief Executive Officer and a director of the Company, Bernard Friedland,
Chairman of the Board and a director of the Company, and William Bregman,
Secretary-Treasurer and a director of the Company, each devote all of their
business time to the day-to-day business operations of the Company.
Additionally, the Company may hire, as and when needed, and as available,
such sales and technical support staff and consultants for specific projects on
a contract basis. See "MANAGEMENT."
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CONSULTING AGREEMENTS
Leonard Cohen
On September 11, 1992, the Company entered into a consulting agreement with
Leonard Cohen (the "Initial Cohen Agreement") for a one-year term commencing on
that date. Prior to the execution of the Initial Cohen Agreement, Mr. Cohen had
no relationship with the Company other than as a former holder of the Company's
Class C Warrants which had been redeemed. Mr. Leonard Cohen has no relationship
to Matthew Cohen who was one of the principals of TRM. The Initial Cohen
Agreement required that Leonard Cohen provide the Company certain consulting
services including, among others: (i) the identification of pharmaceutical
companies which may have an interest in engaging in joint ventures or other
agreements to advance the testing and study of RETICULOSE; (ii) services related
to achieving approval of RETICULOSE for commercial sale in the United States and
in foreign countries; (iii) the location of investment banking firms and venture
capital firms, the purpose of which is to raise capital for the Company through
securities offerings and/or debt financing; (iv) the dissemination of public
information about the Company to persons who may have an interest in RETICULOSE;
and (v) making contacts with persons in the investment and financial
communities.
The Initial Cohen Agreement provided that: (i) upon execution, the Company
would issue to Leonard Cohen 500,000 shares of the Common Stock, which were
issued on October 20, 1992; and (ii) upon completion of 50 hours of services,
the Company would issue to Leonard Cohen an additional 500,000 shares of the
Common Stock, which were issued on February 28, 1993. Mr. Cohen provided the 50
hours of services to the Company during the last quarter of 1992 and the first
quarter of 1993. In addition, upon execution of the Initial Cohen Agreement, the
Company granted to Leonard Cohen the option (the "Cohen Option"), exercisable
commencing as of September 11, 1992, and ending on September 10, 1993 (which
date has been extended through April 30, 1997), to acquire 3,000,000 shares of
the Common Stock at an exercise price of $.09 per share (which exercise price
has been increased to $.13 per share). The Initial Cohen Agreement granted to
the holders of the Cohen Options a one time piggyback registration right (that
is, the right generally to cause the Company to include in its registration
statement, if permissible, filed by the Company with the Commission) with
respect to the shares of Common Stock issued to Mr. Cohen for his services and
the shares underlying the Cohen Option. As of February 28, 1997, Options to
purchase 1,300,000 shares have been exercised for cash consideration of
$156,000.
On February 28, 1993, the Company entered into another consulting agreement
with Leonard Cohen (the "Cohen Agreement") for a three-year term commencing on
March 1, 1993. The Cohen Agreement provides that Leonard Cohen will provide to
the Company financial business consulting services concerning the operation of
the business of the Company and possible strategic transactions. The Cohen
Agreement was entered into because the Company believed that the Cohen Agreement
provided incentive to Mr. Cohen to provide greater services to the Company and
because Mr. Cohen's hourly obligations under the Initial Cohen Agreement had
been satisfied during the last quarter of 1992 and the first quarter of 1993. On
February 28, 1993, pursuant to the Cohen Agreement, 3,500,000 Shares of the
Company's Common Stock were issued to Mr. Cohen and his designees as follows:
(i) Leonard Cohen -- 2,000,000 Shares; and (ii) persons not affiliated with the
Company or any of its officers or directors -- 1,500,000 Shares, which have been
sold. The Cohen Agreement also granted to Mr. Cohen and his designees a one-time
piggyback registration right with respect to those shares. The services provided
and to be provided by Mr. Cohen under the Cohen Agreement were not all inclusive
nor was the compensation given to Mr. Cohen under the Cohen Agreement. As a
result, in consideration for the additional services provided by Mr. Cohen in
connection with the introduction and negotiation of the Exclusive Distribution
Agreement with C.U.R.E. Pharmaceutical Corp. ("C.U.R.E."), a Delaware
corporation, which agreement was terminated because of the failure of C.U.R.E.,
but was then superseded by an agreement with Avix International Pharmaceutical
Corp. ("Avix"). The Company has been informed by Avix that Leonard Cohen is a
controlling shareholder, director and executive officer of Avix. Mr. Cohen was
issued an additional 2,500,000 Shares in April 1994. Further, the Company agreed
to issue to Leonard Cohen an additional 300,000 Shares in 1995, at a time when
the Shares were valued at $.14 per Share, in consideration for expenditures
incurred by Mr. Cohen in connection with securing for the benefit of the Company
and the affiliated distributor, the continued services of Dr. Chinnici. Such
additional 300,000 shares were inadvertently not issued to Mr. Cohen in 1995,
are included in the Registration Statement, and shall be accounted for as
general and administrative expense at $.14 per share, the
38
<PAGE> 41
price when the Shares were to be issued. See the discussion below and
"-- EXCLUSIVE DISTRIBUTION AGREEMENTS."
By letter of September 15, 1993, Leonard Cohen requested registration of
the Shares and Option Shares issued to Mr. Cohen and his designees pursuant to
the Initial Cohen Agreement and the Cohen Agreement. The Company issued the
above referenced additional 2,500,000 Shares to Mr. Cohen for services rendered
by Mr. Cohen in connection with the introduction, negotiation and execution of
an Exclusive Distribution Agreement between the Company and C.U.R.E. dated April
25, 1994, which were in addition to his services under the Cohen Agreement.
Resnick Consulting Agreement
The Company entered in a Medical Advisor Agreement with Lionel Resnick,
M.D., dated as of September 14, 1993, providing for Dr. Resnick's consulting
services and assistance to the Company as reasonably requested by the President
of the Company, but not more than three hours per month without the prior
written consent of the Company, for an initial term of two years commencing on
September 1, 1993, extended for successive one-year periods unless either party
gives the other 60 days prior written notice of its intent not to renew prior to
the expiration of the then current term, at an hourly fee of $200. The Company
has not requested, and Dr. Resnick has not provided, any services pursuant to
the Medical Advisor Agreement. This agreement was formally terminated effective
August 31, 1997 by notice by the Company to Dr. Resnick on March 21, 1997.
C.U.R.E.
The Company's Exclusive Distribution Agreements with C.U.R.E. and its
affiliate were terminated according to their terms on May 31, 1995 because of
C.U.R.E.'s inability to obtain Approvals in a timely manner and its ability to
obtain requisite funding to pursue such Approvals. See "-- EXCLUSIVE
DISTRIBUTION AGREEMENTS -- Termination of Agreements with C.U.R.E." To induce
C.U.R.E. to enter into the Exclusive Distribution Agreement, in April 1994, the
Company issued Messrs. Elliot Bauer and Lee Rizzuto a total of 1,250,000 Shares
and granted Options to acquire 10,000,000 Shares at $.10 per Share (which
exercise price has been increased to $.11 per Share) exercisable through May 1,
1996. The Shares issued to Messrs. Cohen, Bauer and Rizzuto have been accounted
for as a general and administrative expense at a price $.055 per Share. Mr.
Rizzuto sold all of the 625,000 shares and all shares underlying his options.
Mr. Bauer sold 850,000 Option Shares underlying his Option prior to April 30,
1996, and Mr. Bauer also transferred 312,500 Shares to Mark Montifiore and
312,500 Shares to his minor children and he disclaims any beneficial interest
with respect to such Shares. The 4,150,000 Option Shares underlying Mr. Bauer's
Option and the 312,500 Shares owned by Mr. Bauer's minor children as well as the
112,500 Shares owned by Mr. Montifiore are also being registered to permit
public resale hereunder. In addition, Mr. Cohen sold 1,300,000 Option Shares
underlying his Options prior to April 30, 1996. See "SELLING STOCKHOLDERS."
Shalom Z. Hirschman, M.D.
The Company entered into a consulting agreement with Shalom Z. Hirschman,
M.D., dated as of May 24, 1995, pursuant to which Dr. Hirschman agreed to
provide services relating to development and location of pharmacological and
biotechnology companies and agreed to assist the Company in seeking joint
ventures with and financing of companies in such industries through May 1997. As
consideration for such services, the Company issued 1,000,000 shares of Common
Stock to Dr. Hirschman, which have been accounted for as a general and
administrative expense, at a price of $.11 per share, the market price on the
date of issuance, and granted Options to acquire 5,000,000 Shares at $.18 per
Option Share, exercisable through May 24, 1998. Dr. Hirschman sold the 1,000,000
outstanding shares in 1995 and exercised an Option to acquire 900,000 Option
Shares at $.18 per Option Share during 1996. As a result, 4,100,000 of the
Option Shares underlying that Option are registered under the Registration
Statement.
In connection with the Consulting Agreement with Dr. Hirschman, the Company
also issued to Deborah Silver 100,000 Shares and granted to her options to
purchase 500,000 shares exercisable for one year at $.18, which option was fully
exercised and all shares issued under which were sold prior to April 30, 1996.
However,
39
<PAGE> 42
the 100,000 Shares owned by Ms. Silver were not sold and therefore are included
for resale under the Registration Statement. Such options and Shares were issued
for services to the Company and were also accounted for as a general
administrative expense at $.18 per share.
The Company, as of March 24, 1996, executed an addendum to the Consulting
Agreement with Dr. Hirschman, which addendum did not become effective until
April 1, 1996. Pursuant to the addendum, Dr. Hirschman agreed to provide
additional services to the Company through May 2000. Such additional services
include furthering the Company's financial and investment banking efforts, and
assisting the Company in joint efforts for the purpose of securing manufacturing
and sale approvals for RETICULOSE, as well as efforts to pursue regulatory
approvals and fulfill regulatory protocols regarding RETICULOSE. In
consideration for the increased term and additional services, especially in
assisting the Company in its investment banking efforts, the Company granted to
Dr. Hirschman and his designees Options to purchase an aggregate of 15,000,000
Shares, exercisable as follows: Options to purchase 5,000,000 Shares from March
24, 1996 through March 23, 1999 at $.19 per Option Share; Options to purchase
5,000,000 Shares from March 24, 1997 through March 23, 1999 at $.27 per Option
Share; and Options to purchase 5,000,000 Shares from March 24, 1998 through
March 23, 1999 at $.36 per Option Share. The Board of Directors of the Company
has determined that the market price of shares of the Common Stock at the date
the addendum was agreed to was $.18 to $.185 per Share. Dr. Hirschman
transferred (i) Options to acquire 500,000 Option Shares at an exercise price of
$.19 per Option Share during 1996, which Options were exercised by Dr.
Hirschman's transferee in 1996 and (ii) in April 1997, (x) Options to acquire
500,000 Option Shares at an exercise price of $.27 per Option Share and (y)
Options to acquire 500,000 Option Shares at an exercise price of $.36 per Option
Share.
As of October 14, 1996, the Consulting Agreement with Dr. Hirschman was
terminated and an Employment Agreement with Dr. Hirschman became effective. See
"MANAGEMENT -- EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS."
EXCLUSIVE DISTRIBUTION AGREEMENTS
Agreement with DCT S.R.L.
Under an Exclusive Distribution Agreement, dated in June 1994, superseded
by another agreement, dated April 1, 1996, between the Company and DCT, the
Company granted to DCT, subject to certain conditions precedent, the exclusive
right to market and sell RETICULOSE within the territories of Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile (the "DCT Agreement"). The term of
the DCT Agreement was for a three-year period with additional three-year renewal
terms from the date DCT obtained all approvals, licenses, permits and
registrations (the "Approval") to import and distribute RETICULOSE in Argentina,
subject to DCT's right to extend the DCT Agreement so long as DCT was diligently
pursuing the Approval and meeting certain annual minimum purchase requirements
as set forth in the DCT Agreement, in the event the Approval for Argentina was
obtained. DCT was granted an Option to purchase for a period of one year from
the date of Approval, 2,000,000 shares at a purchase price of $.20 per Share
(the "DCT Option"). The Approval has not been obtained to date.
As a result of the 1996 Argentina Agreement, discussed under
"BUSINESS-TESTING AGREEMENTS -- Argentina Agreement" above, and the Health
Ministry's approval for and the commencement of the test of RETICULOSE on the
Human Papilloma Virus (HPV) on patients, the Company agreed that the DCT Option
vested and the 2,000,000 Option Shares underlying the DCT Option are included
for public resale by the three principals of DCT in the Registration Statement.
See "SELLING STOCKHOLDERS."
Termination of Agreements with C.U.R.E.
On April 25, 1994, the Company entered into an Exclusive Distribution
Agreement with C.U.R.E. pursuant to which C.U.R.E. was granted exclusive rights
to distribute RETICULOSE within the countries of China, Japan, Thailand,
Singapore, Hong Kong, Taiwan and Malaysia the ("C.U.R.E. Territory").
The Exclusive Distribution Agreement with C.U.R.E was for an initial term
of five years, subject to certain automatic extensions if C.U.R.E. satisfied its
minimum purchase obligations and obtained Approval for one or
40
<PAGE> 43
more countries constituting the C.U.R.E. Territory, within one year from the
Agreement. Because of its failure to obtain any Approval, the Company terminated
the rights of C.U.R.E. under this agreement.
As of June 1, 1994, the Company had also entered into an Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutica Central Americas Ltd., a
Delaware corporation and an affiliate of C.U.R.E. ("C.U.R.E. C/A Ltd.").
C.U.R.E. C/A Ltd. was required to purchase a minimum of 20,000 milliliters of
RETICULOSE during the first year following Approval and such Approval had to be
obtained within one year of this agreement. C.U.R.E. was unable to obtain such
Approval and the Company terminated C.U.R.E.'s exclusive distribution rights,
effective May 30, 1995, following acknowledgment by C.U.R.E. and C.U.R.E. C/A
Ltd. that neither had obtained Approvals and both lacked additional financing to
pursue the Approvals.
Agreements with AVIX and Unistone
As the result of the termination of agreements with C.U.R.E. and C.U.R.E.
C/A Ltd., the Company entered into an agreement, dated as of June 2, 1995, with
AVIX, pursuant to which AVIX has been granted the exclusive import and
distribution rights during a period of five years from the date that AVIX
obtains Approval for any of the countries formerly within the C.U.R.E. Territory
(the "AVIX Far East Agreement"), and a separate Exclusive Distribution Agreement
with AVIX with respect to Mexico, which rights previously belonged to C.U.R.E.
C/A Ltd. AVIX has informed the Company that it has commenced negotiations with
parties in Mexico and China for the purpose of seeking initial authorization for
testing RETICULOSE, following which Approval for those countries shall be
sought. The Company has been informed by AVIX that certain of the principals of
AVIX (including Leonard Cohen who is an officer and shareholder thereof) were
formerly principals of C.U.R.E. The terms of the agreement with AVIX are
substantially similar to the agreements with C.U.R.E. and C.U.R.E. C/A Ltd.
except that the territory in the AVIX Agreement does not include Thailand,
Malaysia and Singapore but does include Macao.
On December 28, 1995, the Company entered into a separate agreement with
AVIX and Beijing Unistone Pharmaceutical Co., Ltd. ("Unistone"), a company
organized under the laws of the People's Republic of China, with headquarters in
Beijing, China (the "Unistone-AVIX Agreement"). In connection with the
Unistone-AVIX Agreement, the Company and AVIX agreed to utilize the services of
Unistone for the purposes of securing approval to test RETICULOSE in China, with
the intent of gaining Approval for China. Under the Unistone-AVIX Agreement,
during a period of three years commencing on the date of Approval for China,
Unistone shall be the exclusive distributor and have a limited trademark license
for RETICULOSE in China. Unistone is obligated to purchase not more than 100,000
doses of 0.5 ml each in bulk form or 20,000 ampules of 0.5 ml doses for purposes
of seeking Approval for China, at least 1,000,000 doses by the first anniversary
of Approval for China, at least 3,000,000 doses during the next 12-month period,
and at least 10,000,000 doses during each subsequent 12-month period, all at a
purchase price of U.S. $1.00 per 0.5 ml dose shipped in bulk, or U.S. $1.26 per
dose if ordered in prepackaged, four-dose 2 ml ampules. This purchase price is
to be reduced by an aggregate of $100,000 on account of a fee to Unistone for
trials and testing of RETICULOSE for Approval for China. If these annual minimum
purchase requirements are satisfied, the period of the agreement is
automatically extended through the eighth anniversary of the date of Approval.
In addition, AVIX is obligated to pay Unistone $50,000 for its services in
seeking Approval for China. In fact, as of December 31, 1996, the Company had
given Unistone, for testing purposes, 1,600 ampules of RETICULOSE without
charge. Unistone has not fulfilled its obligation under the agreement to obtain
Approval before April 1996.
Under a separate agreement between the Company and AVIX, AVIX shall receive
a royalty equal to 12.5% of the total sales of RETICULOSE in Asia so long as the
Company owns any right to RETICULOSE. AVIX also is entitled to certain payments
by the Company in the event that the Company sells manufacturing rights for
RETICULOSE.
In July, 1996, the AVIX Far East Agreement was amended to grant AVIX the
additional country of Macao and reflect AVIX's waiver of its rights with respect
to the countries of Singapore, Thailand and Malaysia, as well as AVIX's penalty
rights under the AVIX Far East Agreement that would have vested in the event
that the Company could not produce sufficient quantities of RETICULOSE within
certain periods of time. The penalty
41
<PAGE> 44
rights were waived, in part, because AVIX has not yet generated a sufficient
demand for RETICULOSE within its distribution territory. AVIX has not generated
any sales of RETICULOSE.
The period of time during which AVIX must obtain Approval for any of the
countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to the Company.
The Company has not received the $8,000 monthly payment since November, 1996;
the Company has received a total of $40,000 in payments from AVIX. The Company
is currently discussing with AVIX, AVIX's obligation to pay the $8,000 monthly.
If AVIX is complying with the AVIX Far East Agreement, including certain annual
minimum purchase requirements after Approval is obtained (see below) of which
there can be no assurance, the term is automatically extended for five
additional five year terms. The agreements with AVIX further provide that the
results of all studies, research data, documentation and research publications
regarding RETICULOSE in which AVIX has an interest are owned by the Company.
The separate agreement for Mexico requires Approval within one year and has
minimum annual purchase requirement commencing at 20,000 milliliters. The
Company has extended the period for AVIX to secure Approval from Mexico because
management of the Company believes that AVIX has been diligently seeking
Approval from the Ministry of Health of Mexico.
AVIX is required, pursuant to the AVIX Far East Agreement, to purchase
RETICULOSE for $500,000 upon obtaining Approval and after one year after
Approval for China, AVIX is required to purchase RETICULOSE for an additional
$500,000 at $12 per 2 ml ampule.
Agreement with Commonwealth
Under an Exclusive Distribution Agreement, dated October 24, 1994, as
supplemented on November 2, 1995 (collectively, the "Commonwealth Agreement")
with Commonwealth, the Company has granted to Commonwealth Pharmaceuticals
("Commonwealth"), subject to certain conditions precedent, the exclusive right
to market and sell the Company's pharmaceutical drug RETICULOSE within the
territories of the Channel Islands, The Isle of Man, the British West Indies,
Jamaica, Haiti, Bermuda and Belize (collectively, the "Commonwealth
Territories"), and the right (not exclusive) to import, warehouse, market, sell
and distribute RETICULOSE within the territory of Saudi Arabia. The term of the
Commonwealth Agreement as to the Commonwealth Territories is for successive
three year periods (each extension period being with the prior mutual consent of
the parties) from the date Commonwealth obtains Approval for any one of the
Commonwealth Territories.
Pursuant to the Commonwealth Agreement, Commonwealth purchased from the
Company 1,500 ampules of RETICULOSE at a purchase price of $12.00 per ampule (2
milliliters per ampules) and delivered to the Company $5,000 as a signing
payment (for a total payment of $23,000). Further, pursuant to the Commonwealth
Agreement, in the event Approval for any of the Commonwealth Territories is
obtained, Commonwealth is obligated to purchase from the Company (i) $225,000
worth of RETICULOSE within one year from the date of Approval for any of the
Commonwealth Territories; (ii) $642,000 worth of RETICULOSE during the second
year from the date of Approval for any of the Commonwealth Territories; and
(iii) $1,026,000 worth of RETICULOSE during the third year from the date of
Approval for any of the Commonwealth Territories. Commonwealth also is obligated
to purchase from the Company $225,000 worth, $822,000 worth and $1,914,000 worth
of RETICULOSE, respectively, during the first three years from the date of
Approval. In addition, pursuant to the Commonwealth Agreement, the Company has
granted to Commonwealth the right to acquire 3,000,000 shares of the Common
Stock at a purchase price of $.25 per share at any time and from time to time
for a period of one year from the date that certain tests are conducted and a
paper is published with respect to such test of RETICULOSE. The Company has been
informed by Commonwealth that certain of the affiliates of Commonwealth were
formally affiliated with Plata.
Agreement with Dormer Laboratories Inc.
On November 9, 1993, the Company entered into an agreement by which it
granted to Dormer Laboratories Inc., a Canadian corporation ("Dormer"), the
exclusive rights to import, warehouse, market, sell and distribute RETICULOSE
within Canada for a period of five years from the grant of import approval for
Canada, provided that Dormer meets certain RETICULOSE purchase minimums. Because
Approval for Canada was not obtained
42
<PAGE> 45
by November 9, 1995, the Company has the right to terminate this agreement on 90
days prior written notice to Dormer. Although Dormer has purchased no RETICULOSE
from the Company, the Company has not exercised its right to terminate the
agreement.
PROPERTY
Since February 1997 pursuant to a five year lease with an unaffiliated
third party, the Company leases approximately 6,100 square feet at 200 Corporate
Boulevard South, Yonkers, New York, at a base rent of $85,400 per annum. The
Company uses the demised premises as a business office.
The Company currently maintains its executive offices at 1250 East
Hallandale Beach Boulevard, Hallandale, Florida 33009, pursuant to a three year
lease agreement, at approximately $14,000 annually. The Company's telephone
number is (954) 458-7636. The Bahamian manufacturing facility, which was
acquired on December 16, 1987, is located in Freeport, Bahamas and consists of a
29,242 square foot site containing a one-story concrete building of
approximately 7,300 square feet and is equipped for all phases of the testing,
production, and packaging of RETICULOSE. The Bahamian facility is currently
being used to store and produce inventory for testing purposes. In September,
1992, a new roof was placed on the manufacturing facility at a cost to the
Company of approximately $15,000. See "-- EXCLUSIVE RIGHTS OF THE COMPANY TO
RETICULOSE AND PRODUCTION ARRANGEMENTS."
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers of the Company, and further information concerning
them, are as follows:
<TABLE>
<CAPTION>
Name Positions
- ---- ---------
<S> <C>
Shalom Z. Hirschman, M.D.................. President and Chief Executive Officer, director
Bernard Friedland......................... Chairman of the Board, director
William Bregman........................... Secretary-Treasurer, director
Louis J. Silver........................... director
</TABLE>
Shalom Z. Hirschman, M.D. (age 60), President, Chief Executive Officer and
a director of the Company since October 1996, was Director of the Division of
Infectious Diseases and Professor of Medicine at Mount Sinai School of Medicine,
New York, New York, from May 1969 until October 1996.
Bernard Friedland (age 70), Chairman of the Board of the Company since May
1987, director of the Company since July 1985 and President and Chief Executive
Officer of the Company from September 1985 until October 1996, was employed by
Key, Inc. for 29 years, until March 1, 1986, in the Research and Development and
Quality Assurance Departments in Pharmaceuticals, Pharmacology, and
Canceantimetabolites. Has also has been President, Treasurer and a director of
LTD since August 1984.
William Bregman (age 75), director of the Company since July 1985 and
Secretary-Treasurer of the Company since September 1985, was Vice President of
the Company from September 1985 until May 1987 and Vice President and Secretary
of LTD from August 1984 until July 1989, and has been a director of LTD since
August 1984.
Louis J. Silver (age 68), director of the Company since May 1992, has been
self-employed as a free-lance bookkeeper and auditor since 1985. Mr. Silver
previously served as a member of the Board of Directors of the Company during
the periods from May 1987 to July 1987.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" of the Company as those terms as defined in the rules and regulations
promulgated under the Securities Act of 1933, as amended.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified.
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
Director Compensation
The arrangement for director compensation is $150 for each meeting of the
Board of Directors of the Company attended, which has not in fact been paid
within at least the last three years.
Executive Officer Compensation
No officer or director employed by the Company received salary and bonus
exceeding in the aggregate $100,000 in the fiscal year 1996, 1995 or 1994. The
following Summary Compensation Table sets forth the information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the three executive officers of the Company, all of whom are also directors of
the Company. No other person employed by the Company earned in excess of
$100,000 during the fiscal years ended December 31, 1996, 1995 and 1994.
44
<PAGE> 47
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) SARS(#) ($)
- --------------------------- ---- --------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1996 68,750(2) 0 4,825(3) 15,000,00 4,316(4)
President and Chief Executive
Officer of the Company since
October 1996 and consultant
to the Company from May 24,
1995 until October 1996.
Bernard Friedland, 1996 35,000 0 6,500 0 0
Chairman of the Board of the 1995 35,000 0 6,500 0 0
Company since May 1987; 1994 35,000 0 6,500 0 0
President and Chief Executive
Officer of the Company from
1985 until October 1996, and
President and Treasurer of
LTD since August 1984.
William Bregman, 1996 35,000 0 6,500 0 0
Secretary-Treasurer of the 1995 35,000 0 6,500 0 0
Company since 1985. 1994 35,000 0 6,500 0 0
</TABLE>
- ---------------
(1) Other Annual Compensation represents medical insurance premiums paid by the
Company for executive officers, except as stated in note (3) below.
(2) Under the Employment Agreement described under "-EMPLOYMENT CONTRACTS,
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS," Dr.
Hirschman's annual salary as President and Chief Executive Officer (among
other titles) is $325,000.
(3) Other Annual Compensation for Dr. Hirschman includes $1,350 for medical
insurance premiums paid by the Company for him, and $3,475 aggregate
incremental cost to the Company of Dr. Hirschman's automobile lease, gas,
oil, repairs and maintenance.
(4) The dollar value of insurance premiums paid by, or on behalf of, the Company
with respect to term life insurance for the benefit of Dr. Hirschman.
The following table sets forth information concerning stock option grants
made during 1996 to the executive officers of the Company.
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS EMPLOYEES IN BASE
NAME GRANTED(1) FISCAL YEAR PRICE EXPIRATION DATE
- ---- ---------- ------------ -------- ---------------
<S> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 5,000,000(2) 100% $0.19 March 23, 1999
5,000,000(3) $0.27 March 23, 1999
5,000,000(3) $0.36 March 23, 1999
</TABLE>
- ---------------
(1) All options are non-qualified options.
(2) Dr. Hirschman transferred Options to acquire 500,000 Option Shares during
1996.
(3) Dr. Hirschman transferred Options to acquire 500,000 Option Shares in April
1997.
45
<PAGE> 48
The following table provides certain information concerning exercises of
options during 1996 by the executive officers of the Company and the fiscal
year-end value of unexercised options:
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ON VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME EXERCISE(#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 250,000(3) $155,000 8,600,000/10,000,000 $901,000/$100,000
350,000(3) 252,000
300,000(3) 331,500
</TABLE>
- ---------------
(1) The difference between the average of the high and low bid prices per share
of the Common Stock as reported by the Bulletin Board on the date of
exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per share
of the Common Stock as reported by the Bulletin Board on December 31, 1996,
$.29, and the exercise or base price.
(3) Exercise price of $.18 per Option Share.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to an Employment Agreement, dated as of October 14, 1996, between
the Company and Shalom Z. Hirschman, M.D. (the "Hirschman Employment
Agreement"), the Company employs Dr. Hirschman, on a full business time basis as
its President, Chief Executive Officer, Chief Scientific Officer and Chairman of
its Scientific Advisory Board, with duties including supervising day-to-day
operations of the Company, including management of scientific, medical,
financial, regulatory and corporate matters, establishing appropriate
laboratory, executive and other facilities for the Company, and raising
additional capital for the Company. The Hirschman Employment Agreement includes
an agreement by the Company that Dr. Hirschman will be nominated as a director
of the Company for the duration of Dr. Hirschman's employment by the Company
under the Hirschman Employment Agreement, and voting agreements by Bernard
Friedland, William Bregman and Dr. Hirschman. See "PRINCIPAL STOCKHOLDERS." The
term of Dr. Hirschman's employment commenced on October 14, 1996 and continues
for a period of three years unless extended by the parties or unless the
Hirschman Employment Agreement is terminated by either party, either "for
cause," as defined in and in accordance with the provisions of the Hirschman
Employment Agreement, or on the basis that the Company does not receive, on or
before December 31, 1997, funding from whatever source of at least $3,000,000,
excluding traditional institutional and/or bank debt financing and excluding the
proceeds received by the Company upon Dr. Hirschman's exercise of stock options
or his purchase of any of the Company's securities. In the event either party
terminates the Hirschman Employment Agreement as a result of the Company not
receiving this funding, or the Company terminates that agreement "for cause,"
all stock options, benefits under stock bonus plans and stock appreciation
rights ("SARs") (collectively, "Stock Rights") granted to him after October 14,
1996 may be canceled by the Company. If Dr. Hirschman terminates his employment
otherwise than for cause, upon not less than 60 days prior written notice, he is
entitled to compensation and other benefits, including the Stock Rights granted
to him after October 14, 1996, accrued to the effective date of termination
specified in that notice.
Dr. Hirschman's compensation under the Hirschman Employment Agreement is an
annual salary of $325,000, payable in equal monthly installments. The Hirschman
Employment Agreement also entitles Dr. Hirschman to (a) a major medical
insurance policy, disability policy and dental policy insurance to Dr. Hirschman
and his dependents that is reasonably acceptable to the parties, and (b) a term
life insurance policy at least in the amount of $1,000,000, with a beneficiary
to be designated by Dr. Hirschman. Dr. Hirschman agrees to cooperate with the
Company in its purchase of a "key man" life insurance policy on his life for the
benefit of the Company. The Company further agrees to (a) take such action as
may be necessary to permit Dr. Hirschman to be entitled to participate in stock
option, stock bonus or similar plans (including plans for SARs) as are
established by the Company, (b) lease or purchase for Dr. Hirschman, at his
discretion, an automobile selected
46
<PAGE> 49
and to be used by him, having a list price not in excess of $40,000, and pay for
all gas, oil, repairs and maintenance, as well as the lease or purchase
payments, as applicable, in connection with the automobile, (c) reimburse Dr.
Hirschman for all of his proven expenses incurred in and about the course of his
employment that are deductible under the current tax law, including, among other
expenses, his license fees, membership dues in professional organizations,
subscriptions to professional journals, necessary travel, hotel and
entertainment expenses incurred in connection with overnight, out-of-town trips
that contribute to the benefit of the Company in the reasonable determination of
Dr. Hirschman, and all other expenses that may be pre-approved by the Board of
Directors of the Company, and (d) provide not less than four weeks paid vacation
annually and such paid sick or other leave as the Company provides to all of its
employees.
The Hirschman Employment Agreement further provides that Dr. Hirschman is
not authorized, without the express written consent of the Board of Directors
and other than in the ordinary course of business, to pledge the credit of the
Company or any of its other employees, to bind the Company, to release or
discharge any debt due the Company unless the Company has received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
the Company's assets.
Dr. Hirschman has agreed that he will assign to the Company all patents
developed by Dr. Hirschman or resulting from his knowledge acquired while
performing his duties under the Hirschman Employment Agreement, and that, if his
employment under the Hirschman Employment Agreement is terminated by the Company
"for cause" or by Dr. Hirschman otherwise than "for cause," as specified in that
agreement, he will not, directly or indirectly, compete with the Company for
three years after termination or solicit the Company's employees to leave the
service of the Company for one year after termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The directors of the Company perform the functions of the Compensation
Committee of the Company and LTD. Company and LTD directors Friedland and
Bregman also are executive officers of the Company and LTD.
47
<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth as at September 2, 1997, certain information
regarding the beneficial ownership of the Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of the Company's
outstanding voting securities; (ii) each of the Company's directors; and (iii)
all directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Percent Owned After
Name and Address of Shares of Common Stock Percent Owned Exercise of all
Beneficial Owner Beneficially Owned Before Offering(1) Options(s)(2)
------------------- ---------------------- ------------------ -----------------------
<S> <C> <C> <C>
Shalom Z. Hirschman,
M.D..................... 13,100,000(3)(4) 4.6% 4.2%
c/o Advanced Viral
Research Corp.
1250 East Hallandale
Beach Blvd.
Hallandale, FL 33009
Bernard Friedland......... 39,876,730(4)(5) 14.1% 13.2%
c/o Advanced Viral
Research Corp.
1250 East Hallandale
Beach Blvd.
Hallandale, FL 33009
William Bregman........... 35,682,403(4)(6) 12.6% 11.8%
c/o Advanced Viral
Research Corp.
1250 East Hallandale
Beach Blvd.
Hallandale, FL 33009
Louis I. Silver........... 501,000 * *
5110 S.W. 127th Place
Miami, FL 33175
All officers & directors
(4 persons)............. 89,160,133(4)(7) 31.4% 29.7%
</TABLE>
- ---------------
* Less than 1%
(1) Assumes no purchases of Common Stock other than by exercise of options
outstanding as of February 28, 1997. For purposes of this table, beneficial
ownership is computed pursuant to Rule 13d-3 under the Exchange Act; the
inclusion of shares as beneficially owned should not be construed as an
admission that such shares are beneficially owned for purposes of the
Exchange Act. Under the rules of the Commission, a person is deemed to be a
"beneficial owner" of a security if he or she has or shares the power to
vote or direct the voting of such security or the power to dispose of or
direct the disposition of such security. Accordingly, more than one person
may be deemed to be a beneficial owner of the same security. Except as
otherwise indicated, each Selling Stockholder named in the table has sole
voting and dispositive power with respect to such Selling Stockholder's
shares. Shares of Common Stock subject to options held by directors and
executive officers that are exercisable within 60 days after September 2,
1997 are deemed beneficially owned by such person and outstanding for the
purpose of computing such director's or executive officer's percentage
beneficial ownership and the percentage beneficial ownership of all
directors and executive officers as a group. According to American Stock
Transfer & Trust Company, the transfer agent for the Common Stock,
277,190,373 shares of the Common Stock were outstanding as of the close of
business on February 28, 1997.
(2) Based on 30,982,400 Option Shares, and 308,172,773 shares of Common Stock
outstanding after exercise of all Options.
48
<PAGE> 51
(3) Consists of Option Shares which may be acquired pursuant to Options
exercisable within 60 days after September 2, 1997 and which are being
registered under the Registration Statement. See "SELLING STOCKHOLDERS."
(4) The Hirschman Employment Agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that agreement,
shall vote all shares of the Common Stock owned or voted by them in favor of
Dr. Hirschman as a director of the Company. That agreement, however, does
not restrict or otherwise limit their right to sell their shares to third
parties without restriction. The Hirschman Employment Agreement also
provides that Dr. Hirschman, during that term, shall take no action which
shall preclude Messrs. Friedland and Bregman from being nominees as
directors of the Company and that Dr. Hirschman shall vote all shares of the
Common Stock owned or voted by him in favor of Messrs. Friedland and Bregman
as directors of the Company. See "MANAGEMENT -- EMPLOYMENT CONTRACTS,
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS."
(5) Includes 1,000,000 shares of the Common Stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants, 20,000,000 shares of the
Common Stock owned by Mr. Friedland and Shirley Friedland, his spouse, as
joint tenants, 60,000 shares of the Common Stock (as to which Mr. Friedland
disclaims beneficial ownership) owned by Shirley Friedland and 1,000,000
shares owned by the B&SD Friedland Foundation, a not-for-profit foundation
controlled by him.
(6) Includes 23,435,000 shares of the Common Stock held in a trust for which Mr.
Bregman is the sole trustee and sole beneficiary.
(7) Represents Option Shares which may be acquired pursuant to Options held by
Dr. Hirschman that are exercisable within 60 days after September 2, 1997.
See "SELLING STOCKHOLDERS."
CERTAIN TRANSACTIONS
For the past three fiscal years, there were no material transactions
between the Company and any of its officers or directors which involved $60,000
or more.
49
<PAGE> 52
SELLING STOCKHOLDERS
The following table sets forth information regarding the ownership of the
Common Stock by Selling Stockholders as of September 2, 1997 and as adjusted to
reflect the sale of Shares offered hereby and all other shares of Common Stock
that may be sold without restriction or limitation under Rule 144 and that are
beneficially owned by the named Selling Stockholders. No underwriter is
obligated to sell or repurchase any of such Shares. The Shares may be sold by
the Selling Stockholders from time to time in the public marketplace. The
Company has agreed to update the information contained in this Prospectus to
reflect any facts or events arising after the date of this Prospectus, that,
individually or in the aggregate, represents a fundamental change in the
information set forth in this Prospectus and to include any material information
respecting a plan of distribution materially different from the plan of
distribution disclosed in this Prospectus.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIALLY
BY EACH SELLING NUMBER OF SHARES OWNED BY EACH SELLING
STOCKHOLDER(1) (INCLUDING OPTION SHARES) STOCKHOLDER AFTER
-------------------- OFFERED FOR EACH SELLING COMPLETION OF RELATIONSHIP
NAME SHARES STOCKHOLDER'S ACCOUNT THIS OFFERING(2) TO COMPANY
- ---- -------------------- ------------------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard Waldman...... 1,099,334 1,099,334 0 Affiliate of TRM
David Sass........... 1,850,000 1,150,000 700,000 None
Charles Miller(a).... 1,213,100 1,063,100 150,000 Affiliate of Commonwealth
and Affiliate of Plata
David Duffy(b)....... 900,000 800,000 100,000 Affiliate of Plata
Jeffrey A. & Cheryl
L. Miller(c)....... 183,300 183,300 0 Affiliate of Plata
Leonard Cohen(d)..... 3,300,000 2,050,000 1,250,000 Consultant and
Affiliate of AVIX
Elliot Bauer(e)...... 4,412,000 4,412,000 0 Affiliate of AVIX
Shalom Z. Hirschman,
M.D.(f)............ 17,600,000 17,600,000 0 President and
Chief Executive Officer
of the Company
Deborah Silver....... 100,000 100,000 0 None
Commonwealth(g)...... 3,000,000 3,000,000 0 Distributor
Freddie Velez(h)..... 734,000 734,000 0 Affiliate of DCT, SRL
Gary Hussian(h)...... 492,500 492,500 0 Affiliate of DCT, SRL
Cesar Blumtritt,
M.D.(h)............ 320,000 320,000 0 Affiliate of DCT, SRL
Arthur Hawkins....... 500,000 500,000 0 Affiliate of Plata
Mark Montifiore...... 112,500 112,500 0 Affiliate of AVIX
Michael Binder....... 50,000 50,000 0 Affiliate of Plata
Matthew Cohen........ 3,283,333 3,283,333 0 Affiliate of TRM
Norman Schwartz...... 422,400 375,000 47,400 None
Mel Mendelson........ 555,000 375,000 180,000 None
Richard Rubin(i)..... 1,000,000 1,000,000 0 legal counsel
Malcolm Santer....... 100,000 100,000 0 Manager of Freeport
Production facility
Richard Viders....... 100,000 100,000 0 Affiliate of Plata
Laurie Cornell....... 100,000 100,000 0 Affiliate of Plata
</TABLE>
- ---------------
* Less than 1%
(1) See Note (1) to table under "Principal Stockholders." Numbers of shares
stated include, in addition to outstanding Shares, Option Shares to purchase
30,982,400 Shares underlying Options registered for Selling Stockholders
hereunder, as follows: (a) Options to purchase 295,000 Option Shares at $.12
per Option Share and 758,100 Option Shares at $.14 per Option Share; (b)
Options to purchase 800,000 Option Shares at $.12 per Option Share; (c)
Options to purchase 83,300 Option Shares at $.12 per Option Share and
100,000 Option Shares at $.14 per Option Share; (d) Options to purchase
1,700,000 Option Shares at $.13 per Option Share; (e) Options to purchase
4,099,500 Option Shares at $.11 per Option Share; (f) Options to purchase
4,100,000 Option Shares at $.18 per Option Share, 4,500,000 Option Shares at
$.19 per Option Share, 4,500,000 Option Shares at $.27 per Option Share and
4,500,000 Option Shares at $.36 per Option Share; (g) Options to purchase
3,000,000 Option Shares at $.25 per Option Share; (h) Options to purchase an
aggregate of 1,546,500 Option Shares at $.20 per Option Share; and (i)
500,000 Option Shares at $.27 per Option Share and 500,000 Option Shares at
$.36 per Option Share.
(2) Assumes (a) no exercise of any Common Stock purchase options of the Company
other than the Options, (b) no purchases of Common Stock by the named person
except upon exercise of Options, and (c) all Shares and Option Shares, as
well as all shares of the Common Stock that may be sold without restriction
or limitation under Rule 144 and that are beneficially owned by the named
person, are sold.
50
<PAGE> 53
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 1,000,000,000
shares of Common Stock, par value $.00001 per Share. The holders of Common Stock
(i) have equal ratable rights to dividends from funds legally available
therefore, when, as and if declared by the Board of Directors of the Company;
(ii) entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or winding
up of the affairs of the Company; (iii) do not have preemptive, subscription, or
conversion rights and there are no redemption or sinking fund provisions
applicable thereto; and (iv) are entitled to one noncumulative vote per share on
all matters which stockholders may vote on at all meetings of stockholders. All
shares of Common Stock now outstanding are fully paid for and non-assessable.
NON-CUMULATIVE VOTING
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, when voting for the offices, Directors, can elect all of the Directors
to be elected, if they so choose and in such event, the holders of the remaining
shares will not be able to elect any of the Company's Directors.
The Company has not paid or declared any dividends upon its common stock
since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate, or anticipate paying
any dividends upon its common stock in the foreseeable future.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing audited financial statements as soon as practicable at the end of
each year. In addition, the Company may, in its discretion, distribute quarterly
reports containing unaudited financial information for each of the first three
quarters of each year.
DIVIDENDS
The payment by the Company of dividends, if any, in the future rests within
the discretion of its Board of Directors and will depend, among other things,
upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Company has not paid or
declared any dividends upon its Common Stock since its inception and, by reason
of its present financial status and its contemplated financial requirements,
does not contemplate or anticipate paying any dividends upon its Common Stock in
the foreseeable future. See "HIGH RISK FACTORS."
PLAN OF DISTRIBUTION
A total of 39,000,067 Shares are being registered for public resale by
Selling Stockholders. The exercise prices for all of the Options was determined
by negotiation between the Company and the Option Holders at the time the
Options were granted. There is no relationship between the exercise price of the
Options and the assets, book value, net worth of the Company or any other
economic or recognized criterion of value.
The Shares are registered for the account of the Selling Stockholders and
will be offered for sale by them from time to time in the public marketplace.
None of the securities offered by Selling Stockholders are being offered through
underwriters and no arrangements have been made with any outside broker, dealer
or underwriter for the resale of such securities, all of which may be offered
for sale from time to time through the over-the-counter market. The Company will
not receive any proceeds from the sale of the Selling Stockholders.
TRANSFER AGENT
The Transfer Agent for the Common Stock of the Company is American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005.
51
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming that all the Option Shares are
issued upon exercise of the Options, the Company will have a total of
308,172,773 shares of Common Stock outstanding. Of these shares, 93,660,133
shares of Common Stock will be "restricted" securities, within the meaning of
Rule 144 ("Restricted Shares"), excluding shares issuable upon exercise of the
Warrants (the "Warrant Shares"). The Warrant Shares, if issued, would be
"restricted securities" subject to resale under Regulation S under the Act, and
excluding the securities being registered pursuant to this Registration
Statement. The Restricted Shares may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemption provided by Rule 144.
Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including pursuant to Rule 144. In general, under Rule 144, as
currently in effect, beginning 90 days after this offering a person (or persons
whose Shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including affiliates of the Company, would be entitled to sell
in brokers' transactions or to market makers within any three-month period a
number of Restricted Shares that does not exceed the greater of one percent (1%)
of (i) the then outstanding Shares outstanding after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company.
Affiliates may sell shares not constituting Restricted Shares in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the one-year holding period. Restricted Shares held by affiliates of the
Company eligible for sale in the public market under Rule 144 are subject to the
foregoing one-year holding period, volume limitations and other restrictions.
A person who is not an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, is currently entitled to sell such Restricted Shares under Rule
144(k) without regard to the availability of current public information, volume
limitations, manner of sale provisions or notice requirements.
LITIGATION
The Company is not currently a party to any material litigation, nor, to
the knowledge of management, is any such litigation currently threatened.
During 1989, the Commission conducted an informal inquiry into certain of
the Company's prior disclosure documents, including its original prospectus,
press releases and annual reports. On December 14, 1989, the Commission, as
plaintiff, filed a civil complaint-for permanent injunction and other equitable
relief (the "Complaint") in the United States District Court, Southern District
of Florida, Miami Division, against the Company, its then President, Bernard
Friedland, and its then Secretary-Treasurer, William Bregman. The Complaint, a
copy of which is filed as an exhibit to the Company's current report on Form 8-K
dated December 14, 1989 which was filed with the Commission (the "December 1989
Form 8-K"), alleged violations of Sections 5(b)(2) and 17(a) of the Act,
Sections 10(b) and 15(d) of the Exchange Act and Rules 10b-5, 12b-20, 15d-1 and
15d-13 promulgated thereunder.
The Company, Bernard Friedland and William Bregman each, without admitting
or denying the allegations of the Complaint, consented to the entry of an
injunction. Copies of the consents of the Company, Bernard Friedland and William
Bregman are filed as exhibits to the December 1989 Form 8-K. A permanent
injunction was entered in form and also attached as an exhibit to the December
1989 Form 8-K.
Between May 1, 1987, and May 10, 1988, 6,766,350 of the Company's B
Warrants were exercised for the purchase of 6,766,350 shares at a price of $.05
per share for a total of $338,317.50. The prospectus delivered with the shares
on exercise of the B Warrants was not current; accordingly, the Company was not
in compliance with the prospectus delivery provisions of the Act. The Company
offered a right of rescission to all exercising
52
<PAGE> 55
B Warrant holders. The rescission offer period commenced on August 16, 1990 and
terminated October 25, 1990. The Company was obligated to pay an aggregate of
approximately $2,500 to stockholders who exercised their rescission right during
the rescission offer period.
LTD's counsel was advised in August 1988, by the Ministry of Health of the
Government of the Bahamas that a license from the Ministry of Health is required
for the manufacture of pharmaceuticals in the Freeport area of Grand Bahama
Island. LTD has received an opinion of its counsel in the Bahamas that its
license from the Port Authority is valid for the manufacture, export and sale of
ethical pharmaceutical products in the Freeport area of Grand Bahama Island. No
proceedings have been instituted or threatened by the Ministry of Health. If
such proceedings are instituted, LTD intends to defend them vigorously. No
assurance can be given that LTD would successfully defend such proceedings.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Berman Wolfe & Rennert,
P.A., Miami, Florida.
EXPERTS
The Consolidated Financial Statements of the Company included in this
Prospectus and in the Registration Statement except as they pertain to periods
unaudited, have been audited by Rachlin Cohen & Holtz, independent certified
public accountants, for the periods indicated in their report appearing
elsewhere herein, and are included herein in reliance upon the report of such
firm given upon the authority of such firm as experts in accounting and
auditing.
SOURCES
The following is a list of pharmacological and clinical reports on
RETICULOSE:
*Anderson, Robert H., Encephalitis, Symposium, pages 39-52, 1960.
*Anderson, Robert H. and Thompson, Ralph M., Treatment of Viral
Syndrome with a Lipoprotein-Nucleic Acid Compound (RETICULOSE). A Report of
Five Cases. Virginia Medical Monthly, 84, pages 347-353, July 1957.
*Behbehani, The Effect of Reticulose on Viral Infections of
Experimental Animals, Southern Medical Journal, Vol. 55, February 1962.
*Berry, L. Joe and Mitchell, Roland B., The Influence of Polycythemia
Produced at High Altitude on Resistance to Infection, School of Aviation
Medicine, Project Report, 21-35-005, 1951.
* Cooke, Stanford B., Upper Respiratory Viral Manifestations,
Symposium, pages 25-32, 1960.
* Debus, David A. and Meyer, Francis J., (a) Acute Intraperitoneal
Toxicity of RETICULOSE in the Mouse; (b) Acute Intraperitoneal Toxicity of
RETICULOSE in the Rat; (c) Acute Intraperitoneal Toxicity of RETICULOSE in
the Guinea Pig, Reports, Huntington Research Center, Inc., Baltimore,
Maryland, September 15, 1969.
* Hirschman, Shalom Z. and Chey Wei Chen, "Peptide Nucleic Acids
Stimulate Gamma Interferon and Inhibit the Replication of the Human
Immunodeficiency Virus." Journal of Investigative Medicine, Vol. 44, Number
6, August 1996.
* Kempe, A.C. Failure to Demonstrate Antiviral Activity of Reticulose,
American Journal of Diseases of Children, Vol. 103, May 1962.
* Kosaka, K and Shimada, Y., Infectious Hepatitis, Symposium, pages
61-74, 1960.
53
<PAGE> 56
* Kozima, Fumio, Osawa, Mitsuo and Oyama, Mitsuko, Animal Tests on
RETICULOSE ("Key"), Kensan Report No. Sho 43-22, September 4, 1968.
* Kuckku, Morris E., Herpetic Diseases, Symposium, pages 713, 1960.
* McCrady, William D., RETICULOSE in Treatment Herpes Simplex
Labialis, Personal Communication to B.E. LaPenta, March 18, 1964.
* Medoff, Lawrence R., (a) Infectious Mononucleosis, Symposium, pages
33- 37, 1960; (b) Use of a Lipoprotein-Nucleic-Acid Compound in Treatment
of Infectious Mononucleosis, Clinical Medicine, 69: pages 1-4, 1962.
* Plucinski, Stanisloff J., Suspected Viral Varieties, Symposium,
pages 53- 59, 1960.
* Reynolds, Margaret R., (a) Generalized Vaccinia Successfully Treated
with Lipoprotein-Nucleic Acid Complex (RETICULOSE), Archives of Pediatrics,
77:421- 422, 1960; (b) Generalized Vaccinia, Symposium, pages 5-6, 1960.
* Sanders, Murray, Controlled Animal Studies with RETICULOSE
Illustrating the Interference of Lipoprotein-Nucleic Acid Complex
(RETICULOSE) in the Experimental Animal Infected with Human Pathogenic
Viral Entities, Exhibit, Southern Medical Association, Dallas, Texas,
November 1961.
* Schaeffer, Oden A., Influenza, Symposium, pages 15-21, 1960.
* Seydel, Frank, Epidemic, Asian Influenza, Symposium, pages 23-24,
1960.
* Snyder, Walter E., Case Reportings and Observations on the Use of
RETICULOSE in Dogs, Personal Communication to B.E. LaPenta.
* Symposium: Clinical Symposium on Viral Diseases Demonstrating the
Anti-Viral Biotic Properties of the Drug RETICULOSE, Chemico Laboratories,
Inc., Miami, Florida, September 1, 1960.
* Thompson, Ralph M., A Lipoprotein-Nucleic Acid Complex in the
Treatment of Radiation Injury (A Preliminary Report), The Military Surgeon,
110:51-58, 1952.
* Wegryn, Stanley P., Marks, Robert A. and Baugh, John R., Herpes
Gestation is, A Report of 2 Cases, American Journal of Obstetrics and
Gynecology, 79:812-814, 1960.
The following laboratories or individuals have also conducted studies on
RETICULOSE:
* Southern Research Institute.
* International Diagnostics Ltd.
* Dr. Ralph Cott (Dominican Republic).
* Dr. Richard A. Morisset (Canada)
THESE SOURCES SHOULD BE READ IN CONJUNCTION WITH THE PORTIONS OF THIS
PROSPECTUS WHICH DISCUSS THE NEGATIVE RESULTS OF CERTAIN STUDIES.
54
<PAGE> 57
GLOSSARY
The following is a glossary of some of the scientific terms used in this
Prospectus. Except as otherwise noted, the information contained in the glossary
has been obtained from Stedman's Medical Dictionary Illustrated (The Williams &
Wilkins Company, Baltimore, 22nd Edition, c. 1972).
AIDS: Acquired Immune Deficiency Syndrome, a disease of
no known etiology in which the body's immunological
system is destroyed. (Source: Webster's II New
Riverside Dictionary)
Amino acid: An organic acid in which one of the CH hydrogen
atoms has been replaced by NH2.
Ampule: A hermetically sealed container, usually made of
glass, containing a sterile medicinal solution, or
powder to be made up in solution, to be used for
subcutaneous, intramuscular or intravenous
injection.
Antibody: Any body or substance, soluble or cellular, which
is evoked by the stimulus provided by the
introduction of antigen and which reacts
specifically with antigen in some demonstrable way.
Antigen: Any of various sorts of material that, as a result
of coming in contact with appropriate tissues of an
animal body, after a latent period, usually of from
eight to 14 days, induces a state of sensitivity
and/or resistance to infection or toxic substances,
and which will react in a demonstrable way either
with tissues or with serum from the sensitized
subject.
Anti-viral agent: An active force or substance capable of weakening
or abolishing the action of a virus.
Carboxyl: The characteristic chemical group of certain
organic acids.
Cell: A minute structure, the living, active basis of all
plant and animal organization, composed of a mass
of protoplasm, enclosed in a delicate membrane and
containing a nucleus.
HIV: Human Immunodeficiency Virus.
HPV: Human Papilloma Virus (genital warts).
Immune system modulator: Substance or substances which stimulate the human
body's immune system to more actively counter the
effects of viral infection and viral invasion.
Interferon: Substances produced in cell cultures or host
tissues in response to infection with active or
inactivated virus, capable of inducing a state of
resistance to superinfection with related or
unrelated virus.
Intramuscular: Within the substance of a muscle.
Kaposi's Sarcoma: A multiple, bleeding tumor denoting a disease of
unknown cause, involving primitive tissue in the
formation of blood or lymphatic vessels.
Lipoprotein: Complexes or compounds containing lipid and
protein.
Lymphocyte: A type of white blood cell found in the fluid
collected from tissues throughout the body.
Neoplasm: An abnormal tissue that grows by cellular
proliferation more rapidly than normal and
continues to grow after the stimuli that initiated
the new growth cease, e.g., a tumor.
55
<PAGE> 58
Nucleic acids: Ribonucleic acid (RNA) or deoxyribonucleic (DNA)
protein molecules which determine genetic memory of
cells. These molecules are essential to life.
Papilloma: A circumscribed benign epithelial (nipple, or the
thin skin covering the nipple) tumor projecting
from the surrounding surface; more precisely, a
benign epithelial neoplasm consisting of villous or
arborescent outgrowths of fibrovascular strong
covered by neoplastic cells.
Peptide: A compound of two or more amino acids in which the
carboxyl group of one is united with the amino
group of the other, with the elimination of a
molecule of water, thus forming a peptide bond.
Peptone: Intermediate polypeptide products generally water
soluble, diffusable and not coagulable by heat.
RETICULOSE: An anti-viral peptide-nucleic acid complex
preparation, developed by Vincent M. LaPenta, M.D.
specifically to stimulate the reticulo-endothelial
system. (Sources: E. Podolsky, M.D., "The
Reticulo-Endothelial System and Its Activation by
Non-Specific Protein Therapy," The Journal of
Medicine, October 1938; Physicians' Desk Reference
to Pharmaceutical Specialists and Biologicals
(Medical Economics, Inc., Oradell, N.J. (C)1961))
Subcutaneous: Beneath the skin; hypodermic.
Virus: A group of microbes which with few exceptions are
capable of passing through fine fibers that retain
bacteria and are incapable of growth or
reproduction apart from living cells.
Virus replication: The duplication of a virus by itself within the
body cell by breaking down the RNA or DNA of the
host cell and using it to make a replicate of
itself, while killing the host cell.
56
<PAGE> 59
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE> 60
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial information Year Ended December 31, 1996
Report of Independent Certified Public Accountants........ F-3
Consolidated Financial Statements
Balance Sheet, December 31, 1996.......................... F-4
Statements of Operations for the Years Ended December 31,
1996 and 1995 and from Inception (February 20, 1984) to
December 31, 1996...................................... F-5
Statements of Stockholders' Equity from Inception
(February 20, 1984) to December 31, 1996............... F-6
Statements of Cash Flows for the Years Ended December 31,
1996 and 1995 and from Inception (February 20, 1984) to
December 31, 1996...................................... F-9
Notes to Consolidated Financial Statements................ F-10
Financial information (unaudited) Six Months Ended June 30,
1997
Consolidated Balance Sheet, June 30, 1997................. F-19
Consolidated Statements of Operations for the Six Months
Ended June 30, 1997 and 1996 and from Inception
(February 20, 1984) to June 30, 1997................... F-20
Consolidated Statements of Stockholders' Equity from
Inception (February 20, 1984) to June 30, 1997......... F-21
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996 and from Inception
(February 20, 1984) to June 30, 1997................... F-25
Notes to Consolidated Financial Statements................ F-26
</TABLE>
F-2
<PAGE> 61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Hallandale, Florida
We have audited the accompanying consolidated balance sheet of Advanced
Viral Research Corp. (A Development Stage Company) as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996 and for
the period from inception (February 20, 1984) to December 31, 1996. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Viral Research Corp. (A Development Stage Company) as of December 31, 1996 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1996 and for the period from inception
(February 20, 1984) to December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is dependent upon the continued sale of its
securities or obtaining debt financing for funds to meet its cash requirements.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to these matters are described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1997
F-3
<PAGE> 62
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 61,396
Investments............................................... 1,378,841
Inventory................................................. 19,729
Other current assets...................................... 16,081
-----------
Total current assets.............................. 1,476,047
Property and Equipment...................................... 207,209
Other Assets................................................ 33,544
-----------
Total assets...................................... $ 1,716,800
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 46,674
Customer deposits......................................... 7,800
-----------
Total current liabilities......................... 54,474
-----------
Commitments and Contingencies............................... --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 267,031,058 shares issued and
outstanding............................................ 2,671
Additional paid-in capital................................ 7,003,351
Subscription receivable................................... (19,000)
Deficit accumulated during the development stage.......... (4,851,537)
Deferred compensation cost................................ (473,159)
-----------
Total stockholders' equity........................ 1,662,326
-----------
Total liabilities and stockholders' equity........ $ 1,716,800
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 63
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
--------------------------- DECEMBER 31,
1996 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Sales............................................... $ 24,111 $ 27,328 $ 192,041
Interest............................................ 46,796 16,155 345,409
Other income........................................ 32,000 25,000 112,000
------------ ------------ -----------
102,907 68,483 649,450
------------ ------------ -----------
Costs and Expenses:
Research and development............................ 255,660 34,931 1,106,408
General and administrative.......................... 983,256 420,757 4,213,474
Depreciation and amortization....................... 18,731 14,679 178,895
Interest............................................ -- -- 2,210
------------ ------------ -----------
1,257,647 470,367 5,500,987
------------ ------------ -----------
Net Loss.............................................. $ (1,154,740) $ (401,884) $(4,851,537)
============ ============ ===========
Net Loss Per Common Share............................. $ (.00) $ (.00)
------------ ------------
Weighted Average Number of Common Shares
Outstanding......................................... 257,645,815 248,022,608
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 64
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
--------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984)
as previously reported................ $ -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests..... -- (1,000) 1,000 --
------------ ------- ---------- -----------
Balance, inception, as restated......... -- -- 1,000 (1,000)
Net loss, period ended December 31,
1984............................... -- -- -- (17,809)
------------ ------- ---------- -----------
Balance, December 31, 1984.............. -- -- 1,000 (18,809)
Issuance of common stock for cash..... .00 113,846,154 1,138 170 --
Net loss, year ended December 31,
1985............................... -- -- -- (25,459)
------------ ------- ---------- -----------
Balance, December 31, 1985.............. 113,846,154 1,138 1,170 (44,268)
Issuance of common stock -- public
offering........................... .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants.... -- -- 100 --
Expenses of public offering........... -- -- (117,923) --
Issuance of common stock, exercise of
"A" warrants....................... .03 819,860 9 24,587 --
Net loss, year ended December 31,
1986............................... -- -- -- (159,674)
------------ ------- ---------- -----------
Balance, December 31, 1986.............. 154,666,014 1,547 307,534 (203,942)
------------ ------- ---------- -----------
Balance, December 31, 1986.............. 154,666,014 1,547 307,534 (203,942)
Issuance of common stock, exercise of
"A" warrants....................... .03 38,622,618 386 1,158,321 --
Expenses of stock issuance............ -- -- (11,357) --
Acquisition of subsidiary for cash.... -- -- (46,000) --
Cancellation of debt due to
stockholders....................... -- -- 86,565 --
Net loss, period ended December 31,
1987............................... -- -- -- (258,663)
------------ ------- ---------- -----------
Balance, December 31, 1987.............. 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31,
1988............................... -- -- -- (199,690)
------------ ------- ---------- -----------
Balance, December 31, 1988.............. 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31,
1989............................... -- -- -- (270,753)
------------ ------- ---------- -----------
Balance, December 31, 1989.............. 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration
of redemption offer on "B"
warrants........................... .05 6,729,850 67 336,475 --
Issuance of common stock, exercise of
"B" warrants....................... .05 268,500 3 13,422 --
Issuance of common stock, exercise of
"C" warrants....................... .08 12,900 -- 1,032 --
Net loss, year ended December 31,
1990............................... -- -- -- (267,867)
------------ ------- ---------- -----------
Balance, December 31, 1990.............. 200,299,882 2,003 1,845,992 (1,200,915)
------------ ------- ---------- -----------
Issuance of common stock, exercise of
"B" warrants....................... .05 11,400 -- 420 --
Issuance of common stock, exercise of
"C" warrants....................... .08 2,500 -- 200 --
</TABLE>
F-6
<PAGE> 65
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
--------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock, exercise of
underwriters warrants.............. .012 3,760,000 38 45,083 --
Net loss, year ended December 31,
1991............................... -- -- -- (249,871)
------------ ------- ---------- -----------
Balance, December 31, 1991.............. 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for
testing............................ .0405 10,000,000 100 404,900 --
Issuance of common stock, for
consulting services................ .055 500,000 5 27,495 --
Issuance of common stock, exercise of
"B" warrants....................... .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of
"C" warrants....................... .08 5,244,220 52 419,487 --
Expenses of stock issuance............ (7,792)
Net loss, year ended December 31,
1992............................... -- -- -- (839,981)
------------ ------- ---------- -----------
Balance, December 31, 1992.............. 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for
consulting services................ .055 500,000 5 27,495 --
Issuance of common stock, for
consulting services................ 3,500,000 35 104,965 --
Issuance of common stock, for
testing............................ .035 5,000,000 50 174,950 --
Net loss, year ended December 31,
1993............................... -- -- -- (563,309)
------------ ------- ---------- -----------
Balance, December 31, 1993.............. $236,276,991 $ 2,363 $3,416,070 $(2,854,076)
============ ======= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
-------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993...... $ 236,276,991 $2,363 $3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for
consulting services......... .05 4,750,000 47 237,453 -- -- --
Issuance of common stock,
exercise of options......... .08 400,000 4 31,996 -- -- --
Issuance of common stock,
exercise of options......... .10 190,000 2 18,998 -- -- --
Net loss, year ended December
31, 1994.................... -- -- -- -- (440,837) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1994...... 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock,
exercise of options......... .05 3,333,333 33 166,633 -- -- --
Issuance of common stock,
exercise of options......... .08 2,092,850 21 167,407 -- -- --
Issuance of common stock,
exercise of options......... .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for
consulting services......... .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for
consulting services......... .14 300,000 3 41,997 -- -- --
Net loss, year ended December
31, 1995.................... -- -- -- -- (401,884) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1995...... 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ---------- -------- ----------- ---------
Issuance of common stock,
exercise of options......... .05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options......... .08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options......... .10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options......... .11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options......... .12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options......... .18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options......... .19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options......... .20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered........... .50 350,000 3 174,997 -- -- --
Options granted............... -- -- 760,500 -- -- (473,159)
Subscription receivable....... -- -- -- (19,000) -- --
Net loss, year ended December
31, 1996.................... -- -- -- -- (1,154,740) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1996...... 267,031,058 $2,671 $7,003,351 $(19,000) $(4,851,537) $(473,159)
=========== ====== ========== ======== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 67
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 20, 1984)
YEAR ENDED DECEMBER 31, TO
----------------------- DECEMBER 31,
1996 1995 1996
----------- --------- -------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................... $(1,154,740) $(401,884) $(4,851,537)
----------- --------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 18,731 14,679 178,895
Amortization of deferred compensation cost...... 287,341 -- 287,341
Issuance of common stock for services........... 175,000 168,500 1,372,000
Increase in other current assets................ (3,114) (2,804) (16,081)
Increase in inventory........................... (1,638) (18,091) (19,729)
Increase in other assets........................ (27,085) (4,659) (33,544)
Increase (decrease) in accounts payable and
accrued liabilities........................... 39,823 (25,594) 52,874
----------- --------- -----------
Total adjustments............................. 489,058 132,031 1,821,756
----------- --------- -----------
Net cash used in operating activities......... (665,682) (269,853) (3,029,781)
----------- --------- -----------
Cash Flows from Investing Activities:
Purchase of investments............................ (1,247,256) (474,000) (1,726,256)
Proceeds from sale of investments.................. 347,415 -- 347,415
Repayments on loan receivable -- stockholder....... -- 8,762 --
Expenditures for property and equipment............ (11,446) (5,075) (384,504)
----------- --------- -----------
Net cash used in investing activities........... (911,287) (470,313) (1,763,345)
----------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of securities, net of issuance
costs........................................... 1,573,135 602,955 4,854,522
----------- --------- -----------
Net cash provided by financing activities....... 1,573,135 602,955 4,854,522
----------- --------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ (3,834) (137,211) 61,396
Cash and Cash Equivalents, Beginning................. 65,230 202,441 --
----------- --------- -----------
Cash and Cash Equivalents, Ending.................... $ 61,396 $ 65,230 $ 61,396
=========== ========= ===========
Supplemental Disclosure of Non-Cash Financing
Activities:
Options granted accounted for as deferred
compensation cost............................... $ 760,500
===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 68
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced Viral Research Corp. (the Company) was incorporated in Delaware on
July 31, 1985. The Company was organized for the purpose of manufacturing and
marketing a pharmaceutical product named RETICULOSE. While the Company has had
limited sales of this product, primarily for research purposes, the success of
the Company will be dependent upon obtaining certain regulatory approval for its
pharmaceutical product, RETICULOSE, to commence commercial operations. The
Company was in the development stage at December 31, 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 99.6% owned subsidiary, Advance Viral Research (LTD), a Bahamian
Corporation. All significant intercompany accounts have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, with original
maturities of three months or less.
INVESTMENTS
Investments consist of certificates of deposit with maturities greater than
three months, carried at cost which is market value, and U.S. Government
discount notes and U.S. Treasury Bills. The notes and treasury bills are
classified as "held to maturity" and are carried at amortized cost which
approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method, over the estimated useful lives of the assets. Gain or
loss on disposition of assets is recognized currently. Maintenance and repairs
are charged to expense as incurred. Major replacements and betterments are
capitalized and depreciated over the remaining useful lives of the assets.
DEFERRED COMPENSATION COST
Deferred compensation costs are recognized based on fair value for
non-employee stock options. Compensation cost is amortized over the life of the
option period which is either shorter than or essentially equivalent to the
period for which the services are to be provided. Compensation expense is
classified as general and administrative.
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform to 1996 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
F-10
<PAGE> 69
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has suffered losses
from operations during its operating history. The Company is dependent upon
registration of RETICULOSE for sale before it can begin commercial operations.
The Company's cash position may be inadequate to pay all the costs associated
with the full range of testing and clinical trials required by the FDA.
Management does not anticipate registration or other approval of RETICULOSE in
the near future in the United States. Unless and until RETICULOSE is approved
for sale in the United States or another industrially developed country, the
Company may be dependent upon the continued sale of its securities for funds to
meet its cash requirements. Management intends to continue to sell the Company's
securities in an attempt to mitigate the effects of its cash position; however,
no assurance can be given that such equity financing, if and when required, will
be available. In the event that such equity financing is not available, in order
to continue operations, management anticipates that they will have to defer
their salaries. In addition, the Company may seek debt financing, but no
agreements have been entered with regard to such financing. No assurance can be
given that the Company will be able to sustain its operations until FDA approval
is granted or that any approval will ever be granted. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a Bahamian
Corporation with pharmaceutical manufacturing and warehousing facilities, on
February 20, 1984. The acquisition is a combination of two entities under common
control and has been accounted for in a manner similar to a pooling of
interests. In 1986, the Company acquired from LTD exclusive rights to
manufacture and market RETICULOSE worldwide, except within the Bahamas, for
$50,000. The Company also purchased inventory of RETICULOSE from LTD for $45,000
and was obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
ampules purchased and $2 per ampule for purchases exceeding 100,000 ampules. On
December 16, 1987, the Company acquired the controlling beneficial interest in
99.6% of the common stock of LTD through an appropriate trust agreement to
satisfy the rules of the Bahamian Government, from two of the principal
stockholders of the Company at a cost of $46,000. Both stockholders concurrently
canceled $86,565 of indebtedness due them from LTD.
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
(YEARS) 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Land and improvements................................ 15 $ 34,550 $ 34,550
Building and improvements............................ 30 239,434 239,434
Machinery and equipment.............................. 5 110,520 99,074
-------- --------
384,504 373,058
Less accumulated depreciation........................ 177,295 158,564
-------- --------
$207,209 $214,494
======== ========
</TABLE>
The Company maintains certain property and equipment in Freeport, Bahamas.
The property and equipment amounted to $369,358 as of December 31, 1996
including $17,623 expended in 1987 to purchase a land lease expiring in 2068.
These amounts are included above.
F-11
<PAGE> 70
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INVESTMENTS
At December 31, 1996, investments consist of the following:
<TABLE>
<S> <C>
Certificates of deposit..................................... $ 946,226
Held to maturity:
U.S. Government discount notes -- matures 3/30/97......... 334,647
U.S. Treasury bills -- matures 5/31/97.................... 97,968
----------
Total investments................................. $1,378,841
==========
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
GENERAL
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE in an amount equal to 5% of net sales in the
United States and 4% of net sales in foreign countries. The Company has not as
yet received any notice of claim from such parties.
Potential Loss of Bahamian Rights
RETICULOSE is manufactured by Advance Viral Research, Limited (LTD) in
facilities located in Freeport, Grand Bahama Island. LTD has a license to
manufacture pharmaceutical products for export from the Grand Bahama Port
Authority. LTD's counsel was advised in August 1988 by the Ministry of Health of
the Government of the Bahamas that a license from the Ministry of Health is
required for the manufacture of pharmaceuticals in the Freeport area of Grand
Bahama Island. LTD has received an opinion of its counsel in the Bahamas that
the license from the Grand Bahama Port Authority is valid for the manufacture
for export by LTD's of ethical pharmaceutical products in the Freeport area of
Grand Bahama Island. No proceeding to prevent LTD's export of RETICULOSE has
been instituted by the Government of the Bahamas. If such proceedings are
instituted, LTD intends to defend them vigorously. No assurance can be given
that LTD would successfully defend such claim.
Product Liability
The Company could be subjected to claims for adverse reactions resulting
from the use of RETICULOSE. Although the Company is unaware of any such claims
or threatened claims since RETICULOSE was initially marketed in the 1940's, one
study noted adverse reactions from highly concentrated doses in guinea pigs. In
the event any claims for substantial amounts were successful, they could have a
material adverse effect on the Company's financial condition and on the
marketability of RETICULOSE. As of the date hereof, the Company does not have
product liability insurance for RETICULOSE. There can be no assurance that the
Company will be able to secure such insurance in adequate amounts, at reasonable
premiums. Should the Company be unable to secure such product liability
insurance, the risk of loss to the Company in the event of claims would be
greatly increased.
Lack of Patent Protection
The Company does not presently have a patent for RETICULOSE but the Company
is currently applying for patents for RETICULOSE and certain other diseases. The
Company can give no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product. There can be
no assurance that the Company will obtain such patents or if obtained that they
will be enforceable.
F-12
<PAGE> 71
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Office Lease
Management executed a non-cancelable lease for new office space on January
1, 1996, expiring on December 31, 1998 at approximately $14,000 annually.
The Company leased an auto on October 26, 1996 for 36 months at $450 per
month. Lease expense for the years ended December 31, 1996 and 1995 totaled
$13,315 and $13,832, respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997........................................................ $19,500
1998........................................................ 19,500
1999........................................................ 4,500
-------
$43,500
=======
</TABLE>
TESTING AGREEMENTS
Research and development costs are expensed as incurred by the Company.
The only sales generated by the Company have been sales of RETICULOSE for
testing purposes. Sales are recorded by the Company when such test products are
shipped to customers.
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed to perform
a demonstration in the Domincan Republic in accordance with a certain agreed
upon protocol (the "Protocol") to assess the efficacy of a treatment using
RETICULOSE incorporated in the Protocol against AIDS (the "Plata Agreement").
Plata covered all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an additional
5,000,000 shares at $.08 per share through July 9, 1994 (the "Plata Options")
and 5,000,000 shares at $.10 per share through July 9, 1994. Pursuant to several
amendments, the Plata Options and the Additional Plata Options are exercisable
through April 30, 1997 at an exercise price of $.12 and $.14, respectively. As
of December 31, 1996, there are outstanding Plata Options to acquire 813,000
shares at $.11 per share and Additional Plata Options to acquire 858,100 shares
at $.13 per share. Through December 31, 1996, the Company has received
approximately $670,000 pursuant to the issuance of approximately 7.7 million
shares in connection with the exercise of the Plata Options and the Additional
Plata Options.
TRM Management Corp. ("TRM")
In August 1991, the Company entered into an agreement with TRM, whereby TRM
would perform certain open human clinical trial tests in Haiti using RETICULOSE
(the "TRM Agreement"). According to the TRM Agreement, the purpose of the Haiti
tests was to assess the effectiveness of RETICULOSE against the Hepatitis "A"
virus and Hepatitis "B" virus in accordance with and in compliance with a
certain Hepatitis Open Label Clinical Trial Protocol developed by TRM. At the
conclusion of the Haiti tests, TRM was required to prepare a paper describing
the methods and results of testing, the form and substance of which shall be
appropriate for publication by recognized scientific journals ("Results Paper").
The Results Paper was published in the December 1992 issue of the Journal of the
Royal Society of Health.
On January 3, 1992, TRM delivered to the Company the Results Paper. In
accordance with the terms of the TRM Agreement, the Company has authorized the
issuance to the shareholders and certain associated persons of TRM (1) an
aggregate amount of 10,000,000 shares of the Company's common stock (the "TRM
Shares") and
F-13
<PAGE> 72
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) an option to acquire, at any time, for a period of five years from the date
of issuance of the option, 10,000,000 shares of the Company's common stock at a
purchase price of $.05 per share (the "TRM Options"). As of December 31, 1996,
6,666,666 shares of common stock were issued pursuant to the exercise of the TRM
Options for an aggregate exercise price of $333,333. Pursuant to an amendment,
the TRM Options are exercisable through March 15, 1997 at an exercise price of
$.08.
Argentine Agreement
In April 1996, the Company entered into an agreement (the "Argentine
Agreement") with DCT SRL, an Argentine corporation unaffiliated with the Company
("DCT") pursuant to which DCT was to cause a clinical trial to be conducted in
two separate hospitals located in Buenos Aires, Argentina (the "Clinical
Trials"). Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman, M.D. and the
purpose of the Clinical Trials was to assess the efficacy of the Company's drug
RETICULOSE on the Human Papilloma Virus (HPV). The protocol calls for, among
other things, a study to be performed with clinical and laboratory follow-up on
20 male and female human patients between the ages of 18 and 50. The Clinical
Trials did not include a placebo control group or references to any other
antiviral drug.
Pursuant to the Argentine Agreement, the Company delivered $34,000 to DCT
to cover out-of-pocket expenses associated with the Clinical Trials. The
Argentine Agreement further provides that at the conclusion of the Clinical
Trials, DCT shall cause Dr. Flichman to prepare and deliver a written report to
the Company regarding the methodology and results of the Clinical Trials (the
"Written Report"). In September 1996, the Written Report was delivered by Dr.
Flichman to the Company. Upon delivery of the Written Report to the Company, the
Company delivered to the principals of DCT options to acquire 2,000,000 shares
of the Company's common stock for a period of one year from the date of the
delivery of the Written Report, at a purchase price of $.20 per share. As of
December 31, 1996, 473,500 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT SRL the exclusive
right to distribute the Company's drug RETICULOSE in certain South American
countries, including Argentina and the other MERCOSUR States.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being conducted at
the Queen Elizabeth Hospital, Bridgetown, Barbados (the "Barbados Study"). As of
December 31, 1996, the Company has expended approximately $150,000 to cover the
costs of the Barbados Study. Based on information received from the coordinators
of the Barbados Study, the Company is uncertain as to the costs to be incurred
in connection with the Barbados Study and has not been informed as to when
results from the Barbados Study will be forthcoming. In December 1996, the
Company received from the coordinators of the Barbados Study, a written summary
of preliminary results of the Barbados Study (the "Written Summary").
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with Shalom
Hirschman, M.D., Professor of Medicine of Mt. Sinai School of Medicine, New
York, New York and Director of Mt. Sinai's Division of Infectious Diseases,
whereby Dr. Hirschman was to provide consulting services to the Company through
May 1997. The consulting services included the development and location of
pharmaceutical and biotechnology joint venture partners and assisting the
Company with regulatory approvals and protocols.
F-14
<PAGE> 73
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option to
acquire 5,000,000 shares of the Company's common stock for a period of three
years as per the vesting schedule as referred to in the agreement, at a purchase
price of $.18 per share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a person
unaffiliated with the Company, 100,000 shares of the Company's common stock, and
an option to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at a purchase price of $.18 per share. As of December 31, 1996,
900,000 options have been exercised for cash consideration of $162,000 under
this Agreement.
In March 1996, the Company entered into an Addendum to Agreement with Dr.
Hirschman whereby Dr. Hirschman agreed to provide consulting services to the
Company through May 2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman the option to purchase 15,000,000 shares of the
Company's common stock for a three year period pursuant to the following vesting
schedule: (i) options to purchase 5,000,000 shares exercisable at any time and
from time to time commencing March 24, 1996 and ending March 23, 1999 at an
exercise price of $.19 per share, of which options to acquire 500,000 shares
were assigned by Dr. Hirschman to Richard Rubin, counsel to Dr. Hirschman; (ii)
options to purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1997 and ending March 23, 1999 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were assigned by Dr.
Hirschman to Richard Rubin, counsel to Dr. Hirschman; and (iii) options to
purchase 5,000,000 shares exercisable at any time and from time to time
commencing March 23, 1998 and ending March 23, 1999 at an exercise price of $.36
per share, of which options to acquire 500,000 shares were assigned by Dr.
Hirschman to Richard Rubin, counsel to Dr. Hirschman. In addition, the Company
has agreed to cause the shares underlying these options to be registered so long
as there is no cost to the Company. As of December 31, 1996, 500,000 shares of
common stock were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the Company on
matters unrelated to his representation of Dr. Hirschman.
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has agreed to serve
as the President and Chief Executive Officer of the Company for a period of
three years, subject to earlier termination by either party if the Company does
not receive on or prior to December 31, 1997, funding of $3,000,000 from sources
other than traditional institutional/bank debt financing or proceeds from the
purchase by Dr. Hirschman of the Company's securities, including, without
limitation, the exercise of Dr. Hirschman of outstanding stock options. Pursuant
to the Employment Agreement, Dr. Hirschman is entitled to receive an annual base
salary of $325,000, automobile and health, life, disability and dental insurance
benefits for the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to serve as a
member of the Company's Board of Directors for the duration of his employment,
and since October 17, 1996, Dr. Hirschman has served as a member of the
Company's Board of Directors.
CONSULTING AGREEMENTS
Cohen Agreements
In September 1992, the Company entered into a one year consulting agreement
with Leonard Cohen (the "September 1992 Cohen Agreement"). The September 1992
Cohen Agreement required that Mr. Cohen provide certain consulting services to
the Company in exchange for the Company issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which were issuable
upon execution of the September 1992 Cohen Agreement and the remaining 500,000
shares of which were issuable upon Mr. Cohen completing 50 hours of consulting
service to the Company. The Company issued the first 500,000 shares to Mr. Cohen
in October 1992 and the remaining 500,000 shares to Mr. Cohen in February 1993.
Further pursuant to the September 1992 Cohen Agreement, the Company granted to
Mr. Cohen the option to acquire, at any time and
F-15
<PAGE> 74
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from time to time through September 11, 1993 (which date has been extended
through December 31, 1996), the option to acquire 3,000,000 shares of common
stock of the Company at an exercise price of $.09 per share (which exercise
price has been increased to $.12 per share) (the "September 1992 Cohen
Options"). As of December 31, 1996, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000. Pursuant to an
amendment, the options were exercisable through April 30, 1997 at a price of
$.13.
In February 1993, the Company entered into a second consulting agreement
with Mr. Cohen (the "February 1993 Cohen Agreement"). The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing consulting services
concerning the business operations of the Company in exchange for the Company
issuing to Mr. Cohen 3,500,000 shares of common stock (the "February 1993 Cohen
Shares"), 1,000,000 shares of which Mr. Cohen has informed the Company he has
assigned to certain other persons non-affiliated with the Company.
In July 1994, in consideration for services related to the introduction,
negotiation and execution of a distribution agreement the Company issued: (i) to
Mr. Cohen, an additional 2,500,000 shares (the "April 1994 Cohen Shares") and
(ii) to each of Elliot Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and
Rizzuto Shares") as well as options to acquire an additional 5,000,000 shares at
$.10 per share exercisable through May 1, 1996 (the "Bauer and Rizzuto
Options"). The April 1994 Cohen Shares, the Bauer and Rizzuto Shares and the
shares of common underlying the Bauer and Rizzuto Options have been registered.
The Company has been informed that Messrs. Cohen, Bauer and Rizzuto are
principals of a firm which has been granted certain distribution rights. Through
December 31, 1996, 2,855,000 shares were issued pursuant to the exercise of the
Bauer and Rizzuto Options for an aggregate exercise price of $285,500. During
the year ended December 31, 1996, approximately 3,000,000 shares of common stock
were issued for cash consideration of $300,000 pursuant to the exercise of the
Bauer and Rizzuto Options. Pursuant to an amendment, the Rizzuto options are
exercisable through April 30, 1997 at an option price of $.11. The Company
agreed to issue to Cohen an additional 300,000 shares in 1995 at a time when the
shares were valued at $.14 per share, in consideration for expenditures incurred
by Mr. Cohen with securing for the benefit of the Company and the affiliated
distributor, the continued services of a doctor.
The issuance of the September 1992 Cohen Shares, the February 1993 Cohen
Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto Shares have been
accounted for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date. During the year ended December
31, 1996, Mr. Cohen was issued 300,000 shares for services rendered. These
shares were accounted for as an administrative expense in the amount of the
Company's valuation of such shares as of the issuance date.
DISTRIBUTION AGREEMENTS
The Company has entered into separate agreements with five different
entities (the "Entities"), whereby the Company has granted exclusive rights to
distribute RETICULOSE in the countries of China, Japan, Macao, Hong Kong,
Taiwan, Malaysia, Mexico, Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay,
Brazil, Chile, Channel Islands, The Isle of Man, British West Indies, Jamaica,
Haiti, Bermuda and Belize. Pursuant to these agreements, distributors are
obligated to cause RETICULOSE to be approved for commercial sale in such
countries and upon such approval, to purchase from the Company certain minimum
quantities of RETICULOSE to maintain the exclusive distribution rights. Leonard
Cohen, a former consultant to the Company, has informed the Company that he is
an affiliate of two of these entities. To date, the Company has recorded revenue
classified as other income for the sale of territorial rights under the
distribution agreements. No sales have been made by the Company under the
distribution agreements other than for testing purposes.
F-16
<PAGE> 75
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCY
The Company is involved in a lawsuit incidental to its operations. In the
opinion of legal counsel and management of the Company, any liabilities which
may arise from this action would not have a material effect on the financial
position or results of operations of the Company.
NOTE 7. STOCKHOLDERS' EQUITY
During 1996, the Company issued 15,849,284 shares of common stock for an
aggregate consideration of $1,748,135. These amounts were comprised of the
issuance of common stock pursuant to the exercise of stock options of 15,499,284
shares for $1,573,135 and the issuance of common stock in exchange for
consulting services of 350,000 shares for consideration of $175,000.
NOTE 8. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS
No. 109 is an asset and liability approach for computing deferred income taxes.
As of December 31, 1996, the Company had a net operating loss carryforward
for Federal income tax reporting purposes amounting to approximately $4,300,000,
which expires in 2011.
The Company presently has no significant temporary differences between
financial reporting and income tax reporting. The components of the deferred tax
asset as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
Benefit of net operating loss carryforwards................. $1,462,000
Less valuation allowance.................................... 1,462,000
----------
Net deferred tax asset............................ $ --
==========
</TABLE>
As of December 31, 1996, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $1,462,000, which related to the net operating losses,
has been established.
NOTE 9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated fair
value of the Company's financial instruments presented in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107. Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 1996. Since the
reported fair values of financial instruments are based upon a variety of
factors, they may not represent actual values that could have been realized as
December 31, 1996 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash, U.S. government obligations and accounts payable. Fair values were assumed
to approximate carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values or they
are receivable or payable on demand.
The fair value of non-current investments, primarily certificates of
deposit and U.S. government obligations have been estimated using quoted market
prices. At December 31, 1996, the differences between the estimated fair value
and the carrying value of non-current debt instruments were considered
immaterial in relation to the Company's financial position.
F-17
<PAGE> 76
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. DEFERRED COMPENSATION COST
As more fully described in Note 6 to these financial statements, the
Company granted stock options in exchange for testing and consulting services
(non-employee options). In accordance with SFAS 123, Accounting for Stock-Based
Compensation (effective for options granted after December 15, 1995), the
Company recognized compensation cost for non-employee stock options based on the
fair value at the grant dates. The compensation cost is amortized over the life
of the option period which is either shorter than or essentially equivalent to
the period for which services are to be provided. The fair value of the stock
options used to compute deferred compensation cost is the estimated present
value at grant date using the Black-Sholes option pricing model with the
following assumptions for 1996: expected volatility of 20%; a risk-free interest
rate of 6% and an expected holding period ranging from 1-3 years. The deferred
compensation cost is reported as a component of stockholders' equity. At the
beginning of the year there were no options outstanding that were required to be
accounted for under SFAS 123. At the end of the year there were 7,000,000 option
shares outstanding with a weighted average exercise price of $0.195 per share.
NOTE 11. SUBSEQUENT EVENTS
During January 1997, the Company entered into a five year non-cancelable
operating lease for certain office and laboratory space in Yonkers, New York at
an annual rental of $85,400 per year.
In February 1997, the Company obtained financing of $1,000,000 in the form
of 7% convertible debentures to finance research and development.
F-18
<PAGE> 77
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 418,217
Investments............................................... 1,327,226
Inventory................................................. 19,729
Other current assets...................................... 33,646
-----------
Total current assets.............................. 1,798,818
Property and Equipment...................................... 286,161
Other Assets................................................ 187,625
-----------
Total assets...................................... $ 2,272,604
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 113,121
Customer deposits......................................... 7,800
-----------
Total current liabilities......................... 120,921
-----------
Convertible Debenture, Net.................................. 500,000
-----------
Commitments and Contingencies............................... --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized; 272,957,269 and 267,031,058 shares issued
and outstanding........................................ 2,729
Additional paid-in capital................................ 7,772,701
Subscription receivable................................... (19,000)
Deficit accumulated in the development stage.............. (5,823,866)
Deferred compensation cost................................ (280,881)
-----------
Total stockholders' equity........................ 1,651,683
-----------
Total liabilities and stockholders' equity........ $ 2,272,604
===========
</TABLE>
See notes to consolidated condensed financial statements.
F-19
<PAGE> 78
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCEPTION
JUNE 30, (FEBRUARY 20,
--------------------------- 1984) TO
1997 1996 JUNE 30, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Sales............................................... $ 2,278 $ 15,269 $ 194,319
Interest............................................ 34,979 18,949 380,388
Other income........................................ -- -- 112,000
------------ ------------ -----------
37,257 34,218 686,707
------------ ------------ -----------
Costs and Expenses:
Research and development............................ 194,673 74,000 1,301,081
General and administrative.......................... 752,161 189,029 4,965,635
Depreciation and amortization....................... 61,511 8,535 240,406
Interest............................................ 1,241 -- 3,451
------------ ------------ -----------
1,009,586 271,564 6,510,573
------------ ------------ -----------
Net Loss.............................................. $ (972,329) $ (237,346) $(5,823,866)
============ ============ ===========
Net Loss Per Share of Common Stock.................... $ (.00) $ (.00) $ (.00)
============ ============ ===========
Weighted Average Number of Common Shares
Outstanding......................................... 269,261,569 255,859,904
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-20
<PAGE> 79
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
-------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as
previously reported..................... -- $1,000 $ -- (1,000)
Adjustment for pooling of interests....... -- (1,000) 1,000 --
----------- ------ ---------- -----------
Balance, inception, as restated........... -- -- 1,000 (1,000)
Net loss, period ended December 31,
1984................................. -- -- -- (17,809)
----------- ------ ---------- -----------
Balance, December 31, 1984................ -- -- 1,000 (18,809)
Issuance of common stock for cash....... $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31,
1985................................. -- -- -- (25,459)
----------- ------ ---------- -----------
Balance, December 31, 1985................ 113,846,154 1,138 1,170 (44,268)
Issuance of common stock -- public
offering............................. 40,000,000 400 399,600 --
Issuance of underwriter's warrants...... .01 -- -- 100 --
Expenses of public offering............. -- -- (117,923) --
Issuance of common stock, exercise of
"A" warrants......................... .03 819,860 9 24,587 --
Net loss, year ended December 31,
1986................................. -- -- -- (159,674)
----------- ------ ---------- -----------
Balance, December 31, 1986................ 154,666,014 1,547 307,534 (203,942)
Issuance of common stock, exercise of
"A" warrants......................... $ .03 38,622,618 386 1,158,321 --
Expenses of stock issuance.............. -- -- (11,357) --
Acquisition of subsidiary for cash...... -- -- (46,000) --
Cancellation of debt due to
stockholders......................... -- -- 86,565 --
Net loss, period ended December 31,
1987................................. -- -- -- (258,663)
Balance, December 31, 1987................ 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31,
1988................................. -- -- -- (199,690
Balance, December 31, 1988................ 193,288,632 1,933 1,495,063 (662,295)
----------- ------ ---------- -----------
Net loss, year ended December 31,
1989................................. -- -- -- (270,753
Balance, December 31, 1989................ 193,288,632 1,933 1,495,063 (933,048)
----------- ------ ---------- -----------
Issuance of common stock, expiration of
redemption offer on "B" warrants..... .05 6,729,850 67 336,475 --
Issuance of common stock, exercise of
"B" warrants......................... .05 268,500 3 13,422 --
Issuance of common stock, exercise of
"C" warrants......................... .08 12,900 -- 1,032 --
Net loss, year ended December 31,
1990................................. -- -- -- (267,867)
----------- ------ ---------- -----------
Balance, December 31, 1990................ 200,299,882 $2,003 $1,845,992 $(1,200,915)
----------- ------ ---------- -----------
Balance, December 31, 1990................ 200,299,882 $2,003 $1,845,992 $(1,200,915)
Issuance of common stock, exercise of
"B" warrants......................... $ .05 11,400 -- 420 --
Issuance of common stock, exercise of
"C" warrants......................... .08 2,500 -- 200 --
</TABLE>
F-21
<PAGE> 80
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
-------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock, exercise of
underwriters warrants................ .012 3,760,000 38 45,083 --
Net loss, year ended December 31,
1991................................. -- -- -- (249,871)
----------- ------ ---------- -----------
Balance, December 31, 1991................ 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing... .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting
services............................. .055 500,000 5 27,495 --
Issuance of common stock, exercise of
"B" warrants......................... .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of
"C" warrants......................... .08 5,244,220 52 419,487 --
Expenses of stock issuance.............. (7,792)
Net loss, year ended December 31,
1992................................. -- -- -- (839,981)
----------- ------ ---------- -----------
Balance, December 31, 1992................ 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting
services............................. .055 500,000 5 27,495 --
Issuance of common stock, for consulting
services............................. 3,500,000 35 104,965 --
Issuance of common stock, for testing... .035 5,000,000 50 174,950 --
Net loss, year ended December 31,
1993................................. -- -- -- (563,309)
----------- ------ ---------- -----------
Balance, December 31, 1993................ 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
F-22
<PAGE> 81
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
-------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993...... 236,276,991 $2,363 $3,416,070 $(2,854,076) --
Issuance of common stock, for
consulting services......... $.05 4,750,000 47 237,453 -- --
Issuance of common stock,
exercise of options......... .08 400,000 4 31,996 -- --
Issuance of common stock,
exercise of options......... .10 190,000 2 18,998 -- --
Net loss, year ended December
31, 1994.................... -- -- -- (440,837) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1994...... 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock,
exercise of options......... .05 3,333,333 33 166,633 -- -- --
Issuance of common stock,
exercise of options......... .08 2,092,850 21 167,407 -- -- --
Issuance of common stock,
exercise of options......... .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for
consulting services......... .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for
consulting services......... .14 300,000 3 41,997 -- -- --
Net loss, year ended December
31, 1995.................... -- -- -- -- (401,884) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1995...... 251,181,774 2,512 4,475,875 -- (3,696,797) --
Issuance of common stock,
exercise of options......... .05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options......... .08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options......... .10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options......... .11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options......... .12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options......... .18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options......... .19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options......... .20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered........... .50 350,000 3 174,997 -- -- --
Options granted............... -- -- 760,500 -- -- (473,159)
Subscription receivable....... -- -- -- (19,000) -- --
Net loss, year ended December
31, 1996.................... -- -- -- -- (1,154,740) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1996...... 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ---------- -------- ----------- ---------
</TABLE>
F-23
<PAGE> 82
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
--------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ------------ ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... $267,031,058 $2,671 $7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock;
exercise of options........ 0.080 3,333,333 33 247,633 -- -- --
Issuance of common stock;
conversion of debt......... 0.150 894,526 9 133,991 -- -- --
Issuance of common stock;
conversion of debt......... 0.200 1,648,352 16 329,984 -- -- --
Issuance of common stock;
exchange for services...... 0.410 50,000 -- 20,500 -- -- --
Warrant costs................ -- -- 37,242 -- -- --
Amortization of deferred
compensation costs......... -- -- -- -- -- 192,278
Net loss period ended June
30, 1997................... -- -- -- -- (972,329) --
------------ ------ ---------- -------- ----------- ---------
Balance, June 30, 1997......... $272,957,269 $2,729 $7,772,701 $(19,000) $(5,823,866) $(280,881)
============ ====== ========== ======== =========== =========
</TABLE>
See notes to consolidated condensed financial statements.
F-24
<PAGE> 83
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
SIX MONTHS ENDED (FEBRUARY 20,
JUNE 30, 1984) TO
--------------------- JUNE 30,
1997 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................. $(972,329) $(237,346) $(5,823,866)
--------- --------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 62,752 8,535 241,647
Amortization of deferred compensation cost............ 192,278 -- 479,619
Loss on sale of property and equipment................ 1,425 -- 1,425
Issuance of common stock for services................. 20,500 -- 1,392,500
(Increase) decrease in other current assets........... (17,565) 4,739 (52,646)
Increase in inventory................................. -- (1,638) (19,729)
Increase in other assets.............................. (224,295) -- (238,839)
Increase (decrease) in accounts payable and accrued
liabilities......................................... 66,447 2,640 119,321
--------- --------- -----------
Total adjustments................................ 101,542 14,276 1,923,298
--------- --------- -----------
Net cash used by operating activities............ (870,787) (223,070) (3,900,568)
--------- --------- -----------
Cash Flows from Investing Activities:
Purchase of investments.................................. (665,000) (649,980) (2,391,256)
Proceeds from sale of investments........................ 716,615 -- 1,064,030
Expenditures for property and equipment.................. (91,873) (519) (476,377)
Proceeds from sale of property and equipment............. 1,200 -- 1,200
--------- --------- -----------
Net cash provided (used) by investing
activities..................................... (39,058) (650,499) (1,802,403)
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debenture.......... 1,000,000 -- 1,000,000
Proceeds from sale of securities, net of issuance
costs................................................. 266,666 1,373,734 5,121,188
--------- --------- -----------
Net cash provided by financing activities........ 1,266,666 1,373,734 6,121,188
--------- --------- -----------
Net Increase in Cash and Cash Equivalents.................. 356,821 500,165 418,217
Cash and Cash Equivalents, Beginning....................... 61,396 65,230 --
--------- --------- -----------
Cash and Cash Equivalents, Ending.......................... $ 418,217 $ 565,395 $ 418,217
========= ========= ===========
Supplemental Schedule of Non Cash Financing Activities:
During the quarter ended June 30, 1997, $464,000 of the
convertible debenture was converted into 2,542,878
shares of the Company's common stock
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE> 84
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements at
June 30, 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of financial position as of
June 30, 1997 and results of operations for the three months and six months
ended June 30, 1997 and 1996 and cash flows for the six months ended June 30,
1997 and 1996. All such adjustments are of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year. The statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.
NOTE 2. COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The accompanying unaudited consolidated condensed financial statements at
June 30, 1997 have been prepared in conformity with generally accepted
accounting principles which contemplate the continuance of the Company as a
going concern. The Company has suffered losses from operations during its
operating history. The Company is dependent upon registration of RETICULOSE for
sale before it can begin commercial operations. The Company's cash position may
be inadequate to pay all the costs associated with the full range of testing and
clinical trials required by the FDA. Management does not anticipate registration
or other approval of RETICULOSE in the near future in the United States. Unless
and until RETICULOSE is approved for sale, the Company may be dependent upon the
continued sale of its securities for funds to meet its cash requirements.
Management intends to continue to sell the Company's securities in an attempt to
mitigate the effects of its cash position; however, no assurance can be given
that such equity financing, if and when required, will be available. In the
event that such equity financing is not available, in order to continue
operations, management anticipates that they will have to defer their salaries.
In addition, the Company may seek additional debt financing. No assurance can be
given that the Company will be able to sustain its operations until approval is
granted or that any approval will ever be granted. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE. The Company has not as yet received any
notice of claim from such parties.
POTENTIAL LOSS OF BAHAMIAN RIGHTS
RETICULOSE is manufactured by Advance Viral Research, Limited (LTD) in
facilities located in Freeport, Grand Bahama Island. LTD has a license to
manufacture pharmaceutical products for export from The Grand Bahama Port
Authority, Limited. LTD's counsel was advised in August 1988 by the Ministry of
Health of the Government of the Bahamas that a license from the Ministry of
Health is required for the manufacture of pharmaceuticals in the Freeport area
of Grand Bahama Island. LTD has received an opinion of its counsel in the
Bahamas that the license from The Grand Bahama Port Authority, Limited is valid
for the manufacture, export and sale by LTD of ethical pharmaceutical products
in the Freeport area of Grand Bahama Island. No proceedings have been instituted
or threatened by the Ministry of Health. If such proceedings are instituted, LTD
intends to defend them vigorously. No assurance can be given that LTD would
successfully defend such claim.
F-26
<PAGE> 85
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRODUCT LIABILITY
The Company could be subjected to claims for adverse reactions resulting
from the use of RETICULOSE. Although the Company is unaware of any such claims
or threatened claims since RETICULOSE was initially marketed in the 1940's, one
study noted adverse reactions from highly concentrated doses in guinea pigs. In
the event any claims for substantial amounts were successful, they could have a
material adverse effect on the Company's financial condition and on the
marketability of RETICULOSE. As of the date hereof, the Company does not have
product liability insurance for RETICULOSE. There can be no assurance that the
Company will be able to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to secure such
product liability insurance, the risk of loss to the Company in the event of
claims would be greatly increased and could materially adversely affect the
Company.
LACK OF PATENT PROTECTION
The Company does not presently have a patent for RETICULOSE but the Company
is currently applying for patents for RETICULOSE as a treatment for certain
diseases. The Company can give no assurance that other companies, having greater
economic resources, will not be successful in developing a similar product.
There can be no assurance that the Company will obtain such patents or if
obtained that they will be enforceable.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed to perform
a demonstration in the Domincan Republic in accordance with a certain agreed
upon protocol (the "Protocol") to assess the efficacy of a treatment using
RETICULOSE incorporated in the Protocol against AIDS (the "Plata Agreement").
Plata covered all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an additional
5,000,000 shares at $.08 per share through July 9, 1994 (the "Plata Options")
and 5,000,000 shares at $.10 per share through July 9, 1994. Pursuant to several
amendments, the Plata Options and the Additional Plata Options are exercisable
through December 31, 1997 at an exercise price of $.12 and $.14, respectively.
As of June 30, 1997, there are outstanding Plata Options to acquire 813,000
shares at an exercise price of $.12 per share and Additional Plata Options to
acquire 858,100 shares at an exercise price of $.14 per share. Through June 30,
1997, the Company has received approximately $670,000 pursuant to the issuance
of approximately 7.7 million shares in connection with the exercise of the Plata
Options and the Additional Plata Options.
TRM Management Corp. ("TRM")
In August 1991, the Company entered into an agreement with TRM, whereby TRM
performed a controlled open clinical trial test in Haiti (the "Haiti Tests"),
using RETICULOSE (the "TRM Agreement"). According to the TRM Agreement, the
purpose of the Haiti Tests was to assess the effectiveness of RETICULOSE against
the Hepatitis "A" virus and Hepatitis "B" virus in accordance with and in
compliance with a certain Hepatitis Open Label Clinical Trial Protocol developed
by TRM. At the conclusion of the Haiti Tests, TRM was required to prepare a
paper describing the methods and results of testing, the form and substance of
which shall be appropriate for publication by recognized scientific journals
("Results Paper"). The Results Paper was published in the December 1992 issue of
the Journal of the Royal Society of Health.
On January 3, 1992, TRM delivered to the Company the Results Paper. In
accordance with the terms of the TRM Agreement, the Company has issued to the
shareholders and certain associated persons of TRM (1) an
F-27
<PAGE> 86
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate amount of 10,000,000 shares of the Company's common stock (the "TRM
Shares") and (2) an option to acquire, at any time, for a period of five years
from the date of issuance of the option, 10,000,000 shares of the Company's
common stock at a purchase price of $.05 per share (the "TRM Options"). As of
December 31, 1996, 6,666,666 shares of common stock were issued pursuant to the
exercise of the TRM Options for an aggregate exercise price of $333,333. In
March 1997, the remaining 3,333,334 shares of common stock were issued pursuant
to the exercise of the TRM options for an aggregate exercise price of $266,667.
Argentine Agreement
In April 1996, the Company entered into an agreement (the "Argentine
Agreement") with DCT SRL, an Argentine corporation unaffiliated with the Company
("DCT") pursuant to which DCT was to cause a clinical trial to be conducted in
two separate hospitals located in Buenos Aires, Argentina (the "Clinical
Trials"). Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman, M.D. and the
purpose of the Clinical Trials was to assess the efficacy of the Company's drug
RETICULOSE on the Human Papilloma Virus (HPV). The protocol calls for, among
other things, a study to be performed with clinical and laboratory follow-up on
20 male and female human patients between the ages of 18 and 50. The Clinical
Trials were not a double-blind study and did not include a placebo control group
or references to any other antiviral drug.
Pursuant to the Argentine Agreement, the Company paid approximately $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical Trials. The
Argentine Agreement further provides, that at the conclusion of the Clinical
Trials, DCT shall cause Dr. Flichman to prepare and deliver a written report to
the Company regarding the methodology and results of the Clinical Trials (the
"Written Report"). In September 1996, the Written Report was delivered by Dr.
Flichman to the Company. Upon delivery of the Written Report to the Company, the
Company delivered to the principals of DCT options to acquire 2,000,000 shares
of the Company's common stock for a period of one year from the date of the
delivery of the Written Report, at a purchase price of $.20 per share. As of
June 30, 1997, 473,500 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to certain
conditions, the exclusive right to market and sell RETICULOSE in Argentina,
Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT Exclusive Distribution
Agreement").
During the quarter ended June 30, 1997, the Company entered into an
agreement with DCT (the "HIV-HPV Agreement") whereby the Company agreed to
provide to DCT or its assignees, up to $600,000 to cover the costs of a double
blind placebo controlled study in approximately 150 patients to assess the
efficacy of Reticulose for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study").
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $140,000, of which $100,000 was advanced during the three month
period ended June 30, 1997 and is accounted for as a research and development
expense. The amounts have been used to cover expenses associated with
pre-clinical activities.
The HIV-HPV Agreement provides that (i) in the event the data from the
HIV-HPV Study is used in connection with Reticulose being approved for
commercial sale anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the costs of the
HIV-HPV Study, then DCT is obligated to reimburse the Company for all amounts
expended in connection with the HIV-HPV Study.
Barbados Study
A double-blind clinical trial using RETICULOSE in the treatment of AIDS is
being conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados (the
"Barbados Study"). As of June 30, 1997, the Company has
F-28
<PAGE> 87
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expended approximately $275,000 to cover the costs of the Barbados Study. Based
on information received from the coordinators of the Barbados Study, the Company
is uncertain as to the continued costs to be incurred in connection with the
Barbados Study and has not been informed as to when results from the Barbados
Study will be forthcoming. In December 1996, the Company received from the
coordinators of the Barbados Study, a written summary of preliminary results of
the Barbados Study (the "Written Summary").
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with Shalom Z.
Hirschman, M.D., then Professor of Medicine of Mt. Sinai School of Medicine, New
York, New York and Director of Mt. Sinai's Division of Infectious Diseases,
whereby Dr. Hirschman was to provide consulting services to the Company through
May 1997. The consulting services included the development and location of
pharmacological and biotechnology companies and assisting the Company in seeking
joint ventures with and financing of companies in such industries.
In connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option to
acquire 5,000,000 shares of the Company's common stock for a period of three
years as per the vesting schedule as referred to in the agreement, at an
exercise price of $.18 per share. In addition and in connection with entering
into the consulting agreement with Dr. Hirschman, the Company issued to a person
unaffiliated with the Company, 100,000 shares of the Company's common stock, and
an option to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at an exercise price of $.18 per share. As of June 30, 1997,
900,000 shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide additional
consulting services to the Company through May 2000 (the "Addendum"). Pursuant
to the Addendum, the Company granted to Dr. Hirschman and his designees options
to purchase an aggregate of 15,000,000 shares of the Company's common stock for
a three year period pursuant to the following schedule: (i) options to purchase
5,000,000 shares exercisable at any time and from time to time commencing March
24, 1996 and ending March 23, 1999 at an exercise price of $.19 per share, of
which options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March 24, 1998
and ending March 23, 1999 at an exercise price of $.27 per share, of which
options to acquire 500,000 shares were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman; and (iii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March 24, 1998
and ending March 23, 1999 at an exercise price of $.36 per share, of which
options to acquire 500,000 shares were assigned by Dr. Hirschman to Richard
Rubin, counsel to Dr. Hirschman. In addition, the Company has agreed to cause
the shares underlying these options to be registered so long as there is no cost
to the Company. As of June 30, 1997, 500,000 shares of common stock were issued
pursuant to the exercise of stock options by Richard Rubin. Mr. Rubin has, from
time to time in the past, advised the Company on matters unrelated to his
representation of Dr. Hirschman.
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has agreed to serve
as the President and Chief Executive Officer of the Company for a period of
three years, subject to earlier termination by either party, either "for cause,"
as defined in and in accordance with the provisions of the Employment Agreement,
or if the Company does not receive, on or prior to December 31, 1997, funding of
at least $3,000,000 from sources other than traditional institutional/bank debt
financing or proceeds from the purchase by Dr. Hirschman of the Company's
securities, including, without limitation, the exercise of Dr. Hirschman of
outstanding stock options. Pursuant to the Employment Agreement, Dr. Hirschman
is entitled to receive an annual base salary of $325,000, use of an
F-29
<PAGE> 88
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
automobile, major medical, term life, disability and dental insurance benefits
for the term of his employment. The Employment Agreement further provides that
Dr. Hirschman shall be nominated by the Company to serve as a member of the
Company's Board of Directors and that Bernard Friedland and William Bregman will
vote in favor of Dr. Hirschman as a director of the Company, for the duration of
Dr. Hirschman's employment, and since October 1996, Dr. Hirschman has served as
a member of the Company's Board of Directors.
CONSULTING AGREEMENTS
Cohen Agreements
In September 1992, the Company entered into a one year consulting agreement
with Leonard Cohen (the "September 1992 Cohen Agreement") for a one-year term.
The September 1992 Cohen Agreement required that Mr. Cohen provide certain
consulting services to the Company in exchange for the Company's issuing to Mr.
Cohen 1,000,000 shares of common stock (the "September 1992 Cohen Shares"),
500,000 of which were issuable upon execution of the September 1992 Cohen
Agreement and the remaining 500,000 shares of which were issuable upon Mr. Cohen
completing 50 hours of consulting service to the Company. The Company issued the
first 500,000 shares to Mr. Cohen in October 1992 and the remaining 500,000
shares to Mr. Cohen in February 1993. Further pursuant to the September 1992
Cohen Agreement, the Company granted to Mr. Cohen the option to acquire, at any
time and from time to time through September 10, 1993 (which date has been
extended through December 31, 1997), the option to acquire 3,000,000 shares of
common stock of the Company at an exercise price of $.09 per share (which
exercise price has been increased to $.13 per share) (the "September 1992 Cohen
Options"). As of June 30, 1997, 1,300,000 of the September 1992 Cohen Options
have been exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting agreement
with Mr. Cohen (the "February 1993 Cohen Agreement") for a three-year term
commencing on March 1, 1993. The February 1993 Cohen Agreement provides that Mr.
Cohen provide financing business consulting services concerning the operations
of the business of the Company and possible strategic transactions in exchange
for the Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen has informed
the Company he has assigned to certain other persons not affiliated with the
Company or any of its officers or directors.
In July 1994, in consideration for services related to the introduction,
negotiation and execution of a distribution agreement the Company issued: (i) to
Mr. Cohen, an additional 2,500,000 shares (the "April 1994 Cohen Shares") and
(ii) to each of Elliot Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and
Rizzuto Shares") as well as options to acquire an additional 5,000,000 shares at
$.10 per share exercisable through May 1, 1996 (the "Bauer and Rizzuto
Options"). The Company has been informed that Messrs. Cohen, Bauer and Rizzuto
are principals of a firm which has been granted certain distribution rights,
which were terminated on May 31, 1995. Through June 30, 1997, 2,855,000 shares
were issued pursuant to the exercise of the Bauer and Rizzuto Options for an
aggregate exercise price of $285,500. During the year ended December 31, 1996,
approximately 3,000,000 shares of common stock were issued for cash
consideration of $300,000 pursuant to the exercise of the Bauer and Rizzuto
Options. Pursuant to several amendments, the Bauer and Rizzuto options are
exercisable through December 31, 1997 at an option price of $.11. The Company
agreed to issue to Cohen an additional 300,000 shares in 1995 at a time when the
shares were valued at $.14 per share, in consideration for expenditures incurred
by Mr. Cohen in connection with securing for the benefit of the Company and the
affiliated distributor, the continued services of a doctor.
The issuance of the September 1992 Cohen Shares, the February 1993 Cohen
Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto Shares have been
accounted for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date. During the year ended December
31, 1996,
F-30
<PAGE> 89
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Cohen was issued 300,000 shares for services rendered. These shares were
accounted for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five different
entities (the "Entities"), whereby the Company has granted exclusive rights to
distribute RETICULOSE in the countries of China, Japan, Macao, Hong Kong,
Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil, Chile, Channel
Islands, The Isle of Man, British West Indies, Jamaica, Haiti, Bermuda, Belize
and Saudi Arabia. Pursuant to these agreements, distributors are obligated to
cause RETICULOSE to be approved for commercial sale in such countries and upon
such approval, to purchase from the Company certain minimum quantities of
RETICULOSE to maintain the exclusive distribution rights. Leonard Cohen, a
former consultant to the Company, has informed the Company that he is an
affiliate of two of these entities.
NOTE 3. CONVERTIBLE DEBENTURE
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB"). Accrued interest under the Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid principal
balance from February 21, 1997 until the date of interest payment. The Debenture
may be prepaid by the Company before maturity, in whole or in part, without
premium or penalty, if the Company gives the holder of the Debenture notice not
less than 30 days before the date fixed for prepayment in that notice. The
Debenture is convertible, at the option of the holder, into shares of common
stock.
During the quarter ended June 30, 1997, RBB exercised its right to convert
$330,000 of the principal amount of the Debenture into 1,648,352 shares of the
Company's common stock at a conversion price of $.2002 per share and to convert
$134,000 of the principal amount of the Debenture into 894,526 shares of the
Company's common stock at a conversion price of $.1498.
Subsequent to June 30, 1997, RBB exercised its right to convert $500,000 of
the principal amount of the Debenture into 4,133,104 shares of the Company's
common stock at an average conversion price of $0.1316 per share.
In connection with the issuance of the Debenture, the Company issued to RBB
three warrants (the "Warrants") to purchase common stock, each such Warrant
entitling the holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of the common stock. The exercise prices of the three
Warrants are $0.288, $0.576 and $0.864 per Warrant share, respectively. The
Warrants are reported for at the estimated fair value as measured by the
difference between the stock price on the grant date and the exercise price. The
discount is amortized to interest expense over the life of the Warrants. The
unamortized portion is reported as a reduction of the convertible debenture on
the Company's balance sheet.
F-31
<PAGE> 90
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
The Company........................... 3
The Offering.......................... 5
High Risk Factors..................... 6
Dilution.............................. 12
Market Information.................... 13
Dividend Policy....................... 14
Use of Proceeds....................... 14
Capitalization........................ 15
Management's Discussion and Analysis
or Plan of Operation................ 16
Business.............................. 19
Management............................ 44
Principal Stockholders................ 48
Certain Transactions.................. 49
Selling Stockholders.................. 50
Description of Securities............. 51
Shares Eligible for Future Sale....... 52
Litigation............................ 52
Legal Matters......................... 53
Experts............................... 53
Sources............................... 53
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
ADVANCED VIRAL
RESEARCH CORP.
---------------------
PROSPECTUS
---------------------
39,000,067 SHARES
OF
COMMON STOCK
, 1997
======================================================
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the securities:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC Registration Fee........................................ $ 2,718.00
Printing Costs*............................................. 25,500.00
Legal Fees and Expenses*.................................... 40,000.00
Accounting Fees and Expenses*............................... 7,407.00
----------
Total............................................. $75,265.00
==========
</TABLE>
- ---------------
* Indicates expenses that have been estimated for the purposes of this filing.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Ninth of the Company's Certificate of Incorporation contains the
following provision with respect to indemnification of Directors and Officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and
all of the expenses, liabilities or other matters referred to in or covered
by said section, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any By-law, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office, and shall continue
as to a person, who has ceased to be director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Section 145 of the General Corporate Law of the State of Delaware contains
provisions regarding indemnification, among others, of officers and directors.
Section 145 of the General Corporate Law of the State of Delaware provides in
relevant part:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of
II-1
<PAGE> 92
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fee) actually and reasonably
incurred by him in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or, matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no
such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
The Company's Certificate of Incorporation was amended on December 30,
1987, to limit or eliminate director liability by incorporating new Article
Eleventh, which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of laws, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth the Company's sales of unregistered
securities for past three years. All transactions listed below involved the
issuance of Shares or Common Stock and options to acquire Shares of Common Stock
prior to commencement of the offering described in the foregoing Prospectus. No
underwriters were employed with respect to the sale of any of the securities
listed below. All shares were issued in reliance upon Section 4 (2) and/or 3 (b)
of the Securities Act.
<TABLE>
<CAPTION>
SECURITIES ISSUED PURCHASER DATE ACQUIRED CONSIDERATION
- ----------------- --------- ------------- -------------
<S> <C> <C> <C>
2,500,000 Leonard Cohen 4-25-94 Services (Consulting)(1)
300,000 Leonard Cohen 6-23-95 Services (Consulting)(2)>
300,000 Richard Rubin 9-27-95 Services
5,000,000 options Elliot Bauer Services (Consulting)(1)
exercisable at $.10 per
share and 625,000 shares 4-25-94
5,000,000 options Lee Rizzuto Services (Consulting)(1)
exercisable at $.10 per
share and 625,000 shares 4-25-94
1,000,000 shares Shalom Z. Hirschman, M.D. 5-24-95 Services (Consulting)(1)
</TABLE>
II-2
<PAGE> 93
<TABLE>
<CAPTION>
SECURITIES ISSUED PURCHASER DATE ACQUIRED CONSIDERATION
- ----------------- --------- ------------- -------------
<S> <C> <C> <C>
5,000,000 options Shalom Z. Hirschman, M.D. Services (Consulting)(2)
exercisable at each of
$.18, $.19, $.27 and $.36
per share 4-1-96
100,000 shares Deborah Silver 5-24-95 Services (Consulting)(2)
500,000 options Deborah Silver Services (Consulting)(2)
exercisable at $.18 per
share 4-1-96
3,000,000 options Commonwealth Services (Consulting)(2)
exercisable at $.25 per
share 10-24-94
1,000,000 options Freddie Velez Services (Consulting)(2)
exercisable at $.20 per
share 4-1-96
500,000 options Gary Hussian Services (Consulting)(2)
exercisable at $.20 per
share 4-1-96
500,000 options Cesar Blumtritt, M.D. Services (Consulting)(2)
exercisable at $.20 per
share 4-1-96
50,000 shares Malcolm Santer 9-4-96 Services (Consulting)(3)
50,000 shares Malcolm Santer 2-26-97 Services (Consulting)(3)
750,000 shares David Sass 3-21-97 .08
375,000 shares Norman Schwartz 3-21-97 .08
375,000 shares Mel Mendelson 3-21-97 .08
100,000 shares Malcolm Santer 8-27-97 Services (Consulting)
</TABLE>
- ---------------
(1) The 3,750,000 shares issued for consulting services on 4-25-94 have been
valued at $.05 per share.
(2) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
have been valued at $.11 per share.
(3) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
been valued at $.50 per share and $.41 per share, respectively.
(4) The 100,000 shares issued for consulting services on August 27, 1997 have
been valued at $ per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3(a) -- Articles of Incorporation of Advanced Viral Research
Corp.(2)
3(b) -- Bylaws of Advanced Viral Research Corp., as amended(1)
3(c) -- Amendment to Articles of Incorporation of Advanced Viral
Research Corp.(2)
4(a) -- Specimen Certificate of Common Stock(1)
4(b) -- Specimen Warrant Certificate(1)
4(c) -- Warrant Agreement between the Company and American Stock
Transfer and Trust Company(1)
4(d) -- Forms of Common Stock Options and Agreements granted by the
Company to TRM Management Corp.(5)
4(e) -- Form of Common Stock Option and Agreement granted by the
Company to Plata Partners Limited Partnership(12)
4(f) -- Consulting Agreement, dated September 11, 1992, and Form of
Common Stock granted by the Company to Leonard Cohen(6)
4(g) -- Addendum to Agreement granted by the Company to Shalom Z.
Hirschman, M.D. dated March 24, 1996(10)
5(a) -- Opinion and Consent of the law firm of Berman Wolfe &
Rennert, P.A.+
</TABLE>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10(a) -- Declaration of Trust by Bernard Friedland and William
Bregman in favor of the Company dated November 16, 1987(12)
10(b) -- Clinical Trials Agreement, dated September 19, 1990, between
Clinique Medical Actuel and the Company(3)
10(c) -- Letter, dated March 15, 1991 to the Company from Health
Protection Branch(3)
10(d) -- Agreement dated August 20, 1991 between TRM Management Corp.
and the Company(11)(i)
10(e) -- Lease dated December 18, 1991 between Bayview Associates,
Inc. and the Company(4)
10(f) -- Lease Agreement, dated February 16, 1993 between Stortford
Brickell Inc. and the Company(7)
10(g) -- Consulting Agreement dated February 28, 1993 between Leonard
Cohen and the Company(8)
10(h) -- Medical Advisor Agreement, dated as of September 14, 1993,
between Lionel Resnick, M.D. and the Company(11)(ii)
10(i) -- Agreement, dated November 9, 1993, between Dormer
Laboratories Inc. and the Company(12)
10(j) -- Exclusive Distribution Agreement, dated April 25, 1994,
between C.U.R.E. Pharmaceutical Corp. and the
Company(11)(iii)
10(k) -- Exclusive Distribution Agreement, dated as of June 1, 1994,
between C.U.R.E. Pharmaceutica Central Americas Ltd. and the
Company(11)(iv)
10(l) -- Exclusive Distribution Agreement dated as of June 17, 1994
between DCT S.R.L. and the Company, as amended(11)(v)
10(m) -- Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and the
Company(11)(vi)
10(n) -- Agreement dated May 24, 1995 between the Company and Deborah
Silver(9)
10(o) -- Agreement dated May 29, 1995 between the Company and Shalom
Z. Hirschman, M.D.(9)
10(p) -- Exclusive Distribution Agreement, dated as of June 2, 1995,
between AVIX International Pharmaceutical Corp. and the
Company(12)
10(q) -- Supplement to Exclusive Distribution Agreement, dated
November 2, 1995 with Commonwealth Pharmaceuticals(12)
10(r) -- Exclusive Distributorship & Limited License Agreement, dated
December 28, 1995, between AVIX International Pharmaceutical
Corp., Beijing Unistone Pharmaceutical Co., Ltd. and the
Company(11)(vii)
10(s) -- Modification Agreement, dated December 28, 1995, between
AVIX International Pharmaceutical Corp. and the
Company(11)(vii)
10(t) -- Agreement dated April 1, 1996, between DCT S.R.L. and the
Company(11)(viii)
10(u) -- Addendum, dated as of March 24, 1996, to Consulting
Agreement between the Company and Shalom Z. Hirschman,
M.D.(10)
10(v) -- Addendum to Agreement, dated July 11, 1996, between AVIX
International Pharmaceutical Corp. and the Company(11)(ix)
10(w) -- Employment Agreement, dated October 17, 1996, between the
Company and Shalom Z. Hirschman, M.D.(11)(x)
10(x) -- Lease, dated February 7, 1997 between Robert Martin Company,
LLC and the Company(12)
10(y) -- Copy of Purchase and Sale Agreement, dated February 21, 1997
between the Company and Interfi Capital Group(11)(xi)
</TABLE>
II-4
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10(z) -- Material Transfer Agreement-Cooperative Research And
Development Agreement, dated March 13, 1997, between
National Institute of Health, Food and Drug Administration
and the Centers for Disease Control and Prevention(11)(xii)
21 -- Subsidiaries of Registrant -- Advance Viral Research
Limited, a Bahamian corporation.
23(a) -- Consent of Rachlin Cohen & Holtz, independent certified
public accountants(13)
23(b) -- Consent of the law firm of Berman Wolfe & Rennert, P.A. (See
Exhibit 5(a)).
27 -- Financial Data Schedule for the Company as of and for the
Six Months Ended June 30, 1997(13)
</TABLE>
- ---------------
(1) Documents incorporated by reference herein to certain exhibits the
Company's Registration Statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on March 19,
1990.
(2) Documents incorporated by reference herein to certain exhibits to the
Company's Registration Statement on Form S-18, File No. 33-2262-A, filed
with the Securities and Exchange Commission on February 12, 1989.
(3) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
(4) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for period ended March 31, 1991.
(5) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
(6) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-Q for the period ended September 30, 1992.
(7) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.
(8) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1993.
(9) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended June 30, 1995.
(10) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1996.
(11) Incorporated by reference herein to the Company's Reports on Form 8-K and
Exhibits thereto as follows:
<TABLE>
<S> <C>
(i) A report on Form 8-K dated January 3, 1992.
(ii) A report on Form 8-K dated September 14, 1993.
(iii) A report on Form 8-K dated April 25, 1994.
(iv) A report on Form 8-K dated June 3, 1994.
(v) A report on Form 8-K dated June 17, 1994.
(vi) A report on Form 8-K dated October 25, 1994.
(vii) A report on Form 8-K dated December 28, 1995.
(viii) A report on Form 8-K dated April 22, 1996.
(ix) A report on Form 8-K dated July 12, 1996.
(x) A report on Form 8-K dated October 17, 1996.
(xi) A report on Form 8-K dated February 21, 1997.
(xii) A report on Form 8-K dated March 25, 1997.
</TABLE>
(12) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996.
(13) Filed herewith
+ To be filed by amendment
II-5
<PAGE> 96
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-6
<PAGE> 97
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, Advanced Viral Research Corp. certifies that it has reasonable grounds
to believe that it meets all of the requirements of filing on Form SB-2 and
authorized this Registration Statement to be signed on its behalf by the
undersigned, on the 8th day of September, 1997.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
------------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive
Officer
September 8, 1997
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed herein below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ SHALOM Z. HIRSCHMAN, M.D. President and Chief September 8, 1997
- ----------------------------------------------------- Executive Officer and
Shalom Z. Hirschman, M.D. director
/s/ BERNARD FRIEDLAND Chairman of the Board and September 8, 1997
- ----------------------------------------------------- director
Bernard Friedland
/s/ WILLIAM BREGMAN Secretary-Treasurer, September 8, 1997
- ----------------------------------------------------- Principal Financial and
William Bregman Accounting Officer,
director
/s/ LOUIS J. SILVER director September 8, 1997
- -----------------------------------------------------
Louis J. Silver
</TABLE>
II-7
<PAGE> 98
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ----------- -----------
<C> <S> <C>
23(a) Consent of Rachlin Cohen & Holtz
27 Financial Data Schedule for the Company as of and for the
six months ended June 30, 1997.
</TABLE>
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of Advanced Viral Research Corp. of our
report dated January 28, 1997 (which report contains an explanatory paragraph
that describes a condition that raises substantial doubt as to the ability of
the Company to continue as a going concern) relating to the consolidated
financial statements of Advanced Viral Research Corp. appearing in such
Prospectus. We also consent to the references to us under the heading "Experts"
in the Prospectus.
/s/ RACHLIN COHEN & HOLTZ
--------------------------------------
RACHLIN COHEN & HOLTZ
Miami, Florida
September 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE SECOND QUARTER
10-QSB OF ADVANCED VIRAL RESEARCH CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,745,433
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,798,818
<PP&E> 286,161<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,272,604
<CURRENT-LIABILITIES> 129,921
<BONDS> 0
0
0
<COMMON> 2,729
<OTHER-SE> 1,648,954
<TOTAL-LIABILITY-AND-EQUITY> 2,272,604
<SALES> 2,278
<TOTAL-REVENUES> 37,257
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,009,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (972,329)
<INCOME-TAX> 0
<INCOME-CONTINUING> (972,329)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (972,329)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> PP&E VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
