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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
(Name of Small Business Issuer in Its Charter)
DELAWARE 59-2646820
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(954) 458-7636
(Address of Principal Executive Offices, Zip Code; Telephone Number Including
Area Code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]
Issuer's revenues for its most recent fiscal year: $102,907.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of February 28, 1997 (see definition of affiliate
in Rule 12b-2 of the Exchange Act): 191,020,925 shares at $0.43 per share, or
$82,138,998.
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Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No N/A
--- ----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of February 28, 1997: 267,081,058.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). N/A
Transitional Small Business Disclosure Format (check one):
Yes No x
--- ---
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ADVANCED VIRAL RESEARCH CORP.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PART I.....................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS..................................................................1
ITEM 2. DESCRIPTION OF PROPERTY.................................................................37
ITEM 3. LEGAL PROCEEDINGS.......................................................................38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.....................................39
PART II...................................................................................................40
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................40
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...............................41
ITEM 7. FINANCIAL STATEMENTS....................................................................44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................................44
PART III .................................................................................................45
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..............................45
ITEM 10. EXECUTIVE COMPENSATION..................................................................46
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................50
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................52
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................................................52
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Advanced Viral Research Corp. (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
Food and Drug Administration of the United States Department of Health and Human
Services ("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.
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, 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.
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.
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, according to information
received from Dr. Hirschman, 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.
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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.
The Company 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 CD4
counts were performed by SmithKline Beecham Clinical Laboratories
[firms unaffiliated with the Company].
"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 CD4-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.
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"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 RETICULOSE.
The FDA was successful in its litigation and RETICULOSE was withdrawn from
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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 Pharmaceuticals Inc. ("Key Inc.") through its subsidiary, Key
Pharmaceuticals Limited ("Key"), which, on June 1, 1968, obtained a license to
produce ethical pharmaceutical products, including RETICULOSE, for export and
sale from the Grand Bahama Port Authority, Limited (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 a Notice of Claimed Investigational
Exemption for a New Drug ("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 ("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 peptide study conducted exclusively for the
Company from December 1987 to September 1988 (the "Wisconsin Study"), 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:
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"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 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."
In response to these 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 Submission"). 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 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
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further studies and action 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. 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
has 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.
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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. The Company's facility in Freeport, Grand Bahama Island is licensed
for the manufacture of pharmaceuticals for export by the Port Authority.
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. 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. No proceedings have been instituted or threatened by the
Ministry of Health. 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. 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
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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 also ascertained that legal restrictions related to the
purchase of real property interests in the Bahamas by persons not Bahamian
citizens and not owned or controlled by Bahamian citizens. 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 that
LTD's purchase of the property was lawful.
The transaction 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 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 further action since August 1988 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.
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.
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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, issued on October 15, 1992, 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 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. 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.
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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 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
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<PAGE> 14
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:
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<PAGE> 15
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.
"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.
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"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 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.
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"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.
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<PAGE> 18
"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 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.
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<PAGE> 19
"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.
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"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."
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.
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"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 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 with the FDA an amendment to the IND or
seek to reactivate the IND. There can be no assurances as to the costs or the
timing of the refiling of the IND or whether the Company has the resources to
complete the FDA approval process. The Company may allocate certain funds from
the exercise of Common Stock purchase options 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.
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TESTING AGREEMENTS
Testing in the United States of America
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 APPLICATION 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 the HPV
Clinical Trial, 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.
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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 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
(the "TRM Shares") of the Company's Common Stock, par value $.00001 (the "Common
Stock"), 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 of Common Stock 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. Pursuant to an amendment, the TRM Options were
exercisable through March 15, 1997 at an exercise price of $.08.
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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 14, 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 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. Further, the Company is currently not pursuing the registration
certificate in the Dominican Republic.
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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., 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."
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<PAGE> 27
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 CD 4
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.
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.
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<PAGE> 28
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 S.R.L., an Argentine corporation ("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.
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
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<PAGE> 29
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 Common
Stock purchase 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 share issuable under those options. 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. 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 February 28, 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 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
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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 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. 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. 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 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. Until RETICULOSE is
registered and approved for sale in the United States, in another developed
country or in the other countries 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."
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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 Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act.
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
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<PAGE> 32
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, 1977), 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 another entity with which Leonard Cohen is affiliated, 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
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<PAGE> 33
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, and are accounted for as general and administrative
expense at $.14 per share, the 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 of Common Stock and shares covered by Common Stock purchase
options 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. Such
additional shares were included in the Company's July 1, 1994 and July 27, 1995
Registration Statements under the Securities Act to permit the public sale of
those shares by Mr. Cohen.
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." In connection with the
execution of the Exclusive Distribution Agreement with C.U.R.E. 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 of Common Stock 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 shares underlying his option
prior to April 30, 1996, and Mr. Bauer
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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. In addition, Mr. Cohen sold 1,300,000 shares underlying his options
prior to April 30, 1996.
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 of Common Stock at $.18 per Option Share, exercisable through May 24,
1998. Dr. Hirschman sold the 1,000,000 outstanding shares in 1995 and exercised
part of an option to acquire 900,000 shares at $.18 per share during 1996.
In connection with the Consulting Agreement with Dr. Hirschman, the
Company also issued to Deborah Silver 100,000 shares of Common Stock 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. 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 of Common Stock, exercisable as follows: options to purchase 5,000,000
shares from March 24, 1996 through March 23, 1999 at $.19 per share; options to
purchase 5,000,000 shares from March 24, 1997 through March 23, 1999 at $.27 per
share; and options to purchase 5,000,000 shares from March 24, 1998 through
March 23, 1999 at $.36 per 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
options to acquire 500,000 shares at an exercise price of $.19 per share
during 1996.
As of October 14, 1996, the Consulting Agreement with Dr. Hirschman was
terminated and an Employment Agreement with Dr. Hirschman became effective. See
Item 10. Executive Compensation-EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS.
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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").
As a result of the 1996 Argentina Agreement, discussed under "-TESTING
AGREEMENTS- Argentina Agreements" 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.
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 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.
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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 International Pharmaceutical Corp., a New York corporation
("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) were formerly principals of C.U.R.E.
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
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would have vested in the event that the Company could not produce sufficient
quantities of RETICULOSE within certain periods of time. The penalty rights were
waived, in part, because AVIX has not yet generated a sufficient demand for
RETICULOSE within its distribution territory.
The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement has been
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. If AVIX is complying with the AVIX Far East Agreement, including certain
annual minimum purchase requirements set forth in the agreement, 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 shall be 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 (the "Commonwealth Agreement") with
Commonwealth Pharmaceuticals, a corporation organized under the laws of Cayman
Islands, British West Indies ("Commonwealth"), the Company has granted to
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, and the right (not exclusive) to import,
warehouse, market, sell and distribute RETICULOSE within the territory of Saudi
Arabia (collectively, the "Commonwealth Territories"). The term of the
Commonwealth Agreement is for successive three year periods 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
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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. 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 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.
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.
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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.
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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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own or invest in real estate, interests in real
estate, real estate mortgages or securities of or interests in persons primarily
engaged in real estate activities.
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On February 24, 1997 the Company received an executed lease dated
February 7, 1997 from Robert Martin Company, LLC, as landlord, to the Company,
as tenant, concerning approximately 6,100 square feet of rentable space at 200
Corporate Boulevard South, Yonkers, New York. The term of the lease is five
years at a base rent of $85,400 per annum. The Company intends to use the
demised premises as a general office and as a laboratory for medical research.
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 Item 1. DESCRIPTION OF BUSINESS--
EXCLUSIVE RIGHTS OF THE COMPANY TO RETICULOSE AND PRODUCTION ARRANGEMENTS.
ITEM 3. LEGAL PROCEEDINGS.
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 U.S. Securities and Exchange Commission (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 Securities Act, Sections
l0(b) and 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rules l0b-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 Class
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 Class B Warrants was not current; accordingly, the
Company was not in compliance with the prospectus delivery provisions
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of the Securities Act. The Company offered a right of rescission to all
exercising Class 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1996,
no matters were submitted to a vote of security holders of the Company.
[Balance of page intentionally left blank]
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 portion of the quarter ended February 28, 1997, as
reported on the National Association of Securities Dealers, Inc.'s OTC Bulletin
Board (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 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
January 1, 1997 through February 28, 1997 0.26 0.47
</TABLE>
The approximate number of holders of record of the Common Stock as of
February 28, 1997 is 2,598 inclusive of those brokerage firms and/or clearing
houses holding 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.
On September 4, 1996, the Company issued 50,000 shares of the Common
Stock to Malcolm Santer for his consulting services, which have been valued at
$.50 per share, and on February 26, 1997, the Company issued 50,000 shares of
the Common Stock to Malcom Santer for his consulting services, which have been
valued at $.41 per share. For a description of the Company's sale on February
21, 1997 of the Company's ten-year 7% Convertible Debenture due February 28,
2007 and, in connection with that transaction, the Company's issuance of
warrants to purchase shares of the Common Stock, see Item 6. Management's
Discussion and Analysis or Plan of Operation - CAPITAL RESOURCES."
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of the results of operations and the financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Report.
During the fiscal 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 fiscal year ended December 31, 1996
as compared with the fiscal 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, increased research and development and the
implementation of Statement of Financial Accounting Standards Board (SFAS) No.
123, "Accounting for Stock-Based Compensation," which accounts for Common Stock
purchase options granted in 1996. Administrative expenses and the lack of sales
revenues also contribute to the Company's losses.
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. 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 and $55,000 for the sale of territorial
rights in 1995 and 1994, respectively.
Although there can be no assurance of the levels, if any, the Company
believes that it will generate sales revenue at least with respect to testing of
RETICULOSE pursuant to its agreements with exclusive distributors from initial
testing in their respective territories. However, there will be no likelihood of
significant sales of RETICULOSE unless and until requisite approvals are
obtained in such territories.
LIQUIDITY
As of December 31, 1996, the Company had current liquid assets of
$1,476,047 compared to $575,288 at December 31, 1995. The Company had total
assets of $1,716,800 and $796,241 at December 31, 1996 and 1995, respectively.
The increase in liquid assets and total assets was primarily attributable to 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
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REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS
"INACTIVATED." The Company has taken no action with regard to the July 1992
Deficiency Letter or the 1995 deficiency letter. See Item 1. Description of
Business - THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS.
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 Item 3. Legal Proceedings.
The Company's independent accountants' report on the Company's
Consolidated Financial Statements included in this Report 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.
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 (the "Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB") in an offshore transaction pursuant to Regulation S
under the Securities Act. Accrued interest under the Debenture is payable
semiannually, computed at the rate of 7% per annum on the unpaid principal
balance from February 21, 1997 until the date of interest payment. (After
default, interest accrues at 10% per annum.) 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 (prepayment applied first to pay
interest and then to
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principal then outstanding). The Debenture is convertible, at the option of the
holder, into shares of Common Stock pursuant to the following formula: Upon
receipt by the holder of the Debenture of the Company's notice of prepayment of
the Debenture, in whole or in part, and otherwise in accordance with the
schedule stated in the last sentence of this paragraph, the outstanding
principal amount of the Debenture is convertible into such number of shares of
Common Stock as shall equal the quotient obtained by dividing (x) the principal
amount of the Debenture by (y) the Applicable Conversion Price; provided,
however, that the right to convert outstanding principal of the Debenture
terminates at the close of business on the third calendar day preceding the date
fixed for prepayment of the Debenture in the Company's notice of prepayment,
unless the Company defaults in making such prepayment. For this purpose, the
term "Applicable Conversion Price" means the lesser of (q) $0.3432 and (r) the
product obtained by multiplying the Average Closing Price by 0.70; and the
"Average Closing Price" with respect to any conversion elected to be made by the
holder of the Debenture shall be the average of the daily closing prices for the
five consecutive trading days ended on the trading day immediately preceding the
date on which the holder gives the Company a written notice of the holder's
election to convert outstanding principal of the Debenture. The closing price on
any trading day shall be (a) if the Common Stock is then listed or quoted on
either the Bulletin Board, The Nasdaq SmallCap Market or The Nasdaq National
Market, the reported closing bid price for the Common Stock on such day or (b)
if the Common Stock is listed on either the American Stock Exchange or New York
Stock Exchange, the last reported sales price for the Common Stock on such
exchange on such day. The Debenture is not convertible until April 14, 1997, and
is convertible only to the extent of $333,333 from April 15, 1997 through April
29, 1997, and is convertible only to the extent of $666,667 from April 30, 1997
through May 29, 1997.
In connection with this transaction, 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.
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.
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The Company is currently expending approximately $105,000 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 14
months with its current liquid assets, if no Common Stock purchase options or
Warrants are exercised. If all of the outstanding options are exercised, the
Company will receive proceeds of approximately $7,002,000. 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. 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 some of the outstanding options. However,
there can be no assurance that the recent trading levels will be sustained or
that any additional options will be exercised. Management anticipates that it
may have to limit intentions to expand operations beyond current levels which
involve expenditures of $105,000 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 and sell 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 Item 1. Description of Business - THE INVESTIGATIONAL NEW
DRUG APPLICATION PROCESS. For a discussion of the risk of relocation of LTD's
manufacturing facility, see "LIQUIDITY."
ITEM 7. FINANCIAL STATEMENTS
The financial statements by Item 310(a) of Regulation S-B are included
in this Report commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
44
<PAGE> 48
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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
Robert C. Kolodny, M.D. director
William Gedale 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.
Robert C. Kolodny, M.D. (age 52), a director of the Company since
February 1997, has been Medical Director and Chairman of the Board of Behavioral
Medicine Institute, New Canaan, Connecticut, and a Consultant in the Masters &
Johnson Institute, St. Louis Missouri, since 1983. He is currently Managing
General Partner of seven investment partnerships and a director of
Gabelli-O'Connor Treasurer's Fund, a public company. From 1988 through 1994, Dr.
Kolodny was a director of Lynch Corporation, a public company.
45
<PAGE> 49
William Gedale (age 54), a director of the Company since March 1997,
has been unemployed since June 1996. From July 1995 to June 1996, he was
managing partner of John W. Bristol Company, an investment firm. From March
1989 until June 1995, he was President and Chief Executive Officer of General
American Investors' Company, an investment management firm.
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.
For the fiscal year ended December 31, 1996, and for the period ended
February 28, 1997, no person who was a director, officer or beneficial owner of
more than 10% of the Common Stock was subject to Section 16 of the Exchange Act
because the Common Stock is and was not registered under Section 12 of the
Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
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 $100,000
during the fiscal years ended December 31, 1996, 1995 and 1994.
46
<PAGE> 50
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
-------------------
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities All Other
Compensation Underlying Compensation
($)(1) Options/ ($)
SARs(#)
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., President 1996 68,750(2) 0 4,825(3) 15,000,000 4,316(4)
and Chief Executive Officer of the
Company since October 1996 and
consultant to the Company from May 24,
1995 until October 1996.
Bernard Friedland, Chairman of the 1996 35,000 0 6,500 0 0
Board of the Company since May 1987;
President and Chief Executive Officer 1995 35,000 0 6,500 0 0
of the Company from 1985 until
October 1996, and President and 1994 35,000 0 6,500 0 0
Treasurer of LTD since August 1984.
William Bregman, Secretary-Treasurer 1996 35,000 0 6,500 0 0
of the Company since 1985
1995 35,000 0 6,500 0 0
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, including the
potential realizable value of such grants assuming that the market value of the
Common Stock appreciates from the date of the grant to the expiration of the
option at the annualized rates of 5% and 10%, in each case compounded annually
over the term of the option. These assumed annualized rates of appreciation
have been specified by the Securities and Exchange Commission for illustration
purposes only and are not intended to predict actual future prices of the Common
Stock. Other than the 18,600,000 shares of Common Stock underlying Dr.
Hirschman's options, of which 13,600,000 shares are currently exercisable, the
Company currently has outstanding three Warrants, each to acquire 178,378
shares, at exercise prices of $0.288, $0.576 and $0.864 per
47
<PAGE> 51
Warrant share, respectively, and options to acquire 15,715,733 shares of the
Common Stock, none of which are beneficially owned by directors, officers or
employees of the Company.
<TABLE>
<CAPTION>
OPTION GRANTS TABLE
Percent of
Total Potential Realizable Value at
Number of Options Market Exercise Assumed Annual Rates of Stock
Securities Granted to Price on or Price Appreciation for Option Term
Underlying Employees in Date of Base ----------------------------------
Name Options Granted(1) Fiscal Year Grant(2) Price Expiration Date 5% 10%
- ------------------------- ------------------------------ -------- ----- --------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 5,000,000 ) 100% $.1775 $0.19 March 23, 1999 $100,000 $250,000
5,000,000 ) .1775 $0.27 March 23, 1999 -- --
5,000,000 ) .1775 $0.36 March 23, 1999 -- --
</TABLE>
- --------------
1) All options are non-qualified options.
2) The average of the high and low bid prices per share of Common Stock as
reported by the Bulletin Board on March 22, 1996, the last trading day
before the date of grant.
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:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END
OPTION VALUES
Number of Securities
Underlying Value of Unexercised In-
Shares Acquired Unexercised Options at the-Money Options at
on Value Fiscal Year-End 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>
48
<PAGE> 52
- --------------
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 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 Item 11. Security Ownership of
Certain Beneficial Owners and Management. 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
49
<PAGE> 53
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 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as at February 28, 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:
50
<PAGE> 54
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares of Common Stock
Beneficially Owned Percent Owned
---------------------- -------------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 13,600,000(2)(3) 4.8%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Bernard Friedland 39,876,730(3)(4) 14.9%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,682,403(3)(5) 13.4%
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
Robert C. Kolodny, M.D. 0 -
Behavioral Medicine Institute
885 Oenoke Ridge Road
New Canaan, CT 06840
William Gedale 0 -
1775 Broadway, Suite 1410
New York, NY 10019
All officers & directors (6 persons) 89,660,133(3)(6) 31.9%
</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 February 28, 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, 267,081,058 shares of the Common Stock were outstanding as of the close
of business on February 28, 1997.
(2) Consists of shares which may be acquired pursuant to Common Stock purchase
options exercisable within 60 days after February 28, 1997.
(3) 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
51
<PAGE> 55
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 Item 10. Executive Compensation -
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
(4) 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, and 60,000 shares of the Common Stock (as to which Mr. Friedland
disclaims beneficial ownership) owned by Shirley Friedland. On March 4, 1997,
Mr. Friedland transferred 1,000,000 of the shares owned by him to the B&SD
Friedland Foundation, a not-for-profit foundation controlled by him.
(5) Includes 23,435,000 shares of the Common Stock held in a trust for which
Mr. Bregman is the sole trustee and sole beneficiary.
(6) Includes shares which may be acquired pursuant to Common Stock purchase
options held by Dr. Hirschman that are exercisable within 60 days after
February 28, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Documents filed as a part of this report:
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Consolidated Financial Statements F-1
</TABLE>
2. Notes to Consolidated Financial Statements
Schedules have been omitted either because they
are not applicable or because the required
information is reported in the financial
statements or notes.
52
<PAGE> 56
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
EXHIBIT NUMBER DESCRIPTION
<S> <C>
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)
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)
</TABLE>
53
<PAGE> 57
<TABLE>
<C> <C>
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 Pharmaceuticals 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)
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.
27 Financial Data Schedule for the Company as of and for the two years in
period ended December 31, 1996.
</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.
54
<PAGE> 58
(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 onForm 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:
(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.
(12) Filed herewith.
b. Reports on Form 8-K during and after the fiscal quarter ended
December 31, 1996:
(1) Report dated October 17, 1996, including Item 5, regarding Employment
Agreement dated October 17, 1996 between Advanced Viral Research Corp.
and Shalom Z. Hirschman, M.D. No financial statements were filed.
(2) Report dated February 21, 1997, including Item 5, regarding:
A. the Convertible Debenture to RBB Bank AG dated February 21,
1997;
B. An executed lease dated February 24, 1997 from Robert
Martin Company, LLC to the Company; and C. Acceptance of the
Company's invitation to Robert C. Kolodney, M.D. to serve
as a member of its Board of Directors as of February 24, 1997
until the next annual meeting of shareholders and until a
successor shall be elected and shall qualify. No financial
statements were filed.
(3) Report dated March 13, 1997, including Item 5, regarding an Agreement
with the National Cancer Institute of the National Institutes of Health
and the Company, dated March 13, 1997. No financial statements were
filed.
55
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 1997 ADVANCED VIRAL RESEARCH CORP.
(Registrant)
By: /s/ Shalom Z. Hirschman, M.D.
---------------------------------------
Shalom Z. Hirschman, M.D., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 14, 1997 By: /s/ Shalom Z. Hirschman, M.D.
---------------------------------------
Shalom Z. Hirschman, M.D., President
and Chief Executive Officer
and director
Date: April 14, 1997 By: /s/ Bernard Friedland
---------------------------------------
Bernard Friedland, Chairman of the
Board and director
Date: April 14, 1997 By: /s/ William Bregman
---------------------------------------
William Bregman, Secretary -
Treasurer, director, Principal
Financial and Accounting Officer
Date: April 14, 1997 By: /s/ Louis J. Silver
---------------------------------------
Louis J. Silver, director
Date: April 14, 1997 By: /s/ Robert C. Kolodny, M.D.
---------------------------------------
Robert C. Kolodny, M.D., director
Date: April 14, 1997 By: /s/ William Gedale
---------------------------------------
William Gedale, director
56
<PAGE> 60
(c) The accountant's statement or other exhibit required by Rule 12b-25(c)
has been attached if applicable.
PART III - NARRATIVE
State below in reasonable detail the reasons why the subject annual report,
semi-annual report, quarterly report or transition report on Form 10-K, Form
10-KSB, Form 20-F, Form 11-K, Form 10-Q, Form 10-QSB, or Form N-SAR, or portion
thereof, could not be filed within the prescribed time period:
Computer difficulties
PART IV - OTHER INFORMATION
(1) Name and telephone number of person to contact in regard to this
notification:
William Bregman
(954) 458-7636
(2) Have all other periodic reports required under Section 13 or 15(d) of
the Securities Exchange Act of 1934 or Section 30 of the Investment Company Act
of 1940 during the preceding 12 months or for such shorter period that the
Registrant was required to file such report(s) been filed?
If the answer is no, identify reports(s). Yes
(3) Is it anticipated that any significant change in results of operations
from the corresponding period for the last fiscal year will be reflected by the
earnings statements to be included in the subject report or portion thereof?
Yes
If so: attach an explanation of the anticipated change, both narratively
and quantitatively,and, if appropriate, state the reasons why a reasonable
estimate of the results cannot be made.
The Company's increased losses for the fiscal year ended December 31, 1996
($1,154,740) as compared with ($401,884) for the fiscal year ended December 31,
1995 were attributable to the employment of Shalom Z. Hirschman, research and
development and the implementation of Statement of Financial Accounting
Standards Board (SFAS) No. 123, "Accounting for Stock-Based Compensation," which
accounts for options granted in 1996.
ADVANCED VIRAL RESEARCH CORP.
(Name of Registrant as Specified in Charter)
has caused this notification to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: March 27, 1997 By: /s/ William Bregman
------------------------------------------
William Bregman, Secretary-Treasurer,
Principal Financial and Accounting Officer
<PAGE> 61
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-1
<PAGE> 62
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-3
Consolidated Financial Statements
Balance Sheet, December 31, 1996.......................... F-4
Statement of Operations for the Years Ended December 31,
1996 and 1995 and from Inception (February 20, 1984) to
December 31, 1996...................................... F-5
Statement of Stockholders' Equity from Inception (February
20, 1984) to December 31, 1996......................... F-6
Statement 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
</TABLE>
F-2
<PAGE> 63
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> 64
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> 65
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.......................... 695,915 420,757 3,926,133
Depreciation and amortization....................... 306,072 14,679 466,236
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> 66
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> 67
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> 68
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 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> 69
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> 70
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.
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been
reclassified to conform to 1996 presentation.
F-10
<PAGE> 71
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
F-11
<PAGE> 72
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $17,623 expended in 1987 to purchase a
land lease expiring in 2068. These amounts are included above.
NOTE 5. INVESTMENTS
As of December 31, 1996, Investments consisted of the following:
Certificates of Deposit...............................$ 946,226
Held to Maturity:
U.S. Government Discount Notes -- mature 3/30/97....$ 334,647
U.S. Treasury Bills -- mature 5/31/97...............$ 97,968
----------
Total Investments.......................$1,378,841
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.
F-12
<PAGE> 73
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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.
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
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.
F-13
<PAGE> 74
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
TESTING AGREEMENTS
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 (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.
F-14
<PAGE> 75
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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").
F-15
<PAGE> 76
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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.
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.
F-16
<PAGE> 77
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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
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.
F-17
<PAGE> 78
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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.
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.
F-18
<PAGE> 79
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
F-19
<PAGE> 80
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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. In accordance with SFAS 123, Accounting for Stock-Based
Compensation (effective for options granted after December 15, 1995),
the Company recognized compensation cost based on the fair value at
the grant dates. The compensation cost is amortized over the life of
the option period. 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.
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-20
<PAGE> 81
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ----------- -----------
<S> <C> <C>
4(e) Form of Common Stock Option and Agreement granted by the Company to
Plata Partners Limited Partnership
10(a) Declaration of Trust by Bernard Friedland and William Bregman in favor
of the Company dated November 16, 1987
10(i) Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and
the Company
10(p) Exclusive Distribution Agreement, dated as of June 2, 1995, between
AVIX International Pharmaceutical Corp. and the Company
10(q) Supplement to Exclusive Distribution Agreement, dated November 2, 1995
with Commonwealth
10(x) Lease, dated February 7, 1997 between Robert Martin Company, LLC and
the Company
27 Financial Data Schedule for the Company as of and for the two years in
period ended December 31, 1996.
</TABLE>
