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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE YEAR ENDED DECEMBER 31, 1997
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: $121,923.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked price of such common equity as of
March 20, 1998: 211,328,557 shares of common stock, par value $.00001 per share,
at $.32625 per share, or $68,945,942.
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
--- ---
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Number of shares outstanding of each of the issuer's classes of common equity,
as of March 20, 1998: 286,796,690 shares of common stock, par value $.00001 per
share.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ----
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ADVANCED VIRAL RESEARCH CORP.
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1997
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.......................................................................... 27
Item 3. Legal Proceedings................................................................................ 28
Item 4. Submission of Matters to a Vote of Security-Holders.............................................. 28
PART II................................................................................................... 29
Item 5. Market for Common Equity and Related Stockholder Matters......................................... 29
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 29
Item 7. Financial Statements............................................................................. 33
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 33
PART III ................................................................................................. 34
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................................................ 34
Item 10. Executive Compensation........................................................................... 34
Item 11. Security Ownership of Certain Beneficial Owners and Management................................... 37
Item 12. Certain Relationships and Related Transactions................................................... 38
Item 13. Exhibits and Reports on Form 8-K................................................................. 39
</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.
RECENT HISTORY
Due to limited resources, the Company's operations over the last five years
have been limited to engaging others to perform testing and analysis of
RETICULOSE. In connection with these engagements, the Company has also granted
distribution rights for RETICULOSE in certain foreign countries. In 1995, the
Company retained Shalom Hirschman, M.D. as its President. Since becoming
President of the Company, Dr. Hirschman has monitored the testing of RETICULOSE
and intends to perform certain analyses of RETICULOSE with Company personnel,
which analyses the Company believes may be used in connection with the FDA
approval process. There can be no assurances that Dr. Hirschman will be
successful in arranging for further testing and analysis of RETICULOSE.
BACKGROUND OF RETICULOSE
RETICULOSE had been marketed in the United States during the 1940's
through the early 1960's. Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962 (the "1962 Act"), RETICULOSE, among other drugs, was classified
by the FDA as a "new drug" requiring FDA approval prior to any sale in the
United States. Management of the Company believes that, since the 1962 Act,
RETICULOSE has not been marketed for commercial sale. See "GOVERNMENT
REGULATION" and "-THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS." Although
the AIDS Clinical Trial has been the only controlled clinical trial of
RETICULOSE, the published data for the years 1951 through 1962, largely
anecdotal, indicates that RETICULOSE is an anti-viral pharmaceutical product
which is safe and effective in treating a number of interferon related viruses
such as Asian Influenza, Viral Pneumonia, Virus Infectious Hepatitis, Mumps,
Encephalitis, Herpes Simplex and Herpes Zoster. There is no published data that
confirms that any double blind testing has been completed which demonstrates
that RETICULOSE is safe and effective against the treatment of any disease.
Open label clinical trials of RETICULOSE on Human Papilloma Virus (HPV)
on patients who tested positive for the Human Immunodeficiency Virus ("HIV") are
being conducted at two separate hospitals located in Buenos Aires, Argentina
(the "HPV-HIV Study") for the purpose of attempting to satisfy the
investigational new drug application process in Argentina.
The Company received information from Shalom Z. Hirschman, M.D., then
Professor of Medicine and Director of the Division of Infectious Diseases of the
Mount Sinai School of Medicine, New York, New York, which information resulted
from the Hirschman Study, which demonstrates that RETICULOSE stimulates the
production of a unique set of chemokines, including Interleukin 1 (IL-1),
Interleukin 6 (IL-6) and Gamma Interferon, and inhibits the replication of HIV
in cell cultures. Dr. Hirschman currently is President and Chief Executive
Officer and a director of the Company.
The first stage of a double-blind, randomized, placebo-controlled
clinical trial using RETICULOSE in the treatment of AIDS conducted at the Queen
Elizabeth Hospital, Bridgetown, Barbados was completed in late November 1996
(the "Barbados Study"). The Company received a letter, dated November 26, 1996,
(the "Written Summary") from one of the scientists conducting the Barbados
Study, reporting the results of the first stage of a double-blind, randomized,
placebo-controlled clinical trial using RETICULOSE in the treatment of patients
with AIDS, and confirming that the study protocol received ethical approval from
the Chief Medical Officer's committee. In this first stage of the clinical
trial, forty-three patients who had never previously received any
anti-retroviral therapy were enrolled into the study, twenty-one of which
received RETICULOSE and twenty-two of which received placebo, over a sixty day
period. The patients were observed for a further sixty days after the cessation
of therapy. At the end of the sixty day treatment period, the key results of
this first preliminary stage of the clinical trial included a 37% increase in
the mean CD(4)-positive T-cell lymphocytes in the group of patients that
received RETICULOSE, as compared to a 7% decrease in the group of patients that
received placebo, and 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
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load in the group of patients that received placebo. In addition, the letter
reported, among other things, that at the end of the sixty-day observation
period following cessation of treatment, a majority of RETICULOSE-treated group
showed a greater rise in blood hemoglobin, and maintained or increased their
body weight in contrast to only a minority of the placebo-treated patients.
Finally, there were no toxic side effects observed by physicians or reported by
patients receiving RETICULOSE therapy in the first stage of the clinical trial.
An abstract entitled "Controlled Clinical Trial of RETICULOSE, a Peptide Nucleic
Acid with Immunomodulator Activity in Patients with HIV Infection" (the
"Barbados Abstract") which describes the results of the first stage of the
Barbados Study, has been accepted for publication by The American Society for
Microbiology and will be presented in May 1998 at a conference in Atlanta,
Georgia.
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" studies 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
that the exact method of action of RETICULOSE on the virus was not fully
understood, but, since its therapeutic response was so rapid, its action may be
considered a direct one. The study further found that RETICULOSE either altered
the action of the virus or inhibited the host cells to prevent virus
duplication, or it may have done both. In addition, the antigenic properties of
the lipo-protein-nucleic acid complex definitely initiated and promoted 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 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
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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 the Wisconsin Study conducted exclusively for the
Company from December 1987 to September 1988, indicated that RETICULOSE contains
both medium and short chain length amino acid link peptides. Mr. Friedland
opined that in the Wisconsin Study, the peptide analyses of four RETICULOSE
samples, two of which were 16 years old and manufactured by Key, and two of
which were one year old and manufactured by LTD, indicated that all four product
samples were essentially the same product as demonstrated by reverse phase high
performance liquid chromatography. Additional analyses conducted by gel cell
electrophoresis demonstrated that all four samples were essentially of the same
composition, and that 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.
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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 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. The Company purchased
15,000 ampules, all of which were purchased by the Company for testing and
promotional activity. None of these 100,000 ampules remain in inventory.
LTD (then known as Key) received a license from the Port Authority to
manufacture pharmaceutical products for export and leased the former Key plant
in Freeport, Grand Bahama Island, consisting of an approximately 29,100 square
foot site containing a one-story concrete block building of approximately 7,100
square feet, which facility is equipped for the testing, production, processing
and packaging of chemical products in tablet and ampule form, including
RETICULOSE.
Historically, this plant had a production capacity of 40,000 ampules
per week and management believes such capacity should support the Company's
requirements for the foreseeable future. Due to the lack of demand for the
Company's product, the production facility was not operating continuously over
the last year. Accordingly, the approximate weekly average production of
RETICULOSE over the last year has been 1,500 ampules per week. The facility is
not used for any purpose other than the production of RETICULOSE. However, if
RETICULOSE should be approved for sale in the United States or any other market
with material demand for its products, of which there can be no assurance, there
can be no assurance that this facility will be sufficient to produce adequate
quantities of RETICULOSE. If and when the Company's business requires a higher
level of production of RETICULOSE that such level of sales will generate
sufficient revenues to permit construction of another production facility.
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The lease on the Grand Bahama facility expired by its terms in July
1987. Prior to such time, the landlord advised LTD that he would sell to LTD the
then 80-year residue of the 99-year land lease by the Port Authority, dated June
10, 1968, of the property in the Bahamas for a purchase price of $250,000.
Management secured an appraisal from a real estate appraiser in the Bahamas
which indicated that the total value (based upon a depreciated replacement cost
approach) of the property (described in that appraisal as a single-story CBS
building on 29,242.20 square feet of land) and the incorporation of LTD and its
licenses and right to manufacture RETICULOSE (separately valued at B$40,000)
was, as at June 17, 1986, US$580,170. Management secured a later appraisal from
another Bahamian Registered Appraiser which stated that, as of July 24, 1987,
the "property," which consists of the land-lease from the Port Authority (which
has a residue of 80 years to run), the 7,300 sq. feet one-story building thereon
and the plant and equipment contained therein was valued at B$450,000 or US$
459,000.
In November 1987, the Company's stockholders approved the acquisition
by the Company of LTD, the purchase by LTD of the Bahamian manufacturing
facility and the advance by the Company to LTD of the $250,000 purchase price
for that facility, and LTD purchased the facility. On December 16, 1987,
management of the Company, through a Declaration of Trust satisfactory to the
Bahamian Government, completed the acquisition of LTD, as a 99.6% owned
subsidiary of the Company, and paid approximately $29,000 of closing costs. The
acquisition was followed by termination of the Exclusive Rights and Production
Agreement.
Management is aware that Bahamian legal restrictions relating to the
purchase of real property interests in the Bahamas by persons not Bahamian
citizens and not owned or controlled by Bahamian citizens might have impacted
the Company's ability to acquire real property. Inasmuch as LTD was a
pre-existing Bahamian corporation, had secured and maintained the appropriate
licenses and had Bahamian citizens owning 0.4% of the outstanding capital stock
of LTD (the "Ordinary Shares" as that term is used in the Bahamas), and Messrs.
Friedland and Bregman, the Company's principals, had been approved by the
Central Bank of the Bahamas, the Company was advised by its Bahamian legal
counsel, Nottage, Miller & Co., that LTD's purchase of the property was lawful.
The acquisition of LTD by the Company involved an immediate transfer to
the Company of approximately $46,000 in cash, and of all of Messrs. Friedland's,
and Bregman's beneficial interest in all of the 996 shares of the Ordinary
Shares, B$1.00 par value per share, registered in their names, representing
99.6% of all of the outstanding Ordinary Shares of LTD. Messrs. Friedland and
Bregman agreed to make a contribution to the capital of LTD of approximately
$86,000 by forgiveness of indebtedness of LTD to them. Messrs. Friedland and
Bregman also agreed that payment to them for their shares in LTD would be made
from refund of the security deposit by the landlord of the property, which
security deposit was originally paid by Messrs. Friedland and Bregman.
The Company has not taken any action 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. As a result of this refusal, the Company has
commenced discussions with the Bahamian governmental authorities for the purpose
of obtaining a Free Sales Certificate, of which there can be no assurance. If
the Company does not obtain a Free Sales Certificate, it is possible that the
Company will not be able to meet registration requirements in other British
Commonwealth and Southeast Asian countries, since such countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.
5
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Although a number of applications for United States patents have been
filed on behalf of the Company and others are contemplated to be filed, there
can be no assurance that other companies, having greater economic resources,
will not be successful in developing a similar product using processes similar
to those of the Company. There can be no assurance that the Company will obtain
such a patent or, if obtained, that it will be enforceable.
GOVERNMENT REGULATION
The FDA and regulatory agencies in foreign countries impose substantial
requirements upon and conditions precedent to the introduction of therapeutic
drug products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time consuming procedures.
There is no assurance that FDA approval for the sale of RETICULOSE in the United
States will be obtained. If human clinical trials of RETICULOSE are successful,
of which there can be no assurance, the Company will endeavor to raise the
required capital for the purpose of furthering the FDA process. There can be no
assurance that the Company will ever have available sufficient funds nor is
there any assurance that the Company could satisfy FDA regulatory protocol to
gain approval for RETICULOSE in the United States.
The effect of government regulation in certain countries may be to
delay marketing of RETICULOSE for a considerable period of time to impose costly
procedures upon the Company's activities and to furnish a competitive advantage
to the larger companies which compete with the Company in the field of
anti-viral drugs. The extent of potentially adverse government regulations which
might arise from future legislation or administrative action cannot be
predicted.
Third World countries have become increasingly more thorough in the
registration and licensing of pharmaceutical products and require new products
to prove their non toxicity, stability, safety, efficacy and to maintain records
concerning same in many of the Third World countries. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, it is not expected that the Company will be able to generate
material sales revenues. See "-MARKETING AND SALES" and "-EXCLUSIVE DISTRIBUTION
AGREEMENTS."
The Company received from the Port Authority a copy of a grant of
authority, issued on October 15, 1992, confirming the right of LTD to carry on
the manufacture and export sale of ethical pharmaceutical products.
THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or IN VITRO testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. Under FDA regulations,
the Company is not permitted to engage in or authorize human studies regarding
RETICULOSE in the United States if the FDA notifies the Company of "serious
deficiencies that require correction before human studies can begin or that
would require restriction of human studies until correction" until the Company
is notified that the material that it has submitted to correct the deficiencies
is "satisfactory." The Company's understanding is that it is rare for a new drug
sponsor to obtain approval of an IND on the basis of an initial submission, as
the FDA almost always requests additional information. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase I, in which the pharmacological effects and possible
toxicity are evaluated in a small number of volunteers or patients; Phase II, in
which the drug is carefully evaluated in a small population of patients for the
effectiveness of the drug and short-term side effects in controlled clinical
trials; and Phase III, in which greater numbers of patients are employed and
broader information is gathered to provide the basis for the drug's proper use
by physicians. The initial IND may cover only Phase I.
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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 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.
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<PAGE> 10
Management of the Company believed that there was sufficient data
available on RETICULOSE to file an IND with the FDA to investigate the possible
effects of the drug for the treatment of patients with AIDS as well as other
interferon related viruses. This belief was based upon the belief of management
of the Company that RETICULOSE was distributed in the United States and used
regionally from the late 1940's through the 1960's, and upon recent studies. See
"-BACKGROUND OF RETICULOSE."
Nevertheless, the FDA, in a letter dated November 29, 1984 to Bernard
Friedland, as the sponsor of the IND, stated:
We have completed our review of your application and find that the
information presented is inadequate and does not allow us to conclude that it is
reasonably safe to initiate clinical trials. The deficiencies are summarized as
follows:
"Regarding manufacturing and controls:
"1. You have not provided an acceptable definition of the drug moiety. If
you propose a lipid-protein-nucleic acid complex, then the lipid,
protein and nucleic acid must be characterized and their interactions
defined.
"2. After the moiety has been acceptably defined, its quantitative
composition in the vehicle must be stated.
"3. You should include appropriate chemical, physical and microbiological
controls to assure the integrity of the dosage form as well as data
from stability studies using these controls.
"4. Please provide complete information on the composition, size and
dimensions of the container-closure system to be used.
"5. Please include a complete description of the manufacturing and
packaging procedures and the name and address of the producing
facility. An FDA inspection will be required.
"6. Labeling is inadequate until the drug moiety is characterized and a
quantitative composition is proposed. The drug must be labeled sterile.
"Regarding the clinical and preclinical portions of your submission:
"1. Please provide data that show that your [RETICULOSE] formulation is the
same as the [RETICULOSE] formulation that is the subject of the
articles you have provided. The articles cannot be used in support of
the safety of your product if the formulations are different. If the
formulations are not the same, you must provide complete
pharmacology/toxicology information for your formulation.
"2. Please provide clinical and preclinical data to support the statement
that [RETICULOSE] is either an anti-viral or a biological response
modifier, or both.
"3. We are reserving full comment on your clinical protocol until you have
provided the necessary safety information. However, we have these
preliminary comments.
"a. The study objectives are not stated clearly.
"b. [Some of the raw materials used in RETICULOSE] are animal
antigens capable of inducing adverse reactions in humans. What
precautions will be taken with regard to this possibility?
"c. You have not submitted a patient consent form."
On March 27, 1987, the Company advised the FDA that the Freeport, Grand
Bahama manufacturing facility for RETICULOSE had been put into "good
manufacturing process" condition and requested an FDA inspection. The
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<PAGE> 11
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.
"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.
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<PAGE> 12
"f. Complete manufacturing details for the drug substance and
dosage form must be submitted with clear descriptions of
conditions, in-process controls and facilities.
"g. Labeling must define quantities of each ingredient and state
that the product is sterile.
"4. We will not conduct an inspection of the manufacturing facility until
the application is complete in other respects.
"5. Comments on the clinical protocol will not be made until the necessary
safety information has been submitted."
On February 28, 1992, the Company submitted an amendment to the IND,
including the following:
"1. Scientific Rationale for use of RETICULOSE in patients with HIV
infection.
"2. Additional data to support the antiviral activity of [RETICULOSE] with
IN VITRO and in vivo studies against the Influenza A virus, and the
Hepatitis A and B viruses.
"3. Product [reproductibility] comparison with earlier formula, and
comparative stability.
"4. Current toxicity/safety data and discussion concerning allergenic
potential plus earlier toxicity studies.
"5. Manufacturing and controls information, including facility description,
the Master Formula and product specifications for release, and clinical
research labeling.
"6. Revised Clinical Protocol and Patient forms.
"7. Clinical Reports from 1988-1989 and prior to 1984."
The March 1992 FDA Submission included, among other things, findings
from certain independent research laboratories. The purpose of the March 1992
FDA Submission was to obtain FDA approval of the IND to conduct human clinical
trials regarding the efficacy of RETICULOSE on AIDS.
On July 31, 1992, the Company received from the FDA the July 1992
Deficiency Letter stating, among other things, that the Company's resubmitted
IND application, dated February 28, 1992, "does not adequately respond 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> 13
"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-(proportional), 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.
"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
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<PAGE> 14
safety data. In particular, please provide monitoring for the potential
for anaphylaxis, as seen in the preclinical repeat dose study in guinea
pigs.
"15. Please revise the informed consent document to reflect the preclinical
safety and effectiveness data.
"16. Please provide a concise rationale for the proposed sample size and
define the proposed statistical methodology. In general, interim
analyses are not appropriate for a 12 week phase 1 study.
"Until you have submitted the above required information for items 1-16, and we
notify you that if it is safe to initiate the studies, you may not proceed with
the proposed study.
"We also have the following advice which we believe would improve your IND:
"Chemistry
"The following chemistry issues must be addressed prior to studies beyond
initial phase [1 and 2] studies:
"17. Please establish the identity(ies) and structure(s) of the active
component(s).
"18. Please identify the impurities contained in the drug substance(s) and
drug product and establish individual limits for the impurities.
"19. Please incorporate into the drug product specifications and
identification test(s) and an assay for the active ingredient(s) using
properly validated analytical methods.
"20. Please identify the supplier and composition of the ampules.
"Microbiology
"21. Please clarify the following with respect to the data submitted in the
submission:
"(a) Please specify whether the peptide nucleic acid solution and
the [RETICULOSE] preparation used by Dr. Lionel Resnick are
the same or a different preparation.
"(b) Please provide the units of p24 and RT activity and explain
whether the results represent percent inhibition or activity.
In addition, please clarify the discrepancy in the numbers
shown in the submission and in the published report (table 3).
"The following microbiology issues should be addressed concurrent with
phase [1 and 2] studies:
"22. Please use pre-clinical studies in appropriate animal models of
retrovirus infection to define and characterize the activity of
[RETICULOSE].
"23. Please perform studies to investigate whether [RETICULOSE] can induce
an antibody response which might inhibit its activity against HIV.
"24. We encourage you to investigate the mechanism by which [RETICULOSE]
inhibits HIV."
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":
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<PAGE> 15
"1. The protocol lacks sufficient description of many basic clinical trial
elements, such as randomization, blinding and a well defined control
group.
"2. A rationale for the proposed sample size of "two to ten" patients is
not provided.
"3. The rationale for the dose, dosing frequency and duration of therapy is
not provided.
"4. The eligible patient population is inadequately defined. In particular,
the CD4 count range for patient eligibility should be specified.
"5. The primary efficacy assessment of the study (reduction in viral load)
is not consistent with the following statement in section F.O.
Biostatistical Considerations:
'The estimated number of patients eligible for entry into this
trial who will experience an adverse event as defined as an
opportunistic infection or development of another neoplasm at
90 days is 2% or less. We wish to detect such a patient in the
group of up to 5 and provide him/her with whatever alternative
therapy is deemed advisable.'
This statement suggests that there is confusion around the objective of
this study and how a sample size can be estimated based on the desired
objective.
"6. The statement "Patients experiencing an adverse event within the first
7 days of treatment will be considered evaluable for toxicity but not
for efficacy" is unacceptable because all enrolled patients should be
evaluated for both safety and efficacy.
"7. The protocol indicates (section M.2.1) that "elimination of culturable
virus, based on Viral Load assays" is one of two laboratory parameters
of interest, however, nowhere else are viral cultures discussed.
Similarly, "restoration of immune function by tests of delayed
hypersensitivity and optional functional assays" is mentioned in
section M.3.2.2 as an additional laboratory endpoint, however it is not
further described.
"8. The principle [sic.] investigator is not identified.
"9. An informed consent document is not provided."
No assurances can be given that the Company's IND will ever be approved
by the FDA or that results of any testing will demonstrate that RETICULOSE is
safe or effective in the treatment of disease. The Company has not formally
responded to the July 1992 Deficiency Letter or the 1995 deficiency letter, nor
have any of the studies cited in those letters been undertaken. The Company
currently contemplates that it may file 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 options (collectively, the "Options") to purchase shares of the
Company's capital stock for the purpose of filing a new IND with the FDA. No
assurance can be given, however, that any Options will be exercised, that a new
IND will be accepted by the FDA or that any tests previously conducted or to be
conducted will satisfy FDA requirements.
TESTING AGREEMENTS
For the period from inception (2/20/84) through December 31, 1997 the
Company expended approximately $1,900,000 on testing and research and
development activities.
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Testing in the United States
On September 20, 1984, the IND was submitted for a Phase I type study
to determine if there was any pharmacological activity in humans against HIV.
See "-THE INVESTIGATIONAL NEW DRUG 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 Barbados Study, were submitted to
the FDA as part of the March 1992 FDA Submission, but were not deemed sufficient
by the FDA.
Canadian Contract
The Company, during the period from 1992 to 1995, had been seeking
approval in Canada for controlled distribution of RETICULOSE. It submitted an
application for a limited study on 24 patients with Kaposi's Sarcoma, a
condition associated with AIDS, the approval of which application was pending in
1995. However, due to delay in obtaining the approval for this study and after
receiving deficiency letters from the Health Protection Branch of the Health and
Welfare Department of Canada, the Company had withdrawn the application to have
that study commence.
Pursuant to an agreement, dated June 5, 1993 with Richard Morisset,
M.D., a Canadian physician (the "Canadian Agreement"), the Company granted Dr.
Morisset up to $90,000 for Dr. Morisset's undertaking a Compassionate Treatment
of ten HIV-positive patients treated with RETICULOSE and ten HIV-positive
persons not treated with RETICULOSE (the "Canadian Compassionate Treatment").
Although the Company advanced $72,000 under this agreement, the Company does not
currently intend to advance any further monies for the Canadian Compassionate
Treatment. Further, due to the delays in obtaining information and guidance from
Dr. Morisset regarding the Canadian Compassionate Treatment, the Company
believes that no further efforts are being employed by Dr. Morisset in
connection with the Canadian Compassionate Treatment. The Company currently
believes that no further work will be performed by Dr. Morisset and anticipates
formally terminating this agreement in the near future.
TRM Management Corp.
Pursuant to an agreement dated August 20, 1991 between the Company and
TRM Management Corp. ("TRM"), a Florida corporation unaffiliated with the
Company (the "TRM Agreement"), TRM performed, at the Company's expense, a
controlled open clinical trial test in Haiti during a period of 30 days, on 53
patients with early onset Hepatitis "A" or Hepatitis "B", approximately one-half
of whom were treated with RETICULOSE and approximately one quarter of whom were
untreated for each of these two diseases, to assess the effectiveness of
RETICULOSE against the Hepatitis "A" virus and Hepatitis "B" virus in accordance
and in compliance with 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").
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In accordance with the TRM Agreement, Matthew Cohen prepared a paper
which describes the methods and results of the Haiti Tests (the "Results
Paper"). On January 3, 1992, TRM delivered to the Company 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 their 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
authorized the issuance to the shareholders and certain associated persons of
TRM (1) an aggregate amount of 10,000,000 shares (the "TRM Shares") of the
Company's common stock, par value $.00001 per share (the "Common Stock"); 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 and $.08 per share (the "TRM Options"). As of December
31, 1997, 10,000,000 shares of Common Stock were issued pursuant to the exercise
of the TRM Options for an aggregate exercise price of $600,000 by David Sass, as
an assignee of Troy Posner, Richard Waldman, and Matthew Cohen.
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
(collectively, the "Doctors").
In the Transcript, the the Doctors generally expressed their optimism
and hopefulness regarding RETICULOSE and they encouraged further testing of the
efficacy of RETICULOSE against AIDS and efforts to register RETICULOSE. 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 certain 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, which reported 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"), including the
fact that all patients showed weight gain, as well as resolution of malaise,
joint pain, and diarrhea and that those patients initially presented with
herpetic lesions 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 generally
stating that, based upon his 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 he noted that enthusiasm
regarding the Demonstration should be tempered by the lack of a homogeneous
study population and 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
basically stated that RETICULOSE may be an effective alternative treatment for
AIDS patients, based on a review of the data provided, that the results of the
Demonstration appear to indicate that RETICULOSE is tolerated well, with no
significant adverse reactions. The Mangia Correspondence also indicated that the
patients Dr. Mangia examined had experienced an improvement 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, and suggested that such further studies need
to be better controlled and performed on a larger scale with more sophisticated
methods 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"), with respect to the hypothesis, objectives, methodology, clinical
tracking and procedures involved in the Demonstration. Among other things, the
Chinnici Report noted that the majority of the subjects involved experienced a
dramatic clinical improvement, such as 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,
where nine of the ten patients experienced an increase in the CD 4 cells. The
Chinnici Report further noted that the administration of RETICULOSE, among other
things, produced no adverse side affects, significant anemia, nor any decrease
in the subjects' white blood cell count, may cause a halt to viral replication
and may produce endogenous interferon, which improves a patient's condition.
However, The Chinnici Report also indicated, among
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other things, 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 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 (the "Additional
Plata Options"). Pursuant to several amendments, the Plata Options and the
Additional Plata Options are exercisable through April 30, 1998 at an exercise
price of $.12 and $.14, respectively. As of December 31, 1997, there are
outstanding Plata Options to acquire 813,000 shares at $.12 per share and
Additional Plata Options to acquire 858,100 shares at an exercise price of $.14
per share. Through December 31, 1997, the Company has received approximately
$670,000 pursuant to the issuance of approximately 7.7 million shares in
connection with the exercise of the Plata Options and the Additional Plata
Options.
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 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 (the "DCT
Options") to acquire 2,000,000 shares of the Common Stock for a period of one
year from the date of the delivery of the HPV Written Report, at an exercise
price of $.20 per share. As of December 31, 1997, 473,500 shares of Common Stock
were issued pursuant to the exercise of the DCT Options
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for an aggregate exercise price of $94,700. The HPV Clinical Trial was funded by
the Company. See "-EXCLUSIVE DISTRIBUTION AGREEMENTS-Agreement with DCT S.R.L."
In June 1994, DCT S.R.L. and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to certain
conditions, the exclusive right to market and sell RETICULOSE in Argentina,
Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT Exclusive Distribution
Agreement").
During the quarter ended June 30, 1997, the Company entered into an
agreement with DCT (the "HIV-HPV Agreement") whereby the Company agreed to
provide to DCT or its assignees, up to $600,000 to cover the costs of a double
blind placebo controlled study in approximately 150 patients to assess the
efficacy of Reticulose for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study").
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $410,000, which is accounted for as a research and development
expense. The amounts have been used to cover expenses associated with
pre-clinical activities and approval for the commencement of the HIV-HPV study.
The HIV-HPV Agreement provides that (i) in the event the data from the
HIV-HPV Study is used in connection with Reticulose being approved for
commercial sale anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the costs of the
HIV-HPV Study, then DCT is obligated to reimburse the Company for all amounts
expended in connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to $220,000 and
$341,000 to cover the costs of double blind placebo controlled studies in
approximately 360 and 240 patients, respectively to assess the efficacy of the
topical application of RETICULOSE for the treatment of persons diagnosed with
Herpes Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced approximately $49,000
and $88,000, respectively such expenses are accounted for as research and
development expenses. The amounts expended have been used to cover expenses
associated with pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both agreements with DCT provide that (i) in the event the data from
the Studies are used in connection with RETICULOSE being approved for commercial
sale anywhere within the territory granted under the DCT Exclusive Distribution
Agreement or (ii) DCT receives financing to cover the costs of the Studies, then
DCT is obligated to reimburse the Company for all amounts respectively expended
in connection with the Studies.
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."
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Barbados Study
The first stage of the Barbados Study, conducted at the Queen Elizabeth
Hospital, Bridgetown, Barbados, was completed in late November 1996. In December
1996, the Company received from the coordinators of the Barbados Study, the
Written Summary reporting the result of that stage, as set forth under
"-BACKGROUND OF RETICULOSE." As of December 31, 1997, the Company has expended
approximately $345,000 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. The Barbados Abstract, which describes the results of the first
stage of the Barbados Study, has been accepted for publication by The American
Society for Microbiology and will be presented in May 1998 at a conference in
Atlanta, Georgia.
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 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." Pursuant to an agreement dated March 19,
1998, the NCI Agreement has been extended for an additional one year period and
provides for the continued study of the basic mechanisms of immune responses,
the investigation of anti-tumor activity of RETICULOSE and its effect on
rheumatoid arthritis.
Topical Safety Study
In October 1997, the Company contracted with an unaffiliated third
party laboratory to conduct testing to determine the safety of the topical use
of RETICULOSE for the treatment of HPV and Herpes (the "Topical Safety Study").
To date the Company has expended approximately $75,000 in connection with the
Topical Safety Study.
MARKETING AND SALES
RETICULOSE is not being sold commercially anywhere in the world. As of
the date hereof, the efforts of the Company or any of its representatives have
produced no material benefits to the Company regarding the Company's ability to
have RETICULOSE sold commercially anywhere in the world. The Company has entered
into Exclusive Distribution Agreements with five separate entities whereby the
Company has granted exclusive rights to distribute RETICULOSE in the countries
of China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man,
British West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant 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.
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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. To date,
the only application for registration of RETICULOSE which has been filed is an
application requesting that RETICULOSE be available for sale in Argentina.
Notwithstanding the filing of this application, no material progress has been
made to secure approval to sell RETICULOSE in Argentina. 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. The registration of RETICULOSE for sale in these
countries has been frustrated due to the Company's inability to obtain the
registration and approval to sell RETICULOSE in the Bahamas, the country of
origin, and a general lack of published data on the efficacy of RETICULOSE.
Until RETICULOSE is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, there can be no assurance that the Company will
generate significant sales of RETICULOSE. If at least 25% of the Options are
exercised, the Company may file a new IND for RETICULOSE with the FDA. For the
years ended December 31, 1997, 1996 and 1995, the Company reported no commercial
sales except limited sales for testing purposes ($2,278, $24,111 and $27,328,
respectively). RETICULOSE is not legally available for use anywhere in the
world, except for testing purposes. See "-TESTING AGREEMENTS."
COMPETITION
There are inherent difficulties for any development stage company
seeking to enter an established field, particularly in a field so capital
intensive as the manufacture and sale of pharmaceuticals. The Company, if it is
ever successful in securing FDA and other regulatory approvals, will encounter
intense competition engaged in the development and marketing of drug products,
all of which are substantially larger, possess far greater capital assets, have
substantial operating histories and records of successful operations, greater
financial and other resources, more employees and far more extensive facilities
than the Company now has or will have in the foreseeable future. Accordingly,
such companies are in a far better position to compete than the Company.
Moreover, such companies may succeed in discovering, developing and marketing
anti-viral products that are more effective than RETICULOSE. The Company at
present is not, and there can be no assurances that the Company will become in
the foreseeable future, a significant factor in the field in which it proposes
to engage. Additionally, small "start-up" firms, such as the Company, with very
limited resources, are at a very serious competitive disadvantage against
established companies. The Company hopes to compete, however, based on cost and
the effectiveness of RETICULOSE.
EMPLOYEES
The Company has 15 full-time employees, including its three executive
officers, seven employees involved in research, and five administrative
employees. 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
In September 1992, the Company entered into a consulting agreement with
Leonard Cohen (the "September 1992 Cohen Agreement") for a one-year term
commencing on that date. Prior to the execution of the September 1992 Cohen
Agreement, Mr. Cohen had no relationship with the Company other than as a former
holder of the Company's
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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 September 1992 Cohen
Agreement required that Leonard Cohen provide the Company certain consulting
services including, among others: (i) the identification of pharmaceutical
companies which may have an interest in engaging in joint ventures or other
agreements to advance the testing and study of RETICULOSE; (ii) services related
to achieving approval of RETICULOSE for commercial sale in the United States and
in foreign countries; (iii) the location of investment banking firms and venture
capital firms, the purpose of which is to raise capital for the Company through
securities offerings and/or debt financing; (iv) the dissemination of public
information about the Company to persons who may have an interest in RETICULOSE;
and (v) making contacts with persons in the investment and financial
communities.
The September 1992 Cohen Agreement required that Mr. Cohen provide said
consulting services to the Company in exchange for the Company's issuing to Mr.
Cohen 1,000,000 shares of Common Stock (the "September 1992 Cohen Shares"),
500,000 of which were issuable upon execution of the September 1992 Cohen
Agreement and the remaining 500,000 shares of which were issuable upon Mr. Cohen
completing 50 hours of consulting service to the Company. The Company issued the
first 500,000 shares to Mr. Cohen in October 1992 and the remaining 500,000
shares to Mr. Cohen in February 1993. Further, pursuant to the September 1992
Cohen Agreement, the Company granted to Mr. Cohen the option to acquire, at any
time and from time to time through September 10, 1993 (which date has been
extended through April 30, 1998), the option to acquire 3,000,000 shares of
Common Stock of the Company at an exercise price of $.09 per share (which
exercise price has been increased to $.13 per share) (the "September 1992 Cohen
Options"). As of December 31, 1997, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a three year
term commencing on March 1, 1993. The February 1993 Cohen Agreement was entered
into because the Company believed that it provided incentive to Mr. Cohen to
provide greater services to the Company and because Mr. Cohen's hourly
obligations under the September 1992 Cohen Agreement had been satisfied during
the last quarter of 1992 and the first quarter of 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business consulting services
concerning the operations of the business of the Company and possible strategic
transactions in exchange for the Company issuing to Mr. Cohen 3,500,000 shares
of Common Stock (the "February 1993 Cohen Shares"), 1,500,000 shares of which
Mr. Cohen has informed the Company he has assigned to certain other persons not
affiliated with the Company or any of its officers or directors. The February
1993 Cohen Agreement also granted to Mr. Cohen and his designees a one-time
piggyback registration right with respect to those shares.
As a result, in April 1994, 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 as
discussed below and superseded by an agreement with Avix International
Pharmaceutical Corp. ("Avix"), the Company issued: (i) to Mr. Cohen, an
additional 2,500,000 shares (the "April 1994 Cohen Shares"). The Company has
been informed by Avix that Leonard Cohen is a controlling shareholder, director
and executive officer of Avix.
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 September 1992
Cohen Agreement and the February 1993 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. The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, and the April 1994 Cohen 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 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. 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.
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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 inability to
obtain the requisite funding to pursue such Approvals. See "-EXCLUSIVE
DISTRIBUTION AGREEMENTS Termination of Agreements with C.U.R.E." To induce
C.U.R.E. to enter into the Exclusive Distribution Agreement, in April 1994, the
Company issued 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 each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). The Company has been informed that Messrs. Cohen,
Bauer and Rizzuto are principals of C.U.R.E. Through December 31, 1997,
2,855,000 shares were issued pursuant to the exercise of the Bauer and Rizzuto
Options for an aggregate exercise price of $285,500. Mr. Rizzuto sold all of his
shares and all shares underlying his options. Pursuant to several amendments,
the remaining Bauer options are exercisable through April 30, 1998 at an option
price of $.11. See "-EXCLUSIVE DISTRIBUTION AGREEMENTS."
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
pharmacological and biotechnology companies and assisting the Company in seeking
joint ventures with and financing of companies in such industries.
In connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's Common Stock and the option to
acquire 5,000,000 shares of the Company's Common Stock for a period of three
years as per the vesting schedule as referred to in the agreement, at 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, 1997,
900,000 shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide consulting
services to the Company through May 2000 (the "Addendum"). 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 the Company's
Common Stock for a three year period pursuant to the following schedule: (i)
options to purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1996 and ending March 23, 1999 at an exercise price of
$.19 per share, of which options to acquire 500,000 shares were assigned by Dr.
Hirschman to Richard Rubin, consultant to Dr. Hirschman; (ii) options to
purchase 5,000,000 shares exercisable at any time and from time to time
commencing March 24, 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, consultant to Dr. Hirschman; and (iii)
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<PAGE> 25
options to purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1998 and ending March 23, 1999 at an exercise price of
$.36 per share, of which options to acquire 500,000 shares were assigned by Dr.
Hirschman to Richard Rubin, consultant 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, 1997, 500,000
shares of Common Stock were issued pursuant to the exercise of stock options by
Richard Rubin. Mr. Rubin has, from time to time in the past, advised the Company
on matters unrelated to his consultation with Dr. Hirschman.
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares (500,000 at
$.19, 500,000 at $.27 and 500,000 at $.36).
In October 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."
On February 18, 1998, the Board of Directors authorized a $100,000
bonus and granted options to acquire 23,000,000 shares of Common Stock at $.27
per option share provided that the Company is granted FDA approval for testing
RETICULOSE in the United States.
Malcolm Santer
In exchange for the services provided by Malcolm Santer, the Company's
plant manager at the manufacturing facility in Freeport, Bahamas, the Company
issued to Mr. Santer 50,000 shares of Common Stock valued at $.41 per share in
February 1997, and 100,000 shares of Common Stock valued at $.24 cents per share
in September 1997.
EXCLUSIVE DISTRIBUTION AGREEMENTS
Agreement with DCT S.R.L.
Under an Exclusive Distribution Agreement, dated in June 1994,
superseded by another agreement, dated April 1, 1996, between the Company and
DCT, the Company granted to DCT subject to certain conditions precedent, the
exclusive right to market and sell RETICULOSE within the territories of
Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile (the "DCT Agreement").
The term of the DCT Agreement was for a three-year period with additional
three-year renewal terms from the date DCT obtained all approvals, licenses,
permits and registrations (the "Approval") to import and distribute RETICULOSE
in Argentina, subject to DCT's right to extend the DCT Agreement so long as DCT
was diligently pursuing the Approval and meeting certain annual minimum purchase
requirements as set forth in the DCT Agreement, in the event the Approval for
Argentina was obtained. DCT was granted an option to purchase for a period of
one year from the date of Approval, 2,000,000 shares at a purchase price of $.20
per Share (the "DCT Option"). The Approval has not been obtained to date. The
Company has not terminated the DCT Agreement because the Company has not
identified another source it believes will be more successful in obtaining
Approval.
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 HIV
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.
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<PAGE> 26
As of June 1, 1994, the Company had also entered into an Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutica Central Americas Ltd., a
Delaware corporation and an affiliate of C.U.R.E. ("C.U.R.E. C/A Ltd.").
C.U.R.E. C/A Ltd. was required to purchase a minimum of 20,000 milliliters of
RETICULOSE during the first year following Approval and such Approval had to be
obtained within one year of this agreement. C.U.R.E. was unable to obtain such
Approval and the Company terminated C.U.R.E.'s exclusive distribution rights,
effective May 30, 1995, following acknowledgment by C.U.R.E. and C.U.R.E. C/A
Ltd. that neither had obtained Approvals and both lacked additional financing to
pursue the Approvals.
Agreements with AVIX and Unistone
As the result of the termination of agreements with C.U.R.E. and
C.U.R.E. C/A Ltd., the Company entered into an agreement, dated as of June 2,
1995, with AVIX 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 who is an officer and shareholder thereof) were
formerly principals of C.U.R.E. The terms of the agreement with AVIX are
substantially similar to the agreements with C.U.R.E. and C.U.R.E. C/A Ltd.
except that the territory in the AVIX Agreement does not include Thailand,
Malaysia and Singapore but does include Macao. The Approval has not been
obtained to date.
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.
There are no minimum purchase requirements to be met by AVIX under the
AVIX-Unistone Agreement. In addition, AVIX is obligated to pay Unistone $50,000
for its services in seeking Approval for China. As of December 31, 1997, 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. The Company has not terminated the
AVIX-Unistone Agreement because the Company has not identified another source it
believes will be more successful in obtaining Approval.
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 China,
Japan, Taiwan, Hong Kong and Macao so long as the Company owns any right to
RETICULOSE. AVIX also is entitled to certain payments by the Company in the
event that the Company sells manufacturing rights for RETICULOSE.
In July, 1996, the AVIX Far East Agreement was amended to grant AVIX
the additional country of Macao and reflect AVIX's waiver of its rights with
respect to the countries of Singapore, Thailand and Malaysia, as well as AVIX's
penalty rights under the AVIX Far East Agreement that would have vested in the
event that the Company could not produce sufficient quantities of RETICULOSE
within certain periods of time. The penalty rights were waived, in part, because
AVIX has not yet generated a sufficient demand for RETICULOSE within its
distribution territory.
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<PAGE> 27
The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to the Company.
The Company has not received the $8,000 monthly payment since November, 1996;
the Company has received a total of $40,000 in payments from AVIX. Pursuant to
recent discussions with AVIX regarding the AVIX Far East Agreement, the Company
and AVIX have agreed that, in lieu of the $8,000 monthly payment discussed
above, AVIX will fund studies assessing the efficacy of RETICULOSE that may be
performed in Mexico. If AVIX is complying with the AVIX Far East Agreement,
including certain annual minimum purchase requirements after Approval is
obtained (see below) of which there can be no assurance, the term is
automatically extended for five additional five year terms. The agreements with
AVIX further provide that the results of all studies, research data,
documentation and research publications regarding RETICULOSE in which AVIX has
an interest are owned by the Company.
The separate agreement for Mexico requires Approval within one year and
has minimum annual purchase requirement commencing at 20,000 milliliters. The
Company has extended the period for AVIX to secure Approval from Mexico because
management of the Company believes that AVIX has been diligently seeking
Approval from the Ministry of Health of Mexico.
AVIX 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 (collectively, the "Commonwealth Agreement")
with Commonwealth, the Company has granted to Commonwealth Pharmaceuticals
("Commonwealth"), subject to certain conditions precedent, the exclusive right
to market and sell the Company's pharmaceutical drug RETICULOSE within the
territories of the Channel Islands, The Isle of Man, the British West Indies,
Jamaica, Haiti, Bermuda and Belize (collectively, the "Commonwealth
Territories"), and the right (not exclusive) to import, warehouse, market, sell
and distribute RETICULOSE within the territory of Saudi Arabia. The term of the
Commonwealth Agreement as to the Commonwealth Territories is for successive
three year periods (each extension period being with the prior mutual consent of
the parties) from the date Commonwealth obtains Approval for any one of the
Commonwealth Territories. The Approval has not been obtained to date.
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). Commonwealth has advised the Company
that to date it has sold approximately $1,200 worth of RETICULOSE in the
Commonwealth Territories. Further, pursuant to the Commonwealth Agreement, in
the event Approval for any of the Commonwealth Territories is obtained,
Commonwealth is obligated to purchase from the Company (i) $225,000 worth of
RETICULOSE within one year from the date of Approval for any of the Commonwealth
Territories; (ii) $642,000 worth of RETICULOSE during the second year from the
date of Approval for any of the Commonwealth Territories; and (iii) $1,026,000
worth of RETICULOSE during the third year from the date of Approval for any of
the Commonwealth Territories. Commonwealth also is obligated to purchase from
the Company $225,000 worth, $822,000 worth and $1,914,000 worth of RETICULOSE,
respectively, during the first three years from the date of Approval. In
addition, pursuant to the Commonwealth Agreement, the Company has granted to
Commonwealth the right to acquire 3,000,000 shares of the Common Stock at a
purchase price of $.25 per share at any time and from time to time for a period
of one year from the date that certain tests are conducted and a paper is
published with respect to such test of RETICULOSE. The Company has been informed
by Commonwealth that certain of the affiliates of Commonwealth were formally
affiliated with Plata.
Agreement with Dormer Laboratories Inc.
On November 9, 1993, the Company entered into an agreement by which it
granted to Dormer Laboratories Inc., a Canadian corporation ("Dormer"), the
exclusive rights to import, warehouse, market, sell and distribute RETICULOSE
within Canada for a period of five years from the grant of import approval for
Canada, provided that Dormer meets certain RETICULOSE purchase minimums. Because
Approval for Canada was not obtained by
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<PAGE> 28
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, because it has not identified another source it believes will be more
successful in obtaining approval.
GLOSSARY
The following is a glossary of some of the scientific terms used in
this Prospectus. Except as otherwise noted, the information contained in the
glossary has been obtained from STEDMAN'S MEDICAL DICTIONARY ILLUSTRATED (The
Williams & Wilkins Company, Baltimore, 22nd Edition, c. 1972).
AIDS: Acquired Immune Deficiency Syndrome, a disease of no known
etiology in which the body's immunological system is
destroyed. (Source: WEBSTER'S II NEW RIVERSIDE DICTIONARY)
Amino acid: An organic acid in which one of the CH hydrogen atoms has
been replaced by NH2.
Ampule A hermetically sealed container, usually made of glass,
containing a sterile medicinal solution, or powder to be
made up in solution, to be used for subcutaneous,
intramuscular or intravenous injection.
Antibody: Any body or substance, soluble or cellular, which is evoked
by the stimulus provided by the introduction of antigen and
which reacts specifically with antigen in some demonstrable
way.
Antigen: Any of various sorts of material that, as a result of coming
in contact with appropriate tissues of an animal body, after
a latent period, usually of from eight to 14 days, induces a
state of sensitivity and/or resistance to infection or toxic
substances, and which will react in a demonstrable way
either with tissues or with serum from the sensitized
subject.
Anti-viral agent: An active force or substance capable of weakening or
abolishing the action of a virus.
Carboxyl: The characteristic chemical group of certain organic acids.
Cell: A minute structure, the living, active basis of all plant
and animal organization, composed of a mass of protoplasm,
enclosed in a delicate membrane and containing a nucleus.
HIV: Human Immunodeficiency Virus.
HPV: Human Papilloma Virus (genital warts).
Immune system
modulator: Substance or substances which stimulate the human body's
immune system to more actively counter the effects of viral
infection and viral invasion.
Interferon: Substances produced in cell cultures or host tissues in
response to infection with active or inactivated virus,
capable of inducing a state of resistance to superinfection
with related or unrelated virus.
Intramuscular: Within the substance of a muscle.
Kaposi's Sarcoma: A multiple, bleeding tumor denoting a disease of
unknown cause, involving primitive tissue in the formation
of blood or lymphatic vessels.
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<PAGE> 29
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.
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 leases approximately 6,100 square feet for executive
offices, including research laboratory space, at 200 Corporate Boulevard South,
Yonkers, New York from an unaffiliated third party (the "Yonkers Lease"). The
term of the Yonkers Lease is five years through February 2002 and the Company's
annual rental obligation under the Yonkers Lease is approximately $85,500. The
Company's telephone number in Yonkers, NY is (914) 376-7383.
The Company currently maintains corporate 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."
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<PAGE> 30
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
"Comission") 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1997,
no matters were submitted to a vote of security holders of the Company.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 31
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, 1996
and 1997, and for the portion of the quarter ended March 20, 1998, 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>
1996
First Quarter..............................................$0.15 $0.19
Second Quarter..............................................0.35 0.8125
Third Quarter...............................................0.44 0.75
Fourth Quarter..............................................0.26 0.62
1997
First Quarter ..............................................0.26 0.47
Second Quarter..............................................0.16 0.31
Third Quarter...............................................0.15 0.33
Fourth Quarter..............................................0.175 0.345
1998
January 1, 1998 through March 20, 1998......................0.18 0.425
</TABLE>
The approximate number of holders of record of the Common Stock as of
March 20, 1998 is 2,726 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.
For a description of (i) the Company's sale on February 21, 1997 of the
Company's ten-year 7% Convertible Debenture due February 28, 2007 (the "February
Debenture") and (ii) the Company's sale in October 1997 of the Company's
ten-year 7% Convertible Debenture due August 30, 2007 (the "October Debenture"),
and in connection with each 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."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 year ended December 31, 1997, the Company incurred a loss of
$4,141,729 ($.00 per share) compared to $1,154,740 ($.00 per share) in 1996. The
Company's increased losses for the year ended December 31, 1997 as compared with
the year ended December 31, 1996 were attributable primarily to the employment
of Shalom Z. Hirschman, M.D. as President and Chief Executive Officer of the
Company ($325,000 for 1997 vs $68,750 for 1996), interest charges as a result of
the beneficial conversion feature associated with the February Debenture and the
October Debenture ($1,626,368 for 1997 vs $0 for 1996), increased research and
development expense ($817,603 for 1997 vs $255,600 for 1996), opening and
maintenance costs of the Company's Yonkers, NY office ($57,000 for 1997 vs $0
for 1996), and the implementation of Statement of Financial Accounting Standards
Board (SFAS) No. 123, "Accounting for Stock-Based Compensation," which accounted
for Options granted and recorded as compensation expense ($399,322 for 1997 vs
$287,341 for 1996). Administrative expenses and the lack of sales revenues also
contributed to the Company's losses.
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<PAGE> 32
There were $2,278 in sales revenues in 1997 compared to $24,111 in
sales revenues for 1996. All sales revenues resulted from distributors
purchasing RETICULOSE for testing purposes. Interest income was $111,845 in 1997
and $46,796 in 1996. In 1997, the Company collected $0 for the sale of
territorial rights compared to $32,000 in 1996.
Although there can be no assurance, 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, 1997, the Company had current liquid assets of
$3,220,961 compared to $1,476,047 at December 31, 1996. The Company had total
assets of $4,189,842 and $1,716,800 at December 31, 1997 and 1996, respectively.
The increase in liquid assets and total assets was primarily attributable to the
proceeds from the October Debenture.
For 1997, the Company (i) had amortization of deferred compensation
cost of approximately $400,000 with respect to stock options granted, pursuant
to SFAS 123, (ii) amortization of deferred interest on beneficial conversion
features of approximately $1.6 million, (iii) purchased investments of
approximately $3.7 million, (iv) obtained approximately $2 million in proceeds
from the sale of investments, (v) obtained approximately $4 million in proceeds
from the sale of the debentures, and (vi) obtained approximately $267,000 from
the exercise of Options.
During 1997, the Company expended approximately $300,000 for leasehold
improvements and furniture and equipment at the Company's Yonkers, New York
office.
Until RETICULOSE is registered for sale in a developed or developing
country or in one or more of its distributors territories, sales of RETICULOSE
are not expected to generate significant revenues. There can be no assurances
that RETICULOSE will be available for sale in any developed or developing
country or, even if available, that it would generate significant revenues. FDA
approval to begin human clinical trials will require significant cash
expenditures, the amount of which is not currently determinable. BEFORE
SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM THE FDA, WHICH STATED,
AMONG OTHER COMMENTS, THAT THE COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT
PROVIDE AN ADEQUATE RESPONSE TO THE FDA'S EARLIER REQUEST FOR PRECLINICAL
INFORMATION AND ACCORDINGLY THE COMPANY'S IND WAS "INACTIVATED." 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.
The Company presently intends to prepare and file new Investigational
New Drug Applications with the FDA (the "New IND"). In addition, the Company is
currently pursuing the ongoing Barbados Study and the NCI Study (the "Ongoing
Studies") both of which studies are contemplated to produce data which may be
usable by Company in connection with the New IND. Because the Company is only at
the preliminary stages of its efforts with regard to the New IND, it is
impossible to determine whether the data from the Ongoing Studies will be able
to be used by the Company in connection with the New IND or if the New IND will
ever be approved by the FDA.
The Report of the independent certified public accountants of the
Company 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.
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<PAGE> 33
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 "February Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB") in an offshore transaction pursuant to Regulation S
under the Act. Pursuant to the terms of the February Debenture, on April 22,
1997, June 6, 1997, July 3, 1997 and August 20, 1997, RBB exercised its right to
convert $330,000, $134,000, $270,000 and $266,000 of the principal amount into
1,648,352, 894,526, 2,323,580 and 1,809,524 shares of the Common Stock. As of
August 20, 1997 the February Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase Common Stock,
each such February 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 February Warrants are $0.288, $0.576 and $0.864 per warrant
share, respectively. Each February 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 February Warrant as the excess of the market value of
shares of Common Stock over the warrant exercise price bears to that market
value. Each February Warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares as more particularly set
forth therein.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial conversion
feature of $413,793. This amount has been fully amortized to interest expense
with a corresponding credit to additional paid-in-capital.
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 February Debenture, the
Company paid to Interfi the sum of $70,000.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "October Debenture") due August 30, 2007, to RBB in an offshore
transaction pursuant to Regulation S under the Act of 1933. Accrued interest
under the October Debenture is payable semiannually, computed at the rate of 7%
per annum on the unpaid principal balance from the date of the issuance of the
October Debenture until the date of interest payment. (After default, interest
accrues at 10% per annum.) The October 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 October 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 principal then outstanding). The October 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 October Debenture of
the Company's notice of prepayment of the October 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 October 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 October Debenture
by (y) the Applicable Conversion Price; provided, however, that the right to
convert outstanding principal of the October Debenture terminates at the close
of business on the third calendar day preceding the date fixed for prepayment of
the October 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) $0.26 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 October
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 October Debenture. The closing price on
any trading day shall be (a) if the Common Stock is then listed or quoted on
either the National Association
31
<PAGE> 34
of Securities Dealers, Inc.'s OTC 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 October Debenture is fully
convertible, pursuant to notice by the holder, RBB, to the Company.
The October Debenture is convertible only to the extent of $750,000
from November 26, 1997 through December 26, 1997, is convertible only to the
extent of $1,500,000 (less any amounts previously converted) from December 26,
1997 through January 25, 1998 and is convertible only to the extent of
$2,250,000 (less any amounts previously converted) from January 25, 1998 through
February 24, 1998 and is fully convertible after February 24, 1998. In
connection with the issuance by the Company of the October Debenture, the
Company paid to Interfi the sum of $210,000. During 1997, RBB exercised its
right to convert $120,000 of the principal amount of the October Debenture into
772,201 shares of the Common Stock at a conversion price of $.1554 per share.
Subsequent to 1997, RBB exercised its right to convert the principal amount of
the October Debenture as follows: (i) $133,000 into 1,106,042 shares of Common
Stock at a conversion price of $.1309; (ii) $341,250 into 2,512,887 shares at a
conversion price of $.1358; (iii) $750,000 into 5,114,175 shares at a conversion
price of $.14665; and (iv) $335,750 into 1,498,884 shares at a conversion price
of $.224.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase Common Stock,
each such October Warrant entitling the holder to purchase, from the date of
grant through August 30, 2007, 600,000 shares of the Common Stock. The exercise
prices of the three October Warrants are $0.20, $0.23 and $0.27 per warrant
share, respectively. Each October 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 October Warrant as the excess of the market value of
shares of Common Stock over the warrant exercise price bears to that market
value. Each October Warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares as more particularly set
forth therein.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial conversion
feature of $1,350,000. This amount has been treated as deferred interest expense
and recorded as a reduction of the convertible debenture liability with a
corresponding credit to additional paid-in-capital. The deferred interest will
be amortized to interest expense over the period from October 8, 1997 (date of
October Debenture) to February 24, 1998 (date the October Debenture is fully
convertible). During 1997, $1,139,049 was amortized to interest expense.
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 warrants, potential grants and/or additional equity, which there is no
assurance will be available.
The Company is currently expending approximately $250,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, research and development, and travel, principally between the Company's
two offices and its Bahamian facility, and anticipates that it can continue
operations for at least 11months with its current liquid assets, including the
proceeds from the sale of the October Debenture, if no Common Stock purchase
options or warrants are exercised. If all of the outstanding options are
exercised, the Company will receive net proceeds of approximately $6,660,510.
Those proceeds will contribute to general and administrative and working capital
and will permit the Company to substantially increase its budget for research
and development and clinical trials and testing and to operate at significantly
increased levels of operation, assuming RETICULOSE receives approvals and
prospects for sales increase to justify such increased levels of operation, of
which there can be no assurance. However, there can be no assurance that any
additional options will be exercised.
The recent prevailing market price for shares of Common Stock has been
above the exercise prices of certain of the outstanding options. However, there
can be no assurance that the recent trading levels will be sustained or that any
additional options will be exercised. In the event that less than 25% or none of
the outstanding options are exercised, and no other additional financing is
obtained by the Company, in order for the Company to achieve the level of
32
<PAGE> 35
operations contemplated by management, management anticipates that it will have
to limit intentions to expand operations beyond current levels which involve
expenditures of $250,000 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 October Debenture is in place or
identified or currently under discussion. There can be no assurance that any of
the Company's distributors will ever obtain regulatory approvals to test or
market RETICULOSE in any territory. In the event that financing is not
available, in order to continue operations, management anticipates that they
will have to defer their salaries. Management does not believe that, at present,
debt or equity financing will be readily obtainable on favorable terms unless
and until FDA approval for Phase I clinical testing is granted or comparable
approval is obtained from another developed or developing country. Because of
the uncertainties involved in the process of gaining approval for commercial
drug use on humans, no assurance can be given that the Company will be able to
sell RETICULOSE. See 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."
The Company does not have a patent for RETICULOSE, although
applications for United States patents have been filed on behalf of the Company
and others are contemplated to be filed. There can be no assurance that other
companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to those of the Company.
There can be no assurance that the Company will obtain such a patent or, if
obtained, that it will be enforceable. The Company has retained patent counsel
for the purpose of pursuing additional patent protection for RETICULOSE.
However, there is no certainty that patents will be granted, or if granted, that
the patents will be sustained if judicially attacked, and, if declared valid,
that the patents, in fact, will operate to protect the Company from others
copying RETICULOSE. The Company has relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect its
rights to RETICULOSE and the processes for its manufacture, but there can be no
assurance that such efforts and procedures will continue to be successful and
protect the Company from any competition in the future.
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.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
33
<PAGE> 36
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company, and further
information concerning them, are as follows:
<TABLE>
<CAPTION>
NAME POSITIONS
---- ---------
<S> <C>
Shalom Z. Hirschman, M.D. President and Chief Executive Officer, Director
Bernard Friedland Chairman of the Board, Director
William Bregman Secretary-Treasurer, Director
Louis J. Silver Director
</TABLE>
Shalom Z. Hirschman, M.D. (age 62), 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 72), 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 76), 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 69), Director of the Company since May 1992, has
been self-employed as a free-lance bookkeeper and auditor since 1985. Mr. Silver
previously served as a member of the Board of Directors of the Company during
the periods from May 1987 to July 1987.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" of the Company as those terms as defined in the rules and regulations
promulgated under the Securities Act of 1933, as amended.
On June 17, 1997, Robert C. Kolodney, M.D. and William Gedale resigned
from the Company's Board of Directors.
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, 1997, and for the period ended
March 20, 1998, 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.
34
<PAGE> 37
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, no officer or director employed by the
Company received salary and bonus exceeding in the aggregate $100,000 in the
years ended December 31, 1997, 1996 or 1995. 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 $100,000 during the fiscal years ended
December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------------- -----------------------------
Securities
Other Annual Underlying All Other
Compensation Options/ Compensation
Name and Principal Position Year Salary($) Bonus($) ($)(1) SARs (#) ($)
- --------------------------- ---- --------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1997 325,000 43,000 14,604(3) 0 3,956(4)
President and Chief
Executive Officer of the 1996 68,750(2) 4,825 15,000,000 4,316
Company since October
1996 and consultant to the
Company from May 24, 1995
until October 1996.
</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 $7,404 for medical
insurance premiums paid by the Company for him, and $7,200 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.
No stock options were granted during 1997 to the executive officers of
the Company. Other than the 16,100,000 shares of Common Stock underlying Dr.
Hirschman's options, all of which shares are currently exercisable, the Company
currently has outstanding (i) six warrants (the "Warrants"), including the
February Warrants, which each entitle the holder to purchase 178,378 shares of
Common Stock at exercise prices of $0.288, $0.576 and $0.864 per warrant share,
respectively, and the October Warrants, which each entitle the holder to
purchase 600,000 shares of Common Stock,$0.20, $0.23 and $0.27 per warrant
share, respectively, and (ii) options to acquire 15,734,007 shares of the Common
Stock, none of which are beneficially owned by directors, officers or employees
of the Company.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE> 38
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company's Common Stock as of
December 31, 1997 held by the executive officers named in the "Summary
Compensation Table." None of these executives exercised any options during the
year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-
SHARES UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Shalom Z. Hirschman, MD $0 $0 16,100,000/0 $20,500/$20,500(2)(3)
- --------------
</TABLE>
(1) The difference between the average of the high and low bid prices per share
of the Common Stock as reported by the Bulletin Board on the date of
exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per share
of the Common Stock as reported by the Bulletin Board on December 31, 1997,
$.185, and the exercise or base price.
(3) As of December 31, 1997, Dr. Hirschman held options to purchase 4,100,000
shares of Common Stock at $.18 per share, 4,000,000; shares of Common Stock
at $.19 per share; 4,000,000 shares of Common Stock at $.27 per share; and
4,000,000 shares of Common Stock at $.36 per share, all of which are
currently exercisable.
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.
36
<PAGE> 39
Dr. Hirschman's compensation under the Hirschman Employment Agreement
is an annual salary of $325,000, payable in equal monthly installments. The
Hirschman Employment Agreement also entitles Dr. Hirschman to (a) a major
medical insurance policy, disability policy and dental policy insurance to Dr.
Hirschman and his dependents that is reasonably acceptable to the parties, and
(b) a term life insurance policy at least in the amount of $1,000,000, with a
beneficiary to be designated by Dr. Hirschman. Dr. Hirschman agrees to cooperate
with the Company in its purchase of a "key man" life insurance policy on his
life for the benefit of the Company. The Company further agrees to (a) take such
action as may be necessary to permit Dr. Hirschman to be entitled to participate
in stock option, stock bonus or similar plans (including plans for SARs) as are
established by the Company, (b) lease or purchase for Dr. Hirschman, at his
discretion, an automobile selected 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 March 20, 1998, 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:
37
<PAGE> 40
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OWNED
- ------------------------------------ ---------------------- -------------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 16,100,000 (2)(3) 5.3%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Bernard Friedland 39,371,730 (3)(4) 13.7%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,595,403 (3)(5) 12.4%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Louis J. Silver 501,000 *
5110 S.W. 127th Place
Miami, FL 33175
All officers & directors (4 persons) 91,568,133 (3)(6) 30.2%
</TABLE>
- ----------
* Less than 1%
(1) Assumes no purchases of Common Stock other than by exercise of options
outstanding as of March 20, 1998. 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 March 20, 1998 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, 286,796,690 shares of the Common Stock were outstanding as of the close
of business on March 20, 1998.
(2) Consists of shares which may be acquired pursuant to Common Stock purchase
options exercisable within 60 days after March 20, 1998.
(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 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 (i) 1,000,000 shares of the Common Stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants, (ii) 20,000,000 shares of the
Common Stock owned by Mr. Friedland and Shirley Friedland, his spouse, as joint
tenants, (iii) 15,000 shares of the Common Stock (as to which Mr. Friedland
disclaims beneficial ownership) owned by Shirley Friedland, and (iv) 600,000
shares owned by the B&SD Friedland Foundation, a not-for-profit foundation
controlled by Mr. Friedland.
(5) Includes 23,151,250 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 Options held by Dr.
Hirschman that are exercisable within 60 days after March 20, 1998.
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.
38
<PAGE> 41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report
4. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheet, December 31, 1997
Statements of Operations for the Years Ended December 31, 1997
and 1996 and from Inception (February 20, 1984) to
December 31, 1997
Statements of Stockholders' Equity from Inception
(February 20, 1984) to December 31, 1997
Statements of Cash Flows for the Years Ended December 31, 1997
and 1996 and from Inception (February 20, 1984) to
December 31, 1997
Notes to Consolidated Financial Statements
5. Exhibits:
See Exhibits Index. The Exhibits listed in the accompanying Exhibits Index
are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K during and after the fiscal quarter ended
December 31, 1997:
1. Report dated October 24, 1997, including Item 5, regarding the
Convertible Debenture to RBB Bank AG dated September 26, 1997. No financial
statements were filed.
39
<PAGE> 42
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: March 25, 1998 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: March 25, 1998 By: /s/ Shalom Z. Hirschman, M.D.
------------------------------------
Shalom Z. Hirschman, M.D., President
and Chief Executive Officer
and Director
Date: March 25, 1998 By: /s/ Bernard Friedland
------------------------------------
Bernard Friedland, Chairman of the
Board and Director
Date: March 25, 1998 By: /s/ William Bregman
------------------------------------
William Bregman, Secretary -
Treasurer, Director, Principal
Financial and Accounting Officer
Date: March 25, 1998 By: /s/ Louis J. Silver
------------------------------------
Louis J. Silver, Director
40
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT 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. (11)
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. (12)(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. (12)(ii)
10(i) Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and the Company. (11)
10(j) Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and
the Company. (12)(iii)
10(k) Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and the Company. (12)(iv)
10(l) Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and the Company, as
amended. (12)(v)
</TABLE>
41
<PAGE> 44
<TABLE>
<S> <C>
10(m) Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel Islands
and the Company. (12)(vi)
10(n) Agreement dated May 24, 1995 between the Company and Deborah Silver. (9)
10(o) Agreement dated May 29, 1995 between the Company and Shalom Z. Hirschman, M.D. (9)
10(p) Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International Pharmaceutical
Corp. and the Company. (11)
10(q) Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals. (11)
10(r) Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and the Company. (12)(vii)
10(s) Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical Corp.
and the Company. (12)(vii)
10(t) Agreement dated April 1, 1996, between DCT S.R.L. and the Company. (12)(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. (12)(ix)
10(w) Employment Agreement, dated October 17, 1996, between the Company and Shalom Z. Hirschman, M.D. (12)(x)
10(x) Lease, dated February 7, 1997 between Robert Martin Company, LLC and the Company. (11)
10(y) Copy of Purchase and Sale Agreement, dated February 21, 1997 between the Company and RBB Bank
AG. (12)(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. (12)(xii)
10(aa) Copy of Purchase and Sale Agreement, dated September 26, 1997 between the Company and RBB Bank
AG. (12)(xiii)
10(bb) Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development Agreement,
dated March 4, 1998, between National Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (13)
21 Subsidiaries of Registrant - Advance Viral Research Limited, a Bahamian corporation. (12)
27 Financial Data Schedule for the Company as of and for the two years ended December 31, 1997. (13)
</TABLE>
- ----------
(1) Documents incorporated by reference herein to certain exhibits the
Company's Registration Statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on March
19, 1990.
(2) Documents incorporated by reference herein to certain exhibits to the
Company's Registration Statement on Form S-18, File No. 33-2262-A,
filed with the Securities and Exchange Commission on February 12, 1989.
(3) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1990.
(4) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on form 10-K for period ended March 31, 1991.
(5) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(6) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-Q for the period ended September 30, 1992.
42
<PAGE> 45
(7) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
(8) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1993.
(9) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended June 30, 1995.
(10) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1996.
(11) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.
(12) 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.
(xiii) A report on Form 8-K dated October 24, 1997.
(13) Filed herewith.
43
<PAGE> 46
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet, December 31, 1997 F-2
Statements of Operations for the Years Ended December 31, 1997 and 1996 and from
Inception (February 20, 1984) to December 31, 1997 F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 1997 F-4
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 and from
Inception (February 20, 1984) to December 31, 1997 F-10
Notes to Consolidated Financial Statements F-11
</TABLE>
<PAGE> 47
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, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years ended December 31, 1997 and for the period from
inception (February 20, 1984) to December 31, 1997. 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, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 and for the period from inception (February
20, 1984) to December 31, 1997 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
February 10, 1998
(except for the last paragraph
of Note 6, as to which the date
is March 19, 1998)
F-1
<PAGE> 48
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 236,059
Investments 2,984,902
Inventory 19,729
Other current assets 20,240
------------
Total current assets 3,260,930
Property and Equipment 485,661
Other Assets 443,251
------------
Total assets $ 4,189,842
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 375,606
------------
Total current liabilities 375,606
------------
Convertible Debenture, Net 2,384,793
------------
Commitments and Contingencies --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 277,962,574 shares issued and outstanding 2,779
Additional paid-in capital 10,512,767
Subscription receivable (19,000)
Deficit accumulated during the development stage (8,993,266)
Deferred compensation cost (73,837)
------------
Total stockholders' equity 1,429,443
------------
Total liabilities and stockholders' equity $ 4,189,842
============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 49
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, Inception
(February 20, 1984)
--------------------------------- to
1997 1996 December 31, 1997
------------- ------------- -------------------
<S> <C> <C> <C>
Revenues:
Sales $ 2,278 $ 24,111 $ 194,319
Interest 111,845 46,796 457,254
Other income 7,800 32,000 119,800
------------- ------------- -------------
121,923 102,907 771,373
------------- ------------- -------------
Costs and Expenses:
Research and development 817,603 255,660 1,924,011
General and administrative 1,681,436 983,256 5,894,910
Depreciation and amortization 138,245 18,731 317,140
Interest 1,626,368 -- 1,628,578
------------- ------------- -------------
4,263,652 1,257,647 9,764,639
------------- ------------- -------------
Net Loss $ (4,141,729) $ (1,154,740) $ (8,993,266)
============= ============= =============
Net Loss Per Common Share $ (.00) $ (.00)
============= =============
Weighted Average Number of
Common Shares Outstanding 274,534,277 257,645,815
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 50
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<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)
----------- -------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 51
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<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, 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)
----------- ----- --------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 52
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<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, 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 --
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 .03 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-6
<PAGE> 53
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<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) --
----------- ------- ----------- ----- ----------- ------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 54
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<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, 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> 55
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Deficit
------------------------------------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock,
exercise of options .08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt .20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt .15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt .12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt .15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt .16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered .41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered .24 100,000 1 23,999 -- -- --
Beneficial conversion
feature, February debenture -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on
convertible debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- -------- ----------- ----------- ----------- ----------
Balance, December 31, 1997 277,962,574 $ 2,779 $10,512,767 $ (19,000) $(8,993,266) $ (73,837)
=========== ======== =========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 56
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------------- December 31,
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,141,729) $(1,154,740) $(8,993,266)
----------- ----------- -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 138,245 18,731 317,140
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 1,552,842 -- 1,552,842
Amortization of deferred compensation cost 399,322 287,341 686,663
Loss on sale of property and equipment 1,425 -- 1,425
Issuance of common stock for services 44,500 175,000 1,416,500
Imputed interest on convertible debenture 4,768 -- 4,768
Increase in other current assets (4,159) (3,114) (20,240)
Increase in inventory -- (1,638) (19,729)
Increase in other assets (496,126) (27,085) (529,670)
Increase in accounts payable and accrued liabilities 328,932 39,823 381,806
Decrease in customer deposits (7,800) -- (7,800)
----------- ----------- -----------
Total adjustments 1,961,949 489,058 3,783,705
----------- ----------- -----------
Net cash used in operating activities (2,179,780) (665,682) (5,209,561)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of investments (3,651,676) (1,247,256) (5,377,932)
Proceeds from sale of investments 2,045,615 347,415 2,393,030
Expenditures for property and equipment (307,362) (11,446) (691,866)
Proceeds from sale of property and equipment 1,200 -- 1,200
----------- ----------- -----------
Net cash used in investing activities (1,912,223) (911,287) (3,675,568)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 4,000,000 -- 4,000,000
Proceeds from sale of securities, net of issuance costs 266,666 1,573,135 5,121,188
----------- ----------- -----------
Net cash provided by financing activities 4,266,666 1,573,135 9,121,188
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 174,663 (3,834) 236,059
Cash and Cash Equivalents, Beginning 61,396 65,230 --
----------- ----------- -----------
Cash and Cash Equivalents, Ending $ 236,059 $ 61,396 $ 236,059
=========== =========== ===========
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-10
<PAGE> 57
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, 1997.
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 AND 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,
U.S. Government securities and discount notes and U.S. Treasury
Bills. The U.S. Government securities, 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.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the
Company.
DEFERRED COMPENSATION COST
Deferred compensation costs are recognized based on the fair value
for non-employee stock options. Compensation cost is amortized over
the life of the option period which is either shorter than or
essentially equivalent to the period for which the services are to
be provided. Compensation expense is classified as general and
administrative.
F-11
<PAGE> 58
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
The only sales generated by the Company have been sales of
RETICULOSE for testing purposes. Sales are recorded by the Company
when such test products are shipped to customers.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been
reclassified to conform to 1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ
from actual results.
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. During 1997,
the Company obtained debt financing and may seek additional debt
financing if the need arises. 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.
F-12
<PAGE> 59
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition is a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market RETICULOSE
worldwide, except within the Bahamas, for $50,000. The Company also
purchased inventory of RETICULOSE from LTD for $45,000 and was
obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
ampules purchased and $2 per ampule for purchases exceeding 100,000
ampules. On December 16, 1987, the Company acquired the controlling
beneficial interest in 99.6% of the common stock of LTD through an
appropriate trust agreement to satisfy the rules of the Bahamian
Government, from two of the principal stockholders of the Company at a
cost of $46,000. Both stockholders concurrently canceled $86,565 of
indebtedness due them from LTD.
NOTE 4. INVESTMENTS
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Certificates of deposit $ 758,000
Held to maturity:
U.S. Government securities (matures February 1998) 2,226,902
----------
$2,984,902
==========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31,
(Years) 1997
------------- --------------
<S> <C> <C>
Land and improvements 15 $ 34,550
Building and improvements 30 299,550
Machinery and equipment 5 354,250
-------------
688,350
Less accumulated depreciation 202,689
-------------
$ 485,661
=============
</TABLE>
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $370,028 as of
December 31, 1997 including $17,623 expended in 1987 to purchase a land
lease expiring in 2068. These amounts are included above.
F-13
<PAGE> 60
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. CONVERTIBLE DEBENTURES
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 "February Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB"). Accrued interest under the February
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from February 21, 1997 until the
date of interest payment. The February Debenture may be prepaid by the
Company before maturity, in whole or in part, without premium or
penalty, if the Company gives the holder of the Debenture notice not
less than 30 days before the date fixed for prepayment in that notice.
The February Debenture is convertible, at the option of the holder,
into shares of common stock.
The assured incremental yield on the February Debenture was measured
based on the date of issuance of the security and amortized to interest
expense over the conversion period which ended on May 29, 1997 which
was the first date full conversion could occur. The interest expense
relating to this measurement was $4,768.
During the quarter ended June 30, 1997, RBB exercised its right to
convert $330,000 of the principal amount of the February Debenture into
1,648,352 shares of the Company's common stock at a conversion price of
$.2002 per share and to convert $134,000 of the principal amount of the
debenture into 894,526 shares of the Company's common stock at a
conversion price of $.1498.
During the quarter ended September 30, 1997, RBB exercised its right to
convert $270,000 of the principal amount of the February Debenture into
2,323,580 shares of the Company's common stock at a conversion price of
$.1162 per share and to convert $266,000 of the principal amount of the
debenture into 1,809,524 shares of the Company's common stock at a
conversion price of $.1470 per share.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February warrants") to purchase
common stock, each such February warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible debenture.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $413,793. This amount has been fully amortized to
interest expense with a corresponding credit to additional paid-in
capital.
F-14
<PAGE> 61
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. CONVERTIBLE DEBENTURES (Continued)
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7%
Convertible Debenture (the "October Debenture") due August 30, 2007, to
RBB. Accrued interest under the October Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the October
Debenture until the date of interest payment. The October Debenture may
be prepaid by the Company before maturity, in whole or in part, without
premium or penalty, if the Company gives the holder of the Debenture
notice not less than 30 days before the date fixed for prepayment in
that notice . The October Debenture is convertible, at the option of
the holder, into shares of common stock.
During the quarter ended December 31, 1997, RBB exercised its right to
convert $120,000 of the principal amount of the October Debenture into
772,201 shares of the Company's common stock at a conversion price of
$.1554 per share.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October warrants") to purchase
Common Stock, each such October warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
warrants are $0.20 , $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black Sholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized to interest expense
over the expected term of the notes which at December 31, 1997 was 120
months.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and is being amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture is fully convertible). The interest
expense relative to this item was $1,139,049 for 1997.
Unpaid principal balance of October debenture $2,880,000
Less unamortized discount and deferred interest 495,207
----------
Convertible debenture, net $2,384,793
==========
During January 1998, RBB exercised its right to convert $133,000 and
$341,250 of the principal amount of the October debenture into
1,016,043 and 2,512,887 shares of the Company's common stock at a
conversion price of $.1309 and $.1358 per share, respectively.
On February 26, 1998 and March 19, 1998, RBB exercised its right to
convert $750,000 and $335,750 of the principal amount of the October
Debenture into 5,114,175 and 1,498,884 shares of the Company's common
stock at a conversion price of $.14665 and $.224 per share,
respectively.
F-15
<PAGE> 62
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. 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.
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 and could materially adversely
affect the Company.
LACK OF PATENT PROTECTION
The Company does not presently have a patent for RETICULOSE but the
Company is currently applying for patents for RETICULOSE as a
treatment for certain diseases. The Company can give no assurance
that other companies, having greater economic resources, will not
be successful in developing a similar product. There can be no
assurance that the Company will obtain such patents or if obtained
that they will be enforceable.
LEASE COMMITMENTS
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1998 at
approximately $14,000 annually.
Management executed a non-cancelable lease for new office and
laboratory space in Yonkers, New York on April 18, 1997, expiring
on April 30, 2002 at approximately $85,500 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, 1997 and 1996
totaled $76,351 and $13,315, respectively.
F-16
<PAGE> 63
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
LEASE COMMITMENTS (Continued)
Future minimum lease payments are as follows:
Year ending December 31:
1998 $104,400
1999 89,500
2000 85,000
2001 85,000
2002 28,000
--------
$391,900
========
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through April 30, 1998
at an exercise price of $.12 and $.14, respectively. As of December
31, 1997, there are outstanding Plata Options to acquire 813,000
shares at $.12 per share and Additional Plata Options to acquire
858,100 shares at an exercise price of $.14 per share. Through
December 31, 1997, the Company has received approximately $670,000
pursuant to the issuance of approximately 7.7 million shares in
connection with the exercise of the Plata Options and the
Additional Plata Options.
TESTING AGREEMENTS (Continued)
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
F-17
<PAGE> 64
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
TRM MANAGEMENT CORP. ("TRM") (Continued)
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 and $.08 per share (the "TRM
Options"). As of December 31, 1997, 10,000,000 shares of common
stock were issued pursuant to the exercise of the TRM Options for
an aggregate exercise price of $600,000.
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 12 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,
1997, 473,500 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of
approximately $95,000.
F-18
<PAGE> 65
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In April 1996, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In June 1997, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of RETICULOSE for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $410,000 which is accounted for as a research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
RETICULOSE for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $49,000 and $88,000, respectively such expenses are
accounted for a research and development expenses. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts respectively
expended in connection with the Studies.
F-19
<PAGE> 66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
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, 1997, the Company has
expended approximately $345,000 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").
NATIONAL CANCER INSTITUTE AGREEMENT
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which RETICULOSE affects the transcription of the gamma interferon
gene.
TOPICAL SAFETY STUDY
In October 1997, the Company advanced $75,000 towards a total of
$150,000 for a topical safety study to be conducted in the United
States for the topical use of RETICULOSE for the treatment of HPV
and Herpes.
CONSULTING AGREEMENTS
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
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
F-20
<PAGE> 67
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of December 31, 1997, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 1999 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 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, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 1999 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant 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, 1997, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27 and 500,000 at $.36).
F-21
<PAGE> 68
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
does not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus and granted options to acquire 23,000,000 shares of common
stock at $.27 per option share provided that the Company is granted
FDA approval for testing RETICULOSE in the United States.
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's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through April 30, 1998), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.13 per
share) (the "September 1992 Cohen Options"). As of December 31,
1997, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
F-22
<PAGE> 69
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). The Company has been informed that
Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
been granted certain distribution rights, which were terminated on
May 31, 1995. Through December 31, 1997, 2,855,000 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
of his shares and all shares underlying his options. Pursuant to
several amendments, the remaining Bauer options are exercisable
through April 30, 1998 at an option price of $.11. The Company
agreed to issue to Cohen an additional 300,000 shares in 1995 at a
time when the shares were valued at $.14 per share, in
consideration for expenditures incurred by Mr. Cohen in connection
with securing for the benefit of the Company and the affiliated
distributor, the continued services of a doctor.
The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
Shares have been accounted for as an administrative expense in the
amount of the Company's valuation of such shares as of the issuance
date. During the year ended December 31, 1996, 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.
F-23
<PAGE> 70
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. No sales have been made by the
Company under the distribution agreements other than for testing
purposes.
NOTE 8. STOCKHOLDERS' EQUITY
During 1997, the Company issued 10,931,516 shares of common stock for
an aggregate consideration of $1,412,166. These amounts were comprised
of the issuance of common stock pursuant to the exercise of stock
options of 3,333,333 shares for $247,666 and the issuance of common
stock in exchange for consulting services of 150,000 shares for
consideration of $44,500 and the issuance of common stock upon
conversion of debt of 7,448,183 shares for $1,120,000.
NOTE 9. 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, 1997, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $9,000,000, which expires in varying amounts to 2017.
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, 1997 were as follows:
Benefit of net operating loss carryforwards $3,058,000
Less valuation allowance 3,058,000
----------
Net deferred tax asset $ --
==========
F-24
<PAGE> 71
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. INCOME TAXES (Continued)
As of December 31, 1997, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $3,058,000, which related to the net operating
losses, has been established.
NOTE 10. 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, 1997. 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, 1997 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, accounts payable and the
convertible debentures. Fair values were assumed to approximate
carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values
or they are receivable or payable on demand.
The fair value of non-current investments, primarily U.S. government
obligations, have been estimated using quoted market prices. At
December 31, 1997, the differences between the estimated fair value and
the carrying value of non-current and current debt instruments were
considered immaterial in relation to the Company's financial position.
NOTE 11. DEFERRED COMPENSATION COST
As more fully described in Note 7 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 and 1997: expected volatility of 20%; a risk-free
interest rate of 6% and an expected holding period ranging from 1-3
years. The deferred compensation cost is reported as a component of
stockholders' equity. At December 31, 1997 and 1996, there were
7,000,000 option shares outstanding with a weighted average exercise
price of $0.195 per share.
F-25
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT 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. (11)
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. (12)(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. (12)(ii)
10(i) Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and the Company. (11)
10(j) Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and
the Company. (12)(iii)
10(k) Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and the Company. (12)(iv)
10(l) Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and the Company, as
amended. (12)(v)
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
10(m) Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel Islands
and the Company. (12)(vi)
10(n) Agreement dated May 24, 1995 between the Company and Deborah Silver. (9)
10(o) Agreement dated May 29, 1995 between the Company and Shalom Z. Hirschman, M.D. (9)
10(p) Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International Pharmaceutical
Corp. and the Company. (11)
10(q) Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals. (11)
10(r) Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and the Company.
(12)(vii)
10(s) Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical Corp.
and the Company. (12)(vii)
10(t) Agreement dated April 1, 1996, between DCT S.R.L. and the Company. (12)(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. (12)(ix)
10(w) Employment Agreement, dated October 17, 1996, between the Company and Shalom Z. Hirschman, M.D.
(12)(x)
10(x) Lease, dated February 7, 1997 between Robert Martin Company, LLC and the Company. (11)
10(y) Copy of Purchase and Sale Agreement, dated February 21, 1997 between the Company and RBB Bank
AG. (12)(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. (12)(xii)
10(aa) Copy of Purchase and Sale Agreement, dated September 26, 1997 between the Company and RBB Bank
AG. (12)(xiii)
10(bb) Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development Agreement,
dated March 4, 1998, between National Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (13)
21 Subsidiaries of Registrant - Advance Viral Research Limited, a Bahamian corporation. (12)
27 Financial Data Schedule for the Company as of and for the two years ended December 31, 1997. (13)
</TABLE>
- ----------
(1) Documents incorporated by reference herein to certain exhibits the
Company's Registration Statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on March
19, 1990.
(2) Documents incorporated by reference herein to certain exhibits to the
Company's Registration Statement on Form S-18, File No. 33-2262-A,
filed with the Securities and Exchange Commission on February 12, 1989.
(3) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1990.
<PAGE> 74
(4) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on form 10-K for period ended March 31, 1991.
(5) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(6) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-Q for the period ended September 30, 1992.
(7) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10- KSB for the fiscal year ended
December 31, 1992.
(8) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1993.
(9) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended June 30, 1995.
(10) Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1996.
(11) Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10- KSB for the fiscal year ended
December 31, 1996.
(12) 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.
(xiii) A report on Form 8-K dated October 24, 1997.
(13) Filed herewith.
<PAGE> 1
Ex. 10(bb)
AMENDMENTS
----------
CURRENT CRADA TERMS
- -------------------
<TABLE>
<CAPTION>
CURRENT CRADA TERMS
<S> <C> <C> <C> <C>
CRADA# 0566 Term extension(s)(mo.) NIH Dr.: Dr. Howard Young, Section Chief
Effective
Date: 3/4/97 1: 12 Institute: NCI
Orig. Term
(yrs): 1 year 2: Division: DBS
Total term
(mo): 24 Laboratory: LEI
Expiration: 3/4/99 Collab. PI: Shalom Z. Hirschman, M.D.
Collaborator: Advanced Viral Research
Corp.
</TABLE>
Title: Research with peptide nucleic acid drug, RETICULOSE-AMENDMENT
NEW CRADA TERMS
- ---------------
The purpose of this amendment is to change certain terms of the above referenced
Cooperative Research and Development Agreement. These changes are reflected
below and except for these changes and those of any previous amendments, all
other provisions including the research plan of the original CRADA remain in
full force and effect. Two originals of this amendment are provided for
execution - one is to remain with the NCI and the other with the collaborator.
This amendment to the Advanced Viral Research (AVR) Corporation Materials
Transfer Agreement-Cooperative Research & Development Agreement (MTA-CRADA) is
to extend the MTA-CRADA for one (1) additional year beyond the original
expiration date of March 4, 1998. This CRADA will expire March 4, 1999.
This amendment is necessary to permit LEI to complete the evaluation of the
effect of the reagent provided by AVR on cytokine gene expression in cell lines,
human PBMC and mouse spleen cells. Due to lack of a dedicated person, the LEI
has not been able to obtain sufficiently conclusive results to date. However, a
full-time lab member has been reassigned to this project and a one year
extension is necessary to complete the studies. There are no modifications to
the Research Plan.
================================================================================
ACCEPTED AND AGREED TO:
NATIONAL CANCER INSTITUTE ADVANCED VIRAL RESEARCH CORP.
/s/ Alan S. Robson, M.D. /s/ Shalom Z. Hirschman, M.D.
- ------------------------ -----------------------------
Alan S. Robson, M.D. Shalom Z. Hirschman, M.D.
Deputy Director President & CEO
MARCH 19, 1998 MARCH 19, 1998
- --------------------------------- --------------
Date Date
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 236,059
<SECURITIES> 2,984,902
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 3,260,830
<PP&E> 485,661<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,189,842
<CURRENT-LIABILITIES> 375,606
<BONDS> 0
0
0
<COMMON> 2,779
<OTHER-SE> 1,426,664
<TOTAL-LIABILITY-AND-EQUITY> 4,189,842
<SALES> 2,278
<TOTAL-REVENUES> 121,923
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,637,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,626,368
<INCOME-PRETAX> (4,141,729)
<INCOME-TAX> (4,141,729)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,141,729)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>PP&E Values represent net amounts.
</FN>
</TABLE>
