As filed with the Securities and Exchange Commission on April 29, 1999.
Registration No. 333-70523
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
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(Exact name of Registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
5129
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(Primary Standard Industrial Classification Code Number)
59-2646820
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(I.R.S. Employer Identification No.)
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
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(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
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(Name, address and telephone number of agent for service)
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Copies to:
CHARLES J. RENNERT
Berman Wolfe & Rennert, P.A.
NationsBank Tower, Suite 3500
Miami, Florida 33131-2130
(305) 577-4177 Phone (305) 373-6036 Fax
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this registration
statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum
Title of each class of Amount to offering price per aggregate offering Amount of
securities to be registered be registered share(1) price(1) registration fee
- --------------------------- ------------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Common stock par 47,192,584 $0.23 $10,854,234 $3,017
value $0.00001 per share
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Total Fee $3,017 (2)
======
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the average of the closing bid and ask prices of the common
stock on April 26, 1999, as reported on the OTC Electronic Bulletin Board.
(2) $2,700 of the fee was previously paid.
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The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
[This Space Intentionally Left Blank]
<PAGE>
Prospectus subject to completion, dated April 29, 1999.
47,192,584 Shares
ADVANCED VIRAL RESEARCH CORP.
Common Stock
This prospectus relates to the sale of up to 47,192,584 shares of
common stock of Advanced Viral Research Corp. ("AVR") by those persons
identified as selling shareholders in this prospectus. These shares of common
stock include shares which may be issuable upon the conversion of a convertible
debenture and the exercise of certain warrants and stock options. AVR will not
receive any of the proceeds from the sale of the shares by the selling
shareholders.
The actual number of shares of common stock issued or issuable is
subject to adjustment and could be materially less or more than the above
estimated amount, depending upon factors that cannot be predicted by AVR at this
time, including, among others, the future market price of the AVR common stock.
AVR common stock is listed for trading on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On April
26, 1999 the low and high bid prices for the common stock on the Bulletin Board
were $0.21 and $0.25, respectively.
Investing in the AVR common stock involves substantial risks. See "RISK
FACTORS" beginning on page 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is ____________, 1999.
++++++The information in this prospectus is not complete and may be changed. The
selling shareholders may not sell these securities until the registration
statement filed with the Securities Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted. +++++
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
THE OFFERING..................................................................2
SUMMARY FINANCIAL DATA........................................................3
RISK FACTORS..................................................................3
ABOUT THIS PROSPECTUS.........................................................9
WHERE TO FIND MORE INFORMATION................................................9
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE ............................10
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS..............................................11
CAPITALIZATION...............................................................12
SELECTED CONSOLIDATED FINANCIAL DATA.........................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................................15
BUSINESS.....................................................................22
MANAGEMENT...................................................................41
PRINCIPAL SHAREHOLDERS.......................................................46
SELLING SHAREHOLDERS.........................................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................49
DESCRIPTION OF SECURITIES....................................................49
USE OF PROCEEDS..............................................................50
PLAN OF DISTRIBUTION.........................................................50
LEGAL MATTERS................................................................51
EXPERTS......................................................................51
INDEX TO FINANCIAL STATEMENTS...............................................F-1
i
<PAGE>
PROSPECTUS SUMMARY
The following summary may not contain all the information that is
important to you. You should carefully review the information appearing
elsewhere in this prospectus, in particular the 'Risk Factors' section and the
Consolidated Financial Statements and Notes thereto. Except where noted in the
text, all information in this prospectus assumes (i) the issuance of 9,057,971
shares of AVR common stock upon the full conversion of a convertible debenture
dated as of November 16, 1998 in the aggregate principal amount of $1,500,000
(the "1998 Debenture"); (ii) the issuance of 5,451,922 shares of AVR common
stock upon the full exercise of outstanding warrants (the "Warrants"); and (iii)
the issuance of 27,765,415 shares of AVR common stock upon the full exercise of
outstanding stock options (the "Options").
GENERAL INFORMATION REGARDING AVR
Advanced Viral Research Corp. ("AVR") was incorporated in Delaware on
July 31, 1985 to engage in the production and marketing, promotion and sale of
the pharmaceutical product Reticulose(Trademark) ("Reticulose"). AVR is in the
developmental stage, and has not yet commenced any commercial operations. AVR's
offices are located at 1250 East Hallandale Beach Boulevard, Suite 501,
Hallandale, Florida 33009 and 200 Corporate Boulevard South, Yonkers, New York
10701. Its telephone number in Hallandale, Florida is (954) 458-7636 and its
telephone number in Yonkers, New York is (914) 376-7383.
Reticulose has not been registered or approved for commercial
distribution by the Food and Drug Administration of the United States Department
of Health and Human Services ("FDA"), or any other applicable foreign government
body. AVR is dependent on such registration and/or approval of Reticulose in
order to commence commercial operations, and sales of Reticulose will not be
significant unless such approval is granted. FDA approval first requires
clinical testing of Reticulose in human trials, and such clinical testing cannot
be conducted in the United States until AVR satisfies the FDA's requirements in
its Notice of Claimed Investigational Exemption for a New Drug ("IND") for
Reticulose. Although AVR is currently working towards the submission of a new
IND to the FDA, no assurance can be given that the IND will ever be submitted,
or if submitted that the FDA will approve such IND, or if such approval is
granted, that, in the absence of grants or other subsidies, AVR will be able to
fund the first phase of human clinical trials. If AVR needs additional financing
to fund such human clinical trials, there can be no assurance that additional
financing will be available to AVR. No assurance can be given that the results
of such human clinical trials will prove that Reticulose is safe or effective in
the treatment of any diseases. No assurance can be given that the FDA will ever
permit the commercial distribution of Reticulose in the United States.
AVR's operations over the last five years have been limited principally
to engaging in research, in vitro testing and analysis of Reticulose in the
United States, and engaging others to perform testing and analysis of Reticulose
on human patients outside the United States. In connection with these
engagements, AVR has also granted distribution rights for Reticulose in certain
foreign countries. Shalom Hirschman, M.D., President of AVR, has monitored the
testing of Reticulose and has recently performed certain analyses of Reticulose
with Company
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personnel, which analyses AVR believes may be used in connection with the FDA
approval process. In addition, AVR has recently contracted with GloboMax LLC of
Hanover, Maryland to advise AVR in its preparation of an IND to be filed with
the FDA, and to otherwise assist AVR through the FDA process with the objective
of obtaining full approval for Reticulose in the United States. There can be no
assurances as to the costs or the timing of the filing of the new IND or whether
AVR has the resources to complete the FDA approval process.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered (1)...............................................47,192,584 shares
Common Stock to be outstanding after the offering(1)...................343,615,491 shares
Risk Factors...........................................................The securities offered hereby
involve a high degree of risk
and should not be purchased
by investors who cannot
afford the loss of their entire
investment. See "Risk
Factors."
Use of proceeds........................................................The common stock will be
sold by certain selling
shareholders listed in this
prospectus. AVR will not
receive any of the proceeds
from the sale of the shares by
the selling shareholders
OTC Bulletin Board symbol..............................................ADVR
</TABLE>
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(1) In addition to 4,917,276 shares of common stock, includes (i) 9,057,971
shares issuable upon full conversion of the 1998 Debenture, which amount may
fluctuate depending upon, among other things, the future market price of AVR's
Common Stock; (ii) 5,451,922 shares of AVR common stock issuable upon full
exercise of the Warrants; and (iii) 27,765,415 shares issuable upon full
exercise of the Options.
2
<PAGE>
SUMMARY FINANCIAL DATA
SUMMARY STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31
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1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
Net revenues $84,852 $68,483 $102,907 $121,923 102,992
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($3,984,793)
Net loss per common share ($0.00) ($0.00) ($0.00) ($0.02) ($0.01)
Weighted average # of shares 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
<CAPTION>
SUMMARY BALANCE SHEET DATA
December 31
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1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
Total Assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
Long-term debt - - - $2,384,793 1,052,382
Stockholders' equity per common share $0.00 $0.00 $0.01 $0.00 $0.00
Shares outstanding at year end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907
</TABLE>
RISK FACTORS
The securities offered under this prospectus are highly speculative in
nature and involve a high degree of risk. They should be purchased only by
persons who can afford to lose their entire investment. Therefore, each
prospective purchaser should, prior to purchase, consider very carefully the
following risk factors, as well as all other information set forth elsewhere in
this prospectus, particularly the information contained in the consolidated
financial statements in this prospectus.
Broker-Dealer Sales, Market Liquidity of AVR Common Stock
AVR's common stock is subject to the Securities Enforcement and Penny
Stock Reform Act of 1990, which requires additional disclosure relating to the
market for penny stocks in connection with trades in any stock defined as a
penny stock. Commission regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
In addition, because AVR's securities do not meet the exceptions to the
penny stock regulations cited above, trading in AVR's securities is covered by
Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for securities
that are not listed on The Nasdaq Stock Market or any national securities
exchange. Under such rule, broker/dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written
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<PAGE>
agreement to a transaction prior to sale. Securities also are exempt from this
rule if the market price is at least $5.00 per share.
Because AVR's securities are subject to the regulations applicable to
penny stocks, the market liquidity for AVR's securities may be adversely
affected. The regulations on penny stocks limit the ability of broker/dealers to
sell AVR's securities and thus the ability of purchasers of AVR's securities to
sell their securities in the secondary market. In addition, certain states may
have rules and regulations that impose additional sales practice requirements on
broker-dealers who sell the common stock.
Commercial Viability Dependent on Approval of Reticulose for Sale by the FDA.
AVR has a very limited operating history, insignificant operating
revenues and must be considered promotional and still in its early developmental
stage. From inception through December 31, 1998, AVR had an accumulated deficit
of $12,978,059. AVR is dependent upon approval of Reticulose for sale before it
can begin any significant commercial operations.
Management does not anticipate registration or other approval of
Reticulose in an industrialized country in the immediate future. Management of
AVR believes that the United States constitutes one of the major and most
profitable pharmaceutical markets in the world. Since 1962, when Reticulose,
among many other drugs, was reclassified as a "new drug" by the FDA, Reticulose
has not been permitted to be marketed in the United States. This has been the
direct result of AVR's inability to satisfy the regulatory protocols and the
substantial preapproval requirements imposed by the FDA upon the introduction of
any new or unapproved drug product, which include lengthy and detailed
laboratory and clinical testing procedures, sampling activities and other costly
and time consuming procedures. There is no assurance that FDA approval for the
sale of Reticulose in the United States will ever be obtained or that the
results of any clinical studies and tests will be sufficient to lead to FDA
approval of an IND for clinical testing of Reticulose on humans in the United
States. Further, there can be no assurance that Reticulose will ever be approved
for commercial distribution by any country. There is nothing at this time upon
which to base any assumption that AVR will either generate operating revenues or
will ever be able to operate on a profitable basis. If AVR's plans prove to be
unsuccessful, its shareholders and holders of options and warrants may lose all
or a substantial portion of their investment. See "Business -- Competition,"
"-- Testing Agreements," "-- Exclusive Distribution Agreements" and "Government
Regulation; the Investigational New Drug Application Process."
Funds Inadequate for Continued Research, Development and Testing; Uncertainty as
Going Concern
AVR's cash position, from time to time, has been the result of proceeds
from AVR's sale of securities, to a much lesser extent, fees paid for
distribution rights by AVR's exclusive distributors which fees also included
deposits on purchases of Reticulose by a distributor, and limited sales of
Reticulose for testing purposes. AVR's cash position of approximately $1,750,000
as of December 31, 1998 is largely due to stock options being exercised and the
proceeds of convertible debentures sold in 1997 and 1998. AVR's current cash
position will not
4
<PAGE>
be adequate to pay all the costs associated with the full range of continued
research and development and testing, as well as the clinical trials that may be
required by the FDA in order to obtain approval for the IND to test Reticulose
in the United States.
Unless Reticulose is approved for sale in the United States or another
such country or unless Reticulose is approved for sale in one or more of its
distributors' territories with both a material population and healthy profile,
AVR may require additional equity and/or debt financing in the future to meet
the considerable costs of human clinical trials, should the FDA grant permission
for such trials. Such costs have not been ascertained by AVR. AVR may be
dependent upon the continued sale of its securities or the exercise of its
outstanding options or warrants for funds to meet its cash requirements. Any
issuance of a substantial number of additional shares of common stock would
dilute the ownership of present shareholders. If no options or warrants are
exercised, management believes that AVR will be able to continue its business,
which remains in the development stage, at current levels for approximately 12
months. There can be no assurance that the Options or the Warrants will be
exercised in their entirety, if at all. There can be no assurance that any
additional financing will be available or, if available, that it can be obtained
on terms satisfactory to management. If AVR does not obtain material proceeds
from the exercise of the Options or Warrants, AVR could be dependent upon joint
ventures with, or the sale of certain rights regarding Reticulose to, third
parties, the terms of which might not be advantageous to AVR. In addition, AVR
may seek debt financing, but no agreements have been entered into or identified
with regard to any financing. In the event that debt financing is not available,
management anticipates that they will have to defer their salaries in order to
continue operations. No assurances can be given that other debt financing will
be readily obtainable on favorable terms, that AVR will be able to sustain its
operations until approval for sale of Reticulose is granted or that any such
approval will be granted. The Consolidated Financial Statements do not include
any adjustments relating to the recoverability and classification of recorded
assets and classification of liabilities that might be necessary should AVR be
unable to continue in existence. See "Management's Discussion and Analysis and
Results of Operations" and "Notes to Consolidated Financial Statements."
AVR's independent certified public accountants' report on AVR's
consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph regarding AVR's ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements stating that AVR'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 AVR's ability to continue as a going concern. Further,
the accountant's report does not include any adjustments that might result from
the outcome of this uncertainty. AVR has no immediate plan to issue any
securities, otherwise than upon the possible exercise of the Options, the
Warrants, or the conversion of the 1998 Debenture. AVR has suffered material
losses from operations during its operating history.
Reticulose is AVR's Sole Product; Very Limited Sales for Testing Purposes Only.
There have been no sales by AVR of Reticulose except for insignificant
revenues related to distribution of the drug for testing purposes. Reticulose is
not currently marketed or approved for sale or use, and there can be no
assurance that it will be approved for sale or use in the future.
5
<PAGE>
AVR has currently in effect exclusive distribution agreements with distributors
to market and sell Reticulose, subject to each distributor obtaining regulatory
approval, in the following countries: China, Japan, Hong Kong, Macao, and Taiwan
(AVIX International Pharmaceutical Corp., a New York corporation ("AVIX"));
Mexico (AVIX); Channel Islands, Isle of Man, British West Indies, Jamaica,
Haiti, Bermuda, Belize and Saudi Arabia (Commonwealth Pharmaceuticals, a
corporation organized under the laws of Cayman Islands, British West Indies
("Commonwealth")); and Argentina, Bolivia, Paraguay, Uruguay, Brazil, and Chile
(DCT). AVR is dependent upon obtaining regulatory approval of Reticulose for
sale and use in the United States, in other developed countries, or
alternatively in one or more of its distributors' territories in order to have
the potential for significant distribution and sales of Reticulose. There can be
no assurance that any sales will be generated by AVR's distribution agreements,
and further, there can be no assurance that any such distributors will receive
timely, if ever, necessary approvals to market Reticulose in their territories.
See "Business -- Exclusive Distribution Agreements."
Limited Medical Acceptance and No Assurance of Effectiveness of Reticulose.
Reticulose is neither widely known nor accepted by the medical
community nor approved for use in the United States for any purpose by the FDA.
Two articles published in 1962 in recognized medical journals have questioned
the anti-viral effect of Reticulose on Mumps, Encephalitis and Herpes Simplex
utilizing tissue culture; on Herpes Simplex in students; and on Lansing Polio
and mouse adapted and egg adapted Influenza: A. C. Kempe, "Failure to
Demonstrate Antiviral Activity of Reticulose," American Journal of Diseases of
Children, Vol. 103, May 1962, and Behbehani, "The Effect of Reticulose on Viral
Infections of Experimental Animals," Southern Medical Journal, Vol. 55, February
1962. The only "double blind" study of Reticulose completed by or for AVR is a
clinical trial involving 43 human patients with the AIDS which took place in
Bridgetown, Barbados.
Upon AVR's filing of a new IND application with the FDA, it must first
satisfy the FDA that the current formulation of Reticulose is identical to the
formulation reported on in the prior anecdotal history and studies of
Reticulose, of which there can be no assurance. The uncertain amount of time and
costs required for IND approval as a result of the FDA not accepting the prior
history of the drug can be expected to be financially burdensome and have a
material adverse effect on AVR and its likelihood of ever obtaining any
requisite approval in the United States.
There can be no assurance that the FDA will approve the sale or even
the testing on humans of Reticulose in the United States, or that Reticulose
will be effective in treating viruses of any variety on a wide scale or any
other basis. See "Management's Discussion and Analysis and Results of
Operations," "Business -- The Investigational New Drug Process" and "Testing
Agreements."
6
<PAGE>
Complexity and Expense of Complying with Government Regulations.
The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements upon the introduction of therapeutic drug products
including lengthy and detailed laboratory and clinical testing procedures,
sampling activities and other costly and time consuming procedures. Registration
or approval of a pharmaceutical product in at least one other country is a
prerequisite to obtaining registration for sale in many Third World countries.
Such governmental regulation decreases the likelihood that FDA approval for the
sale of Reticulose in the United States or elsewhere will ever be obtained or
that AVR will have adequate funds to finance the necessary clinical studies and
related costs. In addition, the effect of the FDA and foreign government
regulation will be to delay marketing of Reticulose for a considerable period of
time, to impose costly procedures upon AVR's activities and to impede and/or
prevent AVR's ability to compete with larger companies in its industry. The
extent of potentially adverse government regulations which might arise from
future legislation or administrative action cannot be predicted.
Intense Competition in Pharmaceutical Industry.
There are inherent difficulties for any development stage company, such
as AVR, seeking to enter an established field, particularly a field as capital
intensive as the manufacture and sale of pharmaceuticals. AVR can expect to
encounter intense competition from well known pharmaceutical companies and
chemical companies engaged in the development and marketing of therapeutic drug
products. Almost all of such companies are substantially larger, possessing far
greater capital resources, more substantial operating histories and records of
successful operations, greater personnel and other resources, and more extensive
facilities than AVR now has or will have in the foreseeable future. Thus, such
companies are and probably will continue to remain in a far better position to
compete in this industry than AVR. Such companies may succeed in discovering,
developing and marketing products that are either as effective or more effective
than Reticulose, which has not yet been established or proven to be effective as
an anti-viral agent to the FDA's or any other regulatory agency's standards. AVR
is not currently, and there can be no assurances that in the foreseeable future
AVR will be, a significant factor in the pharmaceutical field. Additionally,
small development stage entities, such as AVR, with very limited resources, are
at a very serious disadvantage in attempting to operate in a market against
established Competitors. See "Business -- Competition."
Lack of Patent Protection to Prevent Replication of Reticulose by Competitors.
AVR does not presently have a patent for Reticulose, however, AVR has
two patents for the use of Reticulose as a treatment (the "Use Patents"), and
has 32 patent applications pending with the U.S. Patent and Trademark Office.
Other companies, having greater economic resources, may be successful in
developing a similar product. AVR has retained patent counsel for the purpose
pursuing additional patent protection for Reticulose. However, there is no
certainty that patents will be granted, or if granted, that the patents will be
sustained if judicially attacked, and, if declared valid, that the patents, in
fact, will operate to protect AVR from others copying Reticulose.
7
<PAGE>
Risk of Adverse Product Liability Claims and Lack of Product Liability
Insurance.
AVR, like any pharmaceutical manufacturer, could be subjected to claims
for adverse reactions resulting from the use of Reticulose. Although AVR is
unaware of any such claims or threatened claims since Reticulose was initially
marketed in the 1940's, one study noted adverse reactions in guinea pigs. In the
event any claims for substantial amounts were successful, they could have a
material adverse effect on AVR's financial condition and on the marketability of
Reticulose. As of the date hereof, AVR does not have product liability
insurance. AVR has not allocated any portion of the proceeds that it may receive
upon the exercise of any options or warrants, of which there can be no
assurance, to the cost of product liability insurance. There can be no assurance
that AVR would be able to secure such insurance in adequate amounts, at
reasonable premiums, if it determined to do so. Should AVR be unable to secure
product liability insurance, the risk of loss to AVR in the event of claims
would be greatly increased and could materially adversely affect AVR.
Significant Outstanding Convertible Securities.
As of the date of this prospectus, in addition to the 301,340,183
shares of AVR common stock outstanding, there were outstanding (i) the Options,
which are exercisable into an aggregate of 27,765,415 shares of common stock at
exercise prices ranging from $0.11 to $0.36; (ii) the Warrants, which are
exercisable into 5,451,922 shares of common stock; and (iii) the 1998 Debenture
(currently estimated to be convertible into an aggregate of approximately
9,057,971 shares based upon the market price of the common stock on the date of
this prospectus: $0.22).
If all the Options, Warrants, and the 1998 Debenture were fully
exercised and converted, as the case may be, there would be outstanding
343,615,491 shares of common stock, all of which would be available for public
resale. The sale or availability for sale of this number of shares of common
stock in the public market could adversely affect the market price of the common
stock. Additionally, the availability to AVR of additional equity financing, and
the terms of any such financing, may be adversely affected by the sale or
availability for sale of this number of shares.
Reliance Upon Officers and Key Personnel.
AVR is currently wholly dependent upon the personal efforts and
abilities of its three full-time executive officers, only one of whom, Bernard
Friedland, Chairman of the Board, has any experience in the pharmaceutical
industry. The loss or unavailability to AVR of the services of Bernard Friedland
or Shalom Z. Hirschman, M.D., President and Chief Executive Officer, could have
a material adverse effect on AVR's business prospects and any potential earning
capacity, and, therefore, AVR has obtained "key-man" insurance on the lives of
Mr. Friedland and Dr. Hirschman in the amounts of $400,000 and $1,000,000,
respectively. In the event AVR's level of operations shall significantly
increase, the business may depend upon its abilities to attract and hire
additional management and staff employees. There can be no assurance that AVR
will be able to secure such additional management and staff, if necessary. See
"Management --
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Executive Officers and Directors" for further information concerning the extent,
nature and scope of management's business experience.
Voting Control by Present Management.
As of the date of this prospectus, the current officers and directors
of AVR beneficially owned 91,671,133 shares of common stock of AVR or
approximately 29% of the 301,340,183 shares of common stock deemed outstanding
on that date for the purposes of the percentage calculation, including certain
shares underlying options held by Shalom Z. Hirschman. As there are no
cumulative voting rights, current members of management, by virtue of their
stock ownership, can be expected to influence substantially the election of all
of the directors of AVR and thereby continue to impact substantially AVR's
business, affairs and policies. See "Principal Shareholders" and "Description of
Securities."
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement that Advanced Viral
Research Corp. ("AVR") filed with the Securities and Exchange Commission (the
"SEC" or the "Commission") to register with the Commission the resale of the
shares issued or issuable to the selling shareholders as provided in this
prospectus. This prospectus is a part of that registration statement and
constitutes a prospectus of AVR. As permitted by the Commission's rules, this
prospectus does not contain all of the information you can find in the
registration statement or the exhibits to the registration statement. This
prospectus summarizes some of the documents that are exhibits to the
registration statement, and you should refer to the exhibits for a more complete
description of the matters covered by those documents.
AVR has not authorized anyone to give any information regarding the
offering of the shares that is different from what is contained in this
prospectus. This prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this prospectus is accurate as of any
time after the date of this prospectus, and neither the mailing of this
prospectus to AVR's shareholders nor the issuance of the shares should create
any implication to the contrary.
WHERE TO FIND MORE INFORMATION
AVR files annual, quarterly and special reports with the SEC. The
annual reports contain financial information that has been audited and reported
on, with an opinion expressed by an independent auditor. These filings are
available on the SEC's website: http://www.sec.gov. Hard copies are available at
the SEC's public reference facilities at the following addresses:
- 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549;
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661; and
9
<PAGE>
- 7 World Trade Center, 13th Floor, New York, New York, 10007.
Call the SEC at 1-800-SEC-0330 with questions about its public
reference facilities. To contact us, use the following information:
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Suite 501
Hallandale, Florida 33009
(954) 458-7636
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to expectations concerning matters that are not historical facts. Although AVR
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from such expectations are disclosed in this prospectus, including
those factors discussed in "Risk Factors." We admonish the reader that all
cautionary remarks expressly qualify in their entirety all forward-looking
statements that are attributable to AVR or persons acting on our behalf.
AVR makes no assurances as to the attainability of the projected or
estimated financial information set forth in this prospectus or as to the
accuracy or completeness of the assumptions from which such projected or
estimated information is derived. Projections or estimations of AVR's future
performance are necessarily subject to a high degree of uncertainty and may vary
materially from actual results. Reference is made to the particular discussions
set forth under "Risk Factors," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
10
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON THE
COMMON STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The principal United States market in which AVR's 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 AVR's two recent fiscal years ended December 31, 1997
and 1998, and for the first quarter ended March 31, 1999, 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 High Bid
(per share) (per share)
----------- -----------
<S> <C> <C>
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
First Quarter ..............................................0.18 0.4375
Second Quarter..............................................0.245 0.46
Third Quarter...............................................0.16 0.30
Fourth Quarter..............................................0.155 0.23
1999
First Quarter ..............................................0.17 0.35
</TABLE>
SHAREHOLDERS
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,815 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).
DIVIDEND POLICY
AVR has not declared or paid any dividends on its shares of common
stock. AVR intends to retain future earnings, if any, that may be generated from
AVR's operations to finance the operations and expansion of AVR and does not
plan for the reasonably foreseeable future to pay dividends to holders of AVR
common stock. Any decision as to the future payment of dividends will depend on
the results of operations and financial position of the Company and such other
factors as AVR's Board of Directors in its discretion deems relevant.
11
<PAGE>
CAPITALIZATION
The following table sets forth (i) actual capitalization of AVR derived
from its financial statements as of December 31, 1998, and (ii) an adjusted
capitalization of AVR to reflect the issuance of an additional 47,192,584 shares
of common stock pursuant to: (a) the full conversion of the 1998 Debenture; (b)
the full exercise of the Warrants;(c) the full exercise of the Options; and (d)
the issuance of 4,917,276 shares of AVR common stock pursuant to a private
placement in December 1998. The capitalization information set forth in the
table below is qualified by the more detailed Consolidated Financial Statements
and Notes thereto included elsewhere in this prospectus and should be read in
conjunction with such Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
December 31, 1998 Pro Forma As Adjusted
----------------- ---------------------
<S> <C> <C>
Long-term Debt:
Convertible Debenture issued in November 1998....................... $1,500,000 $1,500,000
Stockholders' Equity:
Common stock, $0.00001 par value; 1,000,000,000 shares authorized;
296,422,907 shares outstanding as of December 31, 1998.......... $2,964 $3,055
Additional paid-in-capital.......................................... $14,325,076 $23,435,197
Deficit accumulated in the Development Stage........................($12,978,059) ($12,112,090)
Deferred Compensation Costs......................................... ($14,769) ($14,769)
Total Stockholders' Equity............................................. $1,335,212 $11,311,393
</TABLE>
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data of AVR as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
the audited financial statements of AVR. The selected consolidated financial
data set forth below should be read along with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this prospectus.
Selected Statement of Operations Data
<TABLE>
Years Ended December 31
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $22,402 $27,328 $24,111 $2,278 $656
Interest 7,450 16,155 46,796 111,845 102,043
Other income 55,000 25,000 32,000 7,800 293
----------- ----------- ----------- ----------- -----------
84,852 68,483 102,907 121,923 102,992
Costs and Expenses:
Research and development 30,040 34,931 255,660 817,603 709,456
General and administrative 478,984 420,757 983,256 1,681,436 2,370,427
Depreciation and amortization 16,665 14,679 18,731 138,245 340,098
Interest -- --- --- 1,626,368 667,804
----------- ----------- ----------- ----------- -----------
525,689 470,367 1,257,647 4,263,652 4,087,785
----------- ----------- ----------- ----------- -----------
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($3,984,793)
=========== =========== =========== =========== ===========
Net loss per share of common stock - basic and diluted $0.00 $0.00 $0.00 $0.02 $0.01
=========== =========== =========== =========== ===========
Weighted Average Number of Common
Shares Outstanding 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
Selected Balance Sheet Data
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $ 211,203 $ 65,230 $ 61,396 $ 236,059 $ 924,420
Investments 5,000 479,000 1,378,841 2,984,902 821,047
Inventory --- 18,091 19,729 19,729 19,729
Other current assets 10,163 12,967 16,081 20,240 29,818
----------- ----------- ----------- ----------- -----------
Total current assets 226,366 575,288 1,476,047 3,260,930 1,795,014
Property and Equipment 224,098 214,494 207,209 485,661 1,049,593
Other Assets 1,800 6,459 33,544 443,251 460,346
----------- ----------- ----------- ----------- -----------
Total assets $ 452,264 $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953
=========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and other $ 40,244 $ 14,651 $ 54,474 $ 375,606 $ 279,024
Capital lease payable-current portion --- --- --- --- 38,355
----------- ----------- ----------- ----------- -----------
Total current liabilities 40,244 14,651 54,474 375,606 317,379
----------- ----------- ----------- ----------- -----------
Long-Term Debt:
Convertible debenture, net --- --- --- 2,384,793 885,002
Capital lease payable-long term portion --- --- --- --- 167,380
----------- ----------- ----------- ----------- -----------
Total Long-Term Debt --- --- --- 2,384,793 1,052,382
----------- ----------- ----------- ----------- -----------
Deposit on securities purchase agreement --- --- --- --- 600,000
----------- ----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock; 1,000,000,000 shares, par
value $0.00001 authorized 2,416 2,512 2,671 2,779 2,964
Additional paid-in capital 3,704,517 4,475,875 7,003,351 10,512,767 14,325,076
Subscription receivable --- --- (19,000) (19,000) ---
Deficit accumulated during the development
stage (3,294,913) (3,696,797) (4,851,537) (8,993,266) (12,978,059)
Deferred compensation cost ---- --- (473,159) (73,837) (14,769)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 412,020 781,590 1,662,326 1,429,443 1,335,212
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 452,264 $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953
=========== =========== =========== =========== ===========
Shares outstanding at year end 241,616,991 251,181,774 247,031,058 277,962,574 296,422,907
=========== =========== =========== =========== ===========
</TABLE>
- -----------
See notes to consolidated financial statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of AVR should be read along with AVR's Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus.
OVERVIEW
Since its inception in July 1985, AVR has been engaged primarily in
research and development activities. AVR has not yet generated significant
operating revenues, and as of December 31, 1998 AVR had incurred a cumulative
net loss of $12,978,059. AVR's ability to generate substantial operating revenue
depends upon its success in gaining FDA approval for the commercial use and
distribution of Reticulose. All of AVR's research and development efforts have
been devoted to the development of Reticulose.
In order to commence clinical trials for regulatory approval of
Reticulose in the United States, it will be necessary for AVR to prepare and
file a new IND with the FDA. Filings with foreign regulatory agencies will be
required to continue or begin new clinical trials overseas. Within the next 12
months, AVR presently intends to submit a new IND to the FDA seeking approval to
conduct a study testing the efficacy of Reticulose on human subjects with AIDS,
as well as other interferon related viruses, which AVR believes will address the
deficiencies noted in the FDA's prior correspondence to AVR regarding
Reticulose. In the new IND, AVR presently intends, among other things, (i) to
establish that the proposed formulation of Reticulose is the same as the
formulation of Reticulose referenced in cited publications; (ii) to include
relevant information on the chemistry, laboratory and animal controls to assure
the integrity of the dosage form; (iii) to include safety information for the
initial study proposed to be conducted on humans; (iv) to include information
assuring the proper identification, quality, purity and strength of Reticulose
and a description of the physical, chemical and microbiological characteristics
of Reticulose; and (iv) to submit data supporting in vitro anti-HIV activity, or
other criterion for a biological response modifier. AVR believes that the new
IND will demonstrate the low incidence of adverse events in the use of
Reticulose for the treatment of AIDS and other interferon related viruses.
However, the FDA will make its own evaluation of the clinical trial data and
there is no assurance that the FDA will approve AVR's IND. Because AVR is only
at the preliminary stages of its efforts with regard to the new IND, it is
impossible to determine whether the data from any ongoing studies will be able
to be used by AVR in connection with the new IND or if the new IND will ever be
approved by the FDA. FDA approval to begin human clinical trials of Reticulose
will require significant cash expenditures, the amount of which is not currently
determinable. Further, there can be no assurance that Reticulose will ever be
approved for commercial distribution by any country.
In addition to developing clinical trial programs, AVR plans to
continue to provide funding for its laboratory testing programs at selected
universities, medical schools, laboratories and hospitals for the purpose of
testing the efficacy of Reticulose, but the amount of research that will be
conducted at those institutions will depend upon AVR's financial status. Because
AVR's research and development expenses and clinical trial expenses will be
charged against earnings for
15
<PAGE>
financial reporting purposes, management expects that losses from operations
will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
During the fiscal years ended December 31, 1998 and 1997, AVR incurred
losses of $3,984,793 and $4,141,729, respectively, compared to $1,154,740 in
1996. AVR's increased losses for the fiscal years ended December 31, 1998 and
1997 as compared with the fiscal year ended December 31, 1996 were attributable
primarily to the salary of Shalom Z. Hirschman, M.D. as President and Chief
Executive Officer of AVR, interest charges as a result of the beneficial
conversion feature associated with the 1997 Debentures (as defined below),
increased research and development expense, opening and maintenance costs of
AVR's Yonkers, NY office, 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. Administrative expenses and the lack of sales revenues also contributed
to AVR's losses.
There were $656 and $2,278 in sales revenues in 1998 and 1997,
respectively, compared to $24,111 in sales revenues for 1996. All sales revenues
resulted from distributors purchasing Reticulose for testing purposes. Interest
income was $102,043 and $111,845 in 1998 and 1997, respectively, compared to
$46,796 in 1996. In 1998 and 1997, AVR collected $0 from the sale of territorial
rights compared to $32,000 in 1996.
There can be no assurance that Reticulose will ever be commercially
distributed anywhere in the world.
LIQUIDITY
As of December 31, 1998, AVR had current assets of $1,795,014, compared
to $3,260,930 at December 31, 1997. AVR had total assets of $3,304,953 and
$4,189,842 at December 31, 1998 and 1997, respectively. The decrease in current
and total assets was primarily attributable to the use of investment capital to
fund increased operating expenditures.
During 1998, AVR used cash of $3,364,528 for operating activities, as
compared to $2,179,780 in 1997 and $665,682 in 1996. During 1998, AVR (i)
incurred non-cash expenses of approximately $230,000 and $285,000, respectively,
relating to amortization of loan costs and discount on warrants relating to the
1997 Debentures; (ii) incurred non-cash expenses of approximately $667,000
relating to amortization of deferred interest; (iii) expended approximately
$316,000 in legal and consulting fees; (iv) expended approximately $210,000 in
laboratory supplies; (v) expended approximately $1.1 million for payroll and
related costs; and (vi) obtained approximately $1.3 million in proceeds from the
sale of the 1998 Debenture. During 1998, AVR expended approximately $675,000 for
leasehold improvements and furniture and equipment at AVR's Yonkers, New York
office.
16
<PAGE>
During 1998, cash flows provided by investing activities was primarily
due to the sales of investments which were available from the proceeds of the
issuance of the convertible debentures in 1997. AVR also acquired property and
equipment for its New York laboratory. See "Capital Resources" for a discussion
of cash flows provided by financing activities.
AVR's independent certified public accountants' report on AVR's
consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph regarding AVR's ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements stating that AVR'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 AVR's ability to continue as a going concern. Further,
the accountant's report does not include any adjustments that might result from
the outcome of this uncertainty. AVR has no immediate plan to issue any
securities, otherwise than upon the possible exercise of the Options, the
Warrants, or the conversion of the 1998 Debenture.
CAPITAL RESOURCES
AVR has been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. The following table
summarizes the securities sold by AVR since February 1997.
<TABLE>
<CAPTION>
=======================================================================================================================
Gross Security Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Issued Exercisable Into Exercise Price Expiration Date
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
------------------------------------------------------------------------------------
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
- -----------------------------------------------------------------------------------------------------------------------
August 1997 $3,000,000 Debenture 17,577,354 shares $0.13-0.23 per share Fully converted
------------------------------------------------------------------------------------
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
- -----------------------------------------------------------------------------------------------------------------------
November 1998 $1,500,000 Debenture 9,057,971 shares (1) $0.1656 per share (1) October 31, 2008
------------------------------------------------------------
Warrants 375,000 shares $0.20 per share
----------------------------------------------
375,000 shares $0.24 per share
------------------------------------------------------------------------------------
January 1999 $802,500 Shares 4,917,276 n/a n/a
------------------------------------------------------------------------------------
Warrants 1,183,394 shares $0.2040 per share December 31,
---------------------------------------------- 2003
1,183,394 shares $0.2448 per share
=======================================================================================================================
</TABLE>
(1) Assumes the full conversion of the debenture based on the average of the
closing bid and ask prices of the common stock on April 26, 1999, as reported on
the OTC Electronic Bulletin Board ($0.23), and an applicable conversion price of
$0.1656.
17
<PAGE>
Debentures and Warrants Issued in 1997.
In February 1997 and October 1997, in order to finance research and
development, AVR sold $1,000,000 and $3,000,000, respectively, principal amount
of its ten-year 7% Convertible Debentures (the "February Debenture" and the
"October Debenture," collectively, the "1997 Debentures") due February 28, 2007
and August 30, 2007, respectively, to RBB in offshore transactions pursuant to
Regulation S under the Securities Act. Accrued interest under the 1997
Debentures was payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The 1997 Debentures were convertible, at the option of the holder, into
shares of common stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the holder,
RBB, to AVR under the February Debenture, $330,000, $134,000, $270,000 and
$266,000, respectively, of the principal amount of the February Debenture was
converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares of the common
stock, respectively. As of August 20, 1997 the February Debenture was fully
converted. On December 9, 1997, January 7, 1998, January 14, 1998, February 19,
1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant
to notice by the holder, RBB, to AVR, $120,000, $133,000, $341,250, $750,000,
$335,750, $425,000, $275,000 and $620,000, respectively, of the October
Debenture was converted into 772,201, 1,017,011, 2,512,887, 5,114,218,
1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of common stock,
respectively. As of May 5, 1998, the October Debenture was fully converted.
In connection with the issuance of the 1997 Debentures, AVR issued to
RBB six warrants (the "1997 Warrants") to purchase common stock, three of such
warrants entitling the holder to purchase, from February 21, 1997 through
February 28, 2007, 178,378 shares of the common stock, and three of such
warrants entitling the holder to purchase, from August 30, 1997 through August
30, 2007, 600,000 shares of the common stock. The exercise prices of the 1997
Warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and $0.27 per warrant share,
respectively. Each 1997 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 1997 Warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
1997 Warrant contains anti-dilution provisions which provide for the adjustment
of warrant price and warrant shares as more particularly set forth therein. As
of March 24, 1999, none of the 1997 Warrants have been exercised.
Debentures and Warrants Issued in 1998.
In November 1998 AVR sold $1,500,000 principal amount of its ten-year
7% convertible debenture due October 31, 2008 to RBB, as agent for the accounts
of certain persons, in an offshore transaction pursuant to Regulation S under
the Securities Act (the "1998 Debenture"). Accrued interest under the 1998
Debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The 1998 Debenture is convertible, at the option of the holder, into
shares of common stock pursuant to a specified formula. The actual number of
shares of common stock issued or issuable upon conversion of the 1998 Debenture
is subject to adjustment and could be materially less or more than
18
<PAGE>
the above estimated amount, depending upon factors that cannot be predicted by
AVR at this time, including, among others, the future market price of the common
stock.
Based on the terms for conversion associated with the 1998 Debenture,
there is an intrinsic value associated with the beneficial conversion feature of
$625,000. This amount has been treated as deferred interest expense and recorded
as a reduction of the convertible debenture with a corresponding credit to
additional paid-in capital and is being amortized to interest expense over a one
year period beginning November 16, 1998, based on management's expectation of
when complete conversion will occur. The interest expense relative to this item
was $52,083 for 1998.
In connection with the issuance of the 1998 Debenture, AVR issued to
RBB two warrants to purchase common stock , each warrant entitling the holder to
purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares as more particularly set forth therein. As of
April 24, 1999, none of such warrants had been exercised.
The fair value of the warrants issued in connection with the 1998
Debenture was estimated to be $48,000 ($0.064 per warrant) based upon a
financial analysis of the terms of such warrants using the Black-Sholes Pricing
Model with the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of one year. This amount
has been reflected in the accompanying consolidated financial statements as
interest expense related to the 1998 Debenture.
Under the terms of the RBB agreement, AVR is required to file with the
Commission this registration statement to register shares of the common stock
issuable upon conversion of the 1998 Debenture and upon exercise of the related
warrants to allow the investors to resell such common stock to the public.
Because this registration statement was not declared effective by the Commission
on or before April 13, 1999, AVR is obligated under the RBB agreement to pay RBB
a penalty equal to the sum of (x) $30,000 and (y) $1,500 for each day lapsed
after such date, until this registration statement is declared effective by the
Commission, provided, however, that total penalties shall not exceed $100,000 in
the aggregate.
In December 1998 pursuant to a securities purchase agreement, AVR sold
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) two warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harborview Group consisting of two warrants to purchase an aggregate 400,000
shares of common stock , in a private offering transaction pursuant to Section
4(2) of the Securities Act, for an aggregate purchase price of $802,500, of
which $600,000 was received on December 31, 1998, and $202,500 was received in
January 1999. Two of the warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. The other two warrants entitle the holders
thereof to purchase 200,000 and 200,000 shares of common stock at exercise
prices of $0.2040 and $0.2448
19
<PAGE>
per share, respectively. All four warrants are exercisable at any time and from
time to time until December 31, 2003. Each warrant provides that the holder may
elect to receive a reduced number of shares of common stock on the basis of a
cashless exercise; that number of shares bears the same proportion to the total
number shares issuable under that warrant as the excess of the market value of
shares of common stock over the warrant exercise price bears to that market
value. Each warrant contains anti-dilution provisions which provide for the
adjustment of warrant price and warrant shares as more particularly set forth
therein. As of April 24, 1999, none of such warrants had been exercised.
Under the terms of the purchase agreement, AVR is required to file with
the Commission this registration statement to register the common stock issued
under the purchase agreement, and upon exercise of the warrants to allow the
resale of such common stock to the public. The purchase agreement further
provides that, in the event this registration statement is not declared
effective by the Commission on or before May 21, 1999, AVR is required to pay a
penalty of $30,000 for each full calendar month or portion thereof lapsed after
such date, until this registration statement is declared effective, provided,
however, that total penalties shall not exceed $100,000 in the aggregate.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares underlying the securities purchase agreement in
connection with the aforementioned transaction was estimated to be $494,000
($0.0208 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2003 expiration date.
Research and Development Expenditures in 1998.
In February 1998, AVR entered into that certain Concurrent Agreement
with DCT, an Argentine corporation, whereby AVR agreed to provide DCT or its
assignees up to $412,960 to cover the costs of a study on 65 patients to compare
the results of treatment of AIDS patients using a three-drug cocktail and
Reticulose versus AIDS patients taking a three-drug cocktail and a placebo. As
of December 31, 1998, AVR has advanced approximately $50,000 for this study,
which has been accounted for as research and development expense. In May 1998,
AVR entered into the Rheumatoid Arthritis Agreement with DCT whereby AVR agreed
to provide DCT or its assignees up to $94,950 to cover the costs of a controlled
study in 30 patients to determine the efficacy of Reticulose for the treatment
of rheumatoid arthritis in humans. In connection with this study, as of December
31, 1998, AVR has advanced approximately $79,200 which has been accounted for as
research and development expenses. In July 1998, AVR authorized the expenditure
of up to $90,000 to study the effects of Reticulose in inhibiting the mutation
of the AIDS virus on patients in Buenos Aires, Argentina. As of December 31,
1998, AVR had advanced approximately $55,000 for such studies, which have been
accounted for as research and development expense.
If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by AVR from the exercise of options and
warrants, potential grants and/or additional equity, the availability of which
funds there can be no assurance.
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AVR is currently expending approximately $300,000 per month, which
expenses include salaries, rent, professional fees, license fees and taxes,
research and development, and travel, principally between AVR's two offices and
its Bahamian facility, and anticipates that it can continue operations for at
least ten months with its current liquid assets, including the proceeds from the
recent sale of the 1998 Debenture and other securities if no Options or Warrants
are exercised. If all of the Options and Warrants are exercised, AVR will
receive net proceeds of approximately $8.4 million. Those proceeds will
contribute to general and administrative and working capital and will permit AVR
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. The recent prevailing market price for shares of common stock has
from time to time been above the exercise prices of certain of the outstanding
Options and Warrants. However, there can be no assurance that the recent trading
levels will be sustained or that any additional options or warrants will be
exercised. In the event that less than 25% or none of the outstanding options
and warrants are exercised, and no other additional financing is obtained by
AVR, in order for AVR to achieve the level of operations contemplated by
management, management anticipates that it will have to limit intentions to
expand operations beyond current levels. AVR is currently seeking debt
financing, licensing agreements, joint ventures and other sources of financing.
There can be no assurance that such additional sources of financing will be
found. There can be no assurance that any of AVR'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 AVR
will be able to sell Reticulose.
AVR does not have a patent for Reticulose, although AVR has two patents
for the use of Reticulose as a treatment. In addition, AVR has filed 32 patent
applications with the United States Patent Office. 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 AVR. There
can be no assurance that AVR will obtain such a patent or, if obtained, that it
will be enforceable. AVR 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 AVR from others copying Reticulose. AVR 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 AVR from any competition in the future.
YEAR 2000 COMPLIANCE
The Year 2000 ("Year 2000") computer issue is the result of computer
programs using a two-digit format, as opposed to a four-digit format to indicate
the year. Such computer programs will
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be unable to recognize date information correctly when the year changes to 2000.
The Year 2000 issue poses risks for AVR's information technology systems.
AVR's information technology systems are based upon software licenses
and software maintenance agreements with third party software companies. Based
upon AVR's internal assessments and communications with its software vendors,
all of the software utilized by AVR is Year 2000 compliant software. AVR has
used internal personnel to test its software systems for Year 2000 compliance
and such tests yielded positive results. AVR will continue to monitor its Year
2000 readiness. Also, AVR does not anticipate difficulty in resolving issues
related to imbedded technology in the equipment provided to AVR by other
manufacturers.
Based on the foregoing, AVR believes that it will be Year 2000
compliant on a timely basis and that future costs relating to the Year 2000
issue will not have a material impact on AVR's consolidated financial position,
results of operations or cash flows.
BUSINESS
OVERVIEW
Advanced Viral Research Corp. (the "Company" or "AVR") 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 a pharmaceutical drug with the
trade name "Reticulose." Reticulose has not been approved for sale or use by the
FDA or any foreign government body. AVR is in the developmental stage, and has
not as yet commenced any commercial operations. AVR is dependent on registration
and/or approval by applicable regulatory authorities of Reticulose, of which
there can be no assurance, in order to commence commercial operations.
AVR's operations over the last five years have been limited principally
to engaging in research, in vitro testing and analysis of Reticulose in the
United States, and engaging others to perform testing and analysis of Reticulose
on human patients overseas. In connection with these engagements, AVR has also
granted distribution rights for Reticulose in certain foreign countries. In
1995, AVR retained Shalom Hirschman, M.D. as its President. Since becoming
President of AVR, Dr. Hirschman has monitored the testing of Reticulose and has
recently performed certain analyses of Reticulose with Company personnel, which
analyses AVR believes may be used in connection with the FDA approval process.
BACKGROUND OF RETICULOSE
Reticulose had been marketed in the United States during the 1940's
through the early 1960's. However, under the Federal Food, Drug, and Cosmetic
Act, as amended in 1962 (the "1962 Act"), the FDA classified Reticulose 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, and
Reticulose was withdrawn from the United States market. The injunction obtained
by the FDA
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prohibits any shipment of Reticulose in the United States for treatment purposes
until a New Drug Application ("NDA") for Reticulose is approved by the FDA.
In 1985, Bernard Friedland, former President and current Chairman of
the Board, and William Bregman, Secretary and Treasurer of AVR, organized AVR
for the purpose of producing Reticulose and seeking approvals for marketing it
world-wide, and thereafter obtained the rights to Reticulose in May 1986. The
FDA has not approved human clinical trials for Reticulose in the United States.
AVR may be required, in the absence of grants or other subsidies, to bear the
expenses of the first phase of human clinical trials to the extent the FDA
permits human clinical trials to occur, of which there can be no assurance. AVR
does not know what the actual cost of such trials would be. If AVR needs
additional financing to fund such human clinical trials, there can be no
assurance that additional financing will be available to AVR. No assurance can
be given that any IND for clinical tests of Reticulose on humans will be
approved by the FDA for human clinical trials, or that the results of such human
clinical trials will prove that Reticulose is safe or effective in the treatment
of any diseases. Further, there is no assurance that the FDA will ever approve
the sale of Reticulose in the United States.
GOVERNMENT REGULATION; THE INVESTIGATIONAL NEW DRUG APPLICATION
PROCESS
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Reticulose, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. Testing in humans may not be commenced until after an IND
exemption is granted by the FDA. A New Drug Application ("NDA") must be
submitted to the FDA for new drugs that have not been previously approved by the
FDA and for new combinations of, and new indications and new delivery methods
for, previously approved drugs.
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. 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 clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; Phase II clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and Phase III
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
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 in the IND.
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 as a substitute for 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 certain other required
information 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
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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.
On September 20, 1984, Bernard Friedland, former President and current
Chairman of the Board of AVR, as sponsor, submitted to the FDA an IND to conduct
a study testing the efficacy of Reticulose on human subjects with AIDS, as well
as other interferon related viruses. 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 AVR
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 form 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
Reticulose and a description of the physical, chemical and microbiological
characteristics of Reticulose. On September 11, 1987, AVR received a further
deficiency letter from the FDA, stating that no data had been submitted
supporting in vitro anti-HIV activity or any criterion for a biological response
modifier. See "Government Regulation; the Investigational New Drug Application
Process."
On March 6, 1992, AVR submitted an amendment to the IND, which
attempted to address the FDA's concerns. In response to the March 1992
submission, AVR received a third deficiency letter from the FDA dated July 27,
1992, which provided detailed comments with respect to chemistry, toxicology,
microbiology and clinical areas requiring further studies and action on the part
of AVR. In June 1995, AVR received further correspondence from the FDA which
stated, among other things, that AVR's prior submissions to the FDA did not
provide an adequate response to the FDA's earlier request for preclinical
information and accordingly AVR's IND was "inactivated."
AVR has not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, AVR contracted with GloboMax LLC of Hanover,
Maryland to advise AVR in its preparation of an IND to be filed with the FDA,
and to otherwise assist AVR through the FDA process with the objective of
obtaining full approval for Reticulose in the United States. Pursuant to the
agreement with GloboMax LLC, AVR is obligated to pay for services on an hourly
basis, at prescribed rates. There can be no assurances as to the costs or the
timing of the filing of the new IND or whether AVR has the resources to complete
the FDA approval process. AVR may allocate certain funds from the exercise of
currently outstanding options and warrants for the purpose of filing a new IND
with the FDA,
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however, no assurance can be given that any of the currently outstanding options
or warrants will be exercised. No assurance can be given that any new IND for
clinical tests of Reticulose on humans will be approved by the FDA for human
clinical trials on AIDS or other diseases, that any tests previously conducted
or to be conducted will satisfy FDA requirements, 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 AVR. 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 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 AVR.
In connection with its activities outside the United States, AVR is
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Reticulose for a considerable period
of time and impose costly procedures upon AVR's activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. No assurance can be
given that clinical studies conducted outside of any country will be accepted by
such country, and the approval of any pharmaceutical or diagnostic product in
one country does not assure that such product will be approved in another
country. Accordingly, until registration is granted, if ever, in the United
States or another developed or developing country, it is not expected that AVR
will be able to generate material sales revenues. AVR received a grant of
authority from the Bahamian Port Authority on October 15, 1992 confirming the
right of AVR's subsidiary, Advanced Viral Research, Ltd., a Bahamian
corporation, to carry on the manufacture and export sale of ethical
pharmaceutical products. See "-Marketing And Sales" and "-Exclusive Distribution
Agreements."
TESTING AGREEMENTS
For the period from inception (February 20, 1984) through
December 31, 1998 AVR expended approximately $2.5 million on testing and
research and development activities.
Testing in the United States.
On September 20, 1984, AVR's IND for Reticulose was submitted for a
Phase I type study to determine if there was any pharmacological activity in
humans against HIV. See "Government Regulation; the Investigational New Drug
Application Process." In response to the FDA deficiency letters in 1984 and 1987
regarding AVR's IND, AVR was required among other things, to demonstrate that
AVR's formulation of Reticulose was identical to the formulation reported in the
prior anecdotal history and studies of Reticulose. In response to the deficiency
letters from the FDA,
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AVR engaged (i) the University of Wisconsin Biotechnology Center to perform a
series of protein tests for product control and protein fragment identification;
(ii) Southern Research Institute, Birmingham, Alabama and Vironc Laboratories,
North Miami Beach, Florida to perform in vitro screenings of Reticulose against
the HIV virus in two separately conducted independent laboratory screenings; and
(iii) International Diagnostics Ltd. Inc., Dania, Florida, an independent
testing laboratory, to perform standard mouse toxicity assays to demonstrate
toxicity of Reticulose. Management of AVR 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 sale or exercise of securities or other
sources, AVR will consider taking the additional 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 AVR but could be considerable. AVR may file a new IND
with the FDA as opposed to amend its prior IND.
Topical Safety Study.
In October 1997, AVR contracted with Chrysalis Preclinical Service
Corporation and Product Investigations, Inc., both unaffiliated third party
laboratories, to conduct testing on animals and cultured human cells to
determine the safety of the topical use of Reticulose, which testing was
completed in November 1998. The studies showed no toxicity for the topical
application of Reticulose. As of December 31, 1998, AVR advanced approximately
$170,000 for such study.
Canadian Contract.
During the period from 1992 to 1995, AVR had been seeking approval in
Canada for controlled distribution of Reticulose. AVR 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, AVR withdrew the application to have such study commence.
Plata Partners Limited Partnership.
On March 20, 1992, AVR entered into an agreement with Plata Partners
Limited Partnership ("Plata"), a Michigan limited partnership unaffiliated with
AVR (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
AVR in its Reports on Form 8-K filed with the Securities and Exchange Commission
("SEC") on July 10, 1992 and November 6, 1992.
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The Demonstration was conducted on the patients from May 1992 through
July 1992. The Demonstration was supervised by Angelo A. Chinnici, M.D., 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 AVR in August 1992. On August 12, 1992 AVR 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 AVR'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, then 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 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, AVR 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, to date
no registration certificate has been granted by the Dominican Republic, and
there can be no assurance that such certificate will be issued. Further, AVR is
currently not pursuing the registration certificate in the Dominican Republic.
AVR 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."
AVR received from Plata certain written information, certain copies of
which are incorporated by reference into AVR'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,
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there was a decrease in lymphotenopathy in the majority of patients, and their
oral thrush was greatly improved.
In August 1992, AVR 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, AVR 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.
AVR 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 other things, that the
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Demonstration was limited in that the subjects were treated for a short period
of time and there was no control group. AVR has not independently verified any
of the statements contained in either the Mangia Correspondence or the Chinnici
Correspondence.
AVR believes the Demonstration will not significantly impact the FDA's
decision to (i) approve an IND filed with the FDA or (ii) approve of the
marketing, sales or distribution of Reticulose within the United States.
Further, AVR believes the Demonstration will not significantly impact AVR's
ability to obtain approval for the marketing, sales or distribution of
Reticulose anywhere in the world.
Pursuant to the Plata Agreement, AVR authorized the issuance to Plata
of 5,000,000 shares of common stock and options to purchase an additional
5,000,000 shares at $0.08 per share through July 9, 1994 (the "Plata Options")
and 5,000,000 shares at $0.10 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, 1999 at an exercise
price of $0.14 and $0.16, respectively. As of December 31, 1998, there are
outstanding Plata Options to acquire 683,300 shares at $0.14 per share and
Additional Plata Options to acquire 108,100 shares at an exercise price of $0.16
per share. Through December 31, 1998, AVR has received approximately $1,332,000
pursuant to the issuance of approximately 9.2 million shares in connection with
the exercise of the Plata Options and the Additional Plata Options.
Argentina Agreements.
On December 27, 1993, AVR entered into an agreement with Juan Carlos
Flichman, M.D., then the 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
AVR that the Argentina Study was delayed because of the failure to gain
regulatory approval in Argentina to commence testing. The Argentina Study was
never completed.
In April, 1996, AVR entered into an agreement (the "1996 Agreement")
with DCT S.R.L., an Argentine corporation ("DCT"), pursuant to which DCT and Dr.
Flichman each agreed to conduct open label clinical trials of Reticulose on the
human papilloma virus (HPV) at two separate hospitals located in Buenos Aires,
Argentina (the "HPV Clinical Trial"). In June, 1994, AVR entered into an
exclusive distribution agreement with DCT, whereby AVR 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 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
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on 20 patients between the ages of 18 and 50 years of age. The HPV Clinical
Trial was not a double-blind study and did not include a placebo control group
or reference to any other anti-viral drug.
Pursuant to the 1996 Agreement, AVR paid approximately $34,000 to DCT
to cover out of pocket expenses associated with the HPV Clinical Trial. The 1996
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 AVR
regarding the methodology and results of the HPV Clinical Trial (the "HPV
Report"). On April 22, 1996, AVR was informed by DCT that the HPV Clinical Trial
had commenced on April 15, 1996. In September 1996, AVR received from Dr.
Flichman the HPV Report. The HPV 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 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 Report to AVR, AVR delivered to the principals
of DCT common stock purchase options (the "DCT Options") to acquire 2,000,000
shares of AVR's common stock for a period of one year from the date of the
delivery of the HPV Report, at an exercise price of $0.20 per share. Pursuant to
several amendments, the DCT options are now exercisable through April 30, 1999
at an exercise price of $0.21 per share. As of December 31, 1998, 464,000 shares
of common stock were issued pursuant to the exercise of these options for an
aggregate exercise price of approximately $93,000. Additionally, in April 1998,
10,000 shares were issued in connection with the exercise of options at $0.20
per share.
In June 1994, DCT and AVR entered into an exclusive distribution
agreement whereby AVR 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 Agreement"). During the quarter ended June
30, 1997, AVR entered into an agreement with DCT (the "HIV-HPV Agreement")
whereby AVR 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"). 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 Agreement or (ii) DCT receives financing to
cover the costs of the HIV-HPV Study, then DCT is obligated to reimburse AVR for
all amounts expended in connection with the HIV-HPV Study. As of December 31,
1998, AVR has advanced approximately $665,000 in connection with the HIV-HPV
Agreement, 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.
In October 1997, AVR entered into two agreements with DCT whereby AVR
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
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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,
as of December 31, 1998, AVR has advanced approximately $58,000 and $132,500,
respectively, and 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 Agreement or (ii) DCT
receives financing to cover the costs of the studies, then DCT is obligated to
reimburse AVR for all amounts respectively expended in connection with the
Studies.
In February 1998, AVR entered into an agreement with DCT (the
"Concurrent Agreement") whereby AVR agreed to provide DCT or its assignees, up
to $412,960 to cover the costs of a study in 65 patients to compare the results
of treatment of patients with AIDS taking a three drug cocktail and Reticulose
with those taking a three drug cocktail and a placebo. As of December 31, 1998,
AVR has advanced approximately $50,000 for such study which has been accounted
for as research and development expense.
In May 1998, AVR entered into an agreement with DCT (the "Rheumatoid
Arthritis Agreement") whereby AVR agreed to provide DCT or its assignees, up to
$94,950 to cover the costs of a controlled study in 30 patients to determine the
efficacy of Reticulose for the treatment of rheumatoid arthritis in humans. In
connection with this study, as of December 31, 1998, AVR has advanced
approximately $79,200 which has been accounted for as research and development
expense.
In July 1998, AVR authorized the expenditure of up to $90,000 to study
the effects of Reticulose in inhibiting the mutation of the AIDS virus on
patients in Buenos Aires, Argentina. As of December 31, 1998, AVR had advanced
approximately $55,000 for such studies, which have been accounted for as
research and development expense.
Hirschman Study.
AVR in late 1995 issued a grant of $30,188 to the Mount Sinai School of
Medicine, New York City, New York, for a study to be conducted by Shalom Z.
Hirschman, M.D., then Professor of Medicine and Director of the Division of
Infectious Diseases of Mount Sinai School of Medicine, for the purpose of
studying the mechanism, if any, by which Reticulose inhibits replication of HIV.
(the "Hirschman Study"). The results of this research demonstrated that
Reticulose stimulates the production of a unique set of chemokines, including
Interleukin 1 (IL-1), Interleukin 6 (IL-6), Gamma Interferon and Tumor Nacrosis
Factor, and inhibits the replication of HIV in cell cultures. 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, 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
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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.
Barbados Study.
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"). AVR received a letter from one of the scientists
conducting the Barbados Study dated November 26, 1996 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, 43 patients who had never
previously received any anti-retroviral therapy were enrolled into the study, 21
of which received Reticulose and 22 of which received placebo, over a 60-day
period. The patients were observed for a further sixty days after the cessation
of therapy. At the end of the 60-day treatment period, the key results 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 load in the group of patients that
received placebo. In addition, the letter reported, among other things, that at
the end of the 60-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 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, was accepted for publication by The American
Society for Microbiology. As of December 31, 1998, AVR has expended
approximately $365,000 to cover the costs of the Barbados Study. Based on
information received from the coordinators of the Barbados Study, AVR is
uncertain as to the costs to be incurred in connection with the Barbados Study
and has not been informed as to when further results from the Barbados Study
will be forthcoming.
In connection with the Barbados Study, in July 1998, AVR authorized
additional expenditures of up to $45,000 to Queen Elizabeth Hospital,
Bridgetown, Barbados to study the effects of Reticulose in inhibiting the
mutation of the AIDS virus. As of December 31, 1998, AVR has advanced
approximately $10,000 for such study which has been accounted for as research
and development expense.
National Cancer Institute Study.
In March 1997, AVR 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
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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. AVR 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 AVR 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 AVR 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.
MARKETING AND SALES
Except for limited sales ($656 in 1998) of Reticulose for testing and
other purposes, Reticulose is not sold commercially anywhere in the world. As of
the date of this prospectus, the efforts of AVR or any of its representatives
have produced no material benefits to AVR regarding AVR's ability to have
Reticulose sold commercially anywhere in the world. AVR has entered into
Exclusive Distribution Agreements with five separate entities whereby AVR has
granted exclusive rights to distribute Reticulose in the countries of China,
Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man, British
West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina, Bolivia,
Paraguay, Uruguay, Brazil and Chile. Pursuant to these agreements, the
distributors are obligated to cause Reticulose to be approved for commercial
sale in such countries and upon such approval, to purchase from AVR certain
minimum quantities of Reticulose to maintain the exclusive distribution rights.
The marketing plans of AVR for Reticulose are still dependent upon registration
of Reticulose for sale in the various jurisdictions where its distributors are
seeking approvals. See "-Exclusive Distribution Agreements."
There can be no assurance that AVR or any distributor will ever secure
registration of Reticulose and AVR 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 permitted to be sold in Argentina,
which was filed in March 1998. Notwithstanding the filing of this application,
no material progress has been made to secure approval to sell Reticulose in
Argentina in that AVR is awaiting the results of a test requested by the
government of Argentina which will demonstrate the effect of Reticulose on
certain animals. AVR 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
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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 AVR'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 AVR
will generate any sales of Reticulose. For the years ended December 31, 1998,
1997 and 1996, AVR reported no commercial sales except limited sales for testing
purposes ($656, $2,278, and $24,111, respectively). Reticulose is not legally
available for use anywhere in the world, except for testing purposes and the
FDA's compassionate use program. 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. AVR, if it is ever
successful in securing FDA or 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 AVR now has or will have in the foreseeable future. Accordingly, such
companies are in a far better position to compete than AVR. Moreover, such
companies may succeed in discovering, developing and marketing anti-viral
products that are more effective than Reticulose. AVR at present is not, and
there can be no assurances that AVR 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 AVR, with very limited resources, are at a very
serious competitive disadvantage against established companies. AVR hopes to
compete, however, based on cost and the effectiveness of Reticulose.
EMPLOYEES
AVR has 24 full-time employees, consisting of its three executive
officers, 17 employees involved in research, and four administrative employees.
Shalom Z. Hirschman, M.D., President and Chief Executive Officer and a Director
of AVR, Bernard Friedland, Chairman of the Board and a Director of AVR, and
William Bregman, Secretary, Treasurer and a Director of AVR, each devote all of
their business time to the day-to-day business operations of AVR.
Additionally, AVR may hire, as and when needed, and as available, such
sales and technical support staff and consultants for specific projects on a
contract basis. See "Management -- Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
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EXCLUSIVE DISTRIBUTION AGREEMENTS
Agreement with DCT S.R.L.
Under an Exclusive Distribution Agreement, dated June 1994, superseded
by another agreement, dated April 1, 1996, between AVR and DCT, AVR 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 (collectively, 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 $0.20 per Share (the "DCT
Option"). The Approval has not been obtained to date. AVR has not terminated the
DCT Agreement because AVR has not identified another source it believes will be
more successful in obtaining the Approval.
As a result of the 1996 Agreement, discussed under "-TESTING
AGREEMENTS-Argentina Agreements" and the Health Ministry's approval for and the
commencement of the test of Reticulose on HPV and HIV patients, AVR agreed that
the DCT Option became exercisable.
Termination of Agreements with C.U.R.E.
On April 25, 1994, AVR 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, AVR terminated the
rights of C.U.R.E. under this agreement.
As of June 1, 1994, AVR 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 entering into this agreement. C.U.R.E. was unable to obtain
such approval and AVR 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.
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Agreements with AVIX and Unistone.
As the result of the termination of agreements with C.U.R.E. and
C.U.R.E. C/A Ltd., AVR entered into an agreement, dated as of June 2, 1995, with
AVIX, pursuant to which AVIX has been granted the exclusive import and
distribution rights during a period of five years from the date that AVIX
obtains Approval for any of the countries formerly within the C.U.R.E. Territory
(the "AVIX Far East Agreement"), and a separate Exclusive Distribution Agreement
with AVIX with respect to Mexico, which rights previously belonged to C.U.R.E.
C/A Ltd. AVIX has informed AVR that it received initial authorization for
testing Reticulose in Mexico in July 1998, and that it has commenced
negotiations with parties in China for initial authorization for testing
Reticulose, following which Approval for those countries shall be sought. AVR
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, AVR 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, AVR 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, AVR 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. AVR has not terminated the AVIX-Unistone Agreement
because AVR has not identified another source it believes will be more
successful in obtaining Approval.
Under a separate agreement between AVR 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 AVR owns any right to Reticulose. AVIX also is
entitled to certain payments by AVR in the event that AVR sells manufacturing
rights for Reticulose.
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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 AVR could not produce sufficient quantities of Reticulose within
certain periods of time. The penalty rights were waived, in part, because AVIX
has not yet generated a sufficient demand for Reticulose within its distribution
territory.
The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to AVR. AVR has
not received the $8,000 monthly payment since November, 1996; AVR has received a
total of $40,000 in payments from AVIX. Pursuant to recent discussions with AVIX
regarding the AVIX Far East Agreement, AVR 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 AVR.
The separate agreement for Mexico requires Approval within one year and
has minimum annual purchase requirement commencing at 20,000 milliliters. AVR
extended the period for AVIX to secure Approval from Mexico because management
of AVR believes that AVIX is diligently seeking such Approval from the Ministry
of Health of Mexico. In July 1998, the Ministry of Health of Mexico granted
authorization for testing and analysis of Reticulose on human subjects with HIV
and AIDS, and AVR is currently exploring candidates to perform such tests.
Through March 1999, no studies have commenced in Mexico and no amounts for such
testing have been advanced by AVIX.
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, AVR has granted to Commonwealth, subject to certain
conditions precedent, the exclusive right to market and sell AVR'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.
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Pursuant to the Commonwealth Agreement, Commonwealth purchased from AVR
1,500 ampules of Reticulose at a purchase price of $12.00 per ampule (2
milliliters per ampules) and delivered to AVR $5,000 as a signing payment (for a
total payment of $23,000). Commonwealth has advised AVR 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 AVR $225,000 worth of Reticulose within one year from the date of
Approval for any of the Commonwealth Territories; $642,000 worth of Reticulose
during the second year from the date of Approval for any of the Commonwealth
Territories; and $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 AVR $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, AVR has granted
to Commonwealth the right to acquire 3,000,000 shares of the common stock at a
purchase price of $0.25 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. AVR 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, AVR entered into an agreement by which it granted
to Dormer Laboratories Inc., a Canadian corporation ("Dormer"), the exclusive
rights to import, warehouse, market, sell and distribute Reticulose within
Canada for a period of five years from the grant of import approval for Canada,
provided that Dormer meets certain Reticulose purchase minimums. Because
Approval for Canada was not obtained by November 9, 1995, AVR had the right to
terminate this agreement on 90 days prior written notice to Dormer. Upon notice
by AVR, the agreement was terminated in August 1998.
GLOSSARY OF TERMS
The following is a glossary of some of the scientific terms used in
this report. 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.
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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 or Human
Papilloma Virus: Genital warts, indicated by a circumscribed benign
epithelial tumor projecting from the surrounding
surface.).
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.
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.
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.
Reticulose: An anti-viral peptide-nucleic acid 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.
Viral replication: The duplication of a virus 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.
40
<PAGE>
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.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of AVR, and further information
concerning them, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 63 President and Chief Executive Officer, Chief
Scientific Officer
Bernard Friedland 73 Chairman of the Board of Directors
William Bregman 77 Vice President, Secretary, Treasurer, Director
Louis J. Silver 70 Director
</TABLE>
Shalom Z. Hirschman, M.D., President, Chief Executive Officer and a
Director of AVR 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, Chairman of the Board of AVR since May 1987,
Director of AVR since July 1985 and President and Chief Executive Officer of AVR
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.
William Bregman, Director of AVR since July 1985 and
Secretary-Treasurer of AVR since September 1985, was Vice President of AVR from
September 1985 until May 1987 and Vice President and Secretary of LTD from
August 1984 until July 1989.
Louis J. Silver, Director of AVR 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 AVR during the periods from May 1987 to
July 1987.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" of AVR as those terms as defined in the rules and regulations
promulgated under the Securities Act. Directors are elected to serve until the
next annual meeting of stockholders and until their successors have been elected
and have qualified. For the fiscal year ended December 31, 1998, and for the
41
<PAGE>
period ended March 24, 1999, 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 AVR does not have a class of securities registered under
Section 12 of the Exchange Act.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the Board of Directors of AVR attended, which has not in fact been paid within
at least the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, no director, officer or employee of AVR
received salary and bonus exceeding in the aggregate $100,000 in the years ended
December 31, 1998, 1997 or 1996. The following Summary Compensation Table sets
forth the information concerning compensation for services in all capacities
awarded to, earned by or paid to the named executive officers for the years
ended December 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
- -------------------------------------------------------------------------------------------------------------------------------
Securities
Underlying
Other Annual Options/ All Other
Name and Principal Position Year Salary Bonus Compensation (1) SARs (3) Compensation (4)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1998 $325,000 $0 $12,288 23,000,000 $4,316
President, Chief Executive -----------------------------------------------------------------------------------------------
Officer and Chief Scientific 1997 $325,000 $43,000 $14,604 0 $3,956
Officer of AVR since October -----------------------------------------------------------------------------------------------
1996 and consultant to AVR 1996 $68,750(2) $0 $ 4,825 15,000,000 $4,316
from May 24, 1995 until
October 1996.
- -------------------------------------------------------------------------------------------------------------------------------
Bernard Friedland, President 1998 - - - - -
and Chief Executive Officer -----------------------------------------------------------------------------------------------
of AVR through October 13, 1997 - - - - -
1996 -----------------------------------------------------------------------------------------------
1996 $35,000 - $6,500 - -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other Annual Compensation for Dr. Hirschman and Mr. Friedland include
medical insurance premiums paid by AVR for him, and aggregate incremental
cost to AVR of Dr. Hirschman's automobile lease, gas, oil, repairs and
maintenance.
(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) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) The dollar value of insurance premiums paid by, or on behalf of, AVR with
respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, Dr. Hirschman was granted options to acquire
23,000,000 shares of common stock, the exerciseability of which is subject to
conditions precedent. No other stock options were granted to the named executive
officers during 1998. Other than Dr. Hirschman's options to acquire an
additional 16,100,000 shares of common stock, AVR currently has outstanding:
42
<PAGE>
(i) three 1997 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;
(ii) three 1997 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;
(iii) two warrants which entitle the holder to purchase 375,000 and
375,000 shares of common stock at exercise prices of $0.20 and $0.24
per warrant share, respectively;
(iv) four warrants which entitle the holder to purchase 983,394,
983,394, 200,000 and 200,000 shares of common stock at exercise prices
of $0.2040, $0.2448, $0.2040, and $0.2448 per warrant share,
respectively; and
(v) options to acquire 14,365,415 shares of the common stock, none of
which are beneficially owned by directors, officers or employees of
AVR.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase AVR's common stock as of December
31, 1998 held by the named executive officers. No options were exercised during
the year ended December 31, 1998 by the named executive officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the-
Shares Unexercised Options 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 / 23,000,000 $267,800 / $0 (2)(3)
- -----------------------------------------------------------------------------------------------------------------------
Bernard Friedland 0 $0 0/0 $0/$0
- -----------------------------------------------------------------------------------------------------------------------
</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, 1998,
$0.218, and the exercise or base price.
(3) As of December 31, 1998, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share, 4,000,000; shares of common
stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
share; and 4,000,000 shares of common stock at $0.36 per share, all of
which are currently exercisable. In addition, Dr. Hirschman held options to
purchase 23,000,000 shares of common stock at $0.27 per share which become
exercisable through February 2008 upon the earlier to occur of : (i) the
day an IND number is obtained from and approved by the FDA so that human
research may be conducted using Reticulose; (ii) the occurrence of a change
in control; or (iii) the execution of an agreement relating to co-marketing
pursuant to which one or more third parties commit to make payments to AVR
of at least $15 million.
43
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between AVR and Shalom Z. Hirschman, M.D. (the "Employment
Agreement"), AVR 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 AVR, including management of scientific, medical, financial,
regulatory and corporate matters, establishing appropriate laboratory, executive
and other facilities for AVR, and raising additional capital for AVR. The
Employment Agreement includes an agreement by AVR that Dr. Hirschman will be
nominated as a Director of AVR for the duration of Dr. Hirschman's employment by
AVR under the Employment Agreement, and voting agreements regarding the election
of Messrs. Friedland, Bregman and Dr. Hirschman as directors. See "Principal
Shareholders."
Pursuant to the Employment Agreement, the term of Dr. Hirschman's
employment continues until December 31, 2000 and will continue for one year
periods thereafter unless either AVR or Dr. Hirschman gives the other notice at
least two years in advance that such one year automatic extension shall be
vitiated. In the event the Employment Agreement is terminated by AVR "for cause"
(as defined therein), all unvested stock options, benefits under stock bonus
plans and stock appreciation rights ("SARs") (collectively, "Stock Rights")
granted to Dr. Hirschman may be canceled by AVR. In the event the Employment
Agreement is terminated by Dr. Hirschman "for cause" (as defined therein), AVR
is required to pay to Dr. Hirschman his annual salary and employee benefits
through the remainder of the then current term.
Pursuant to the Employment Agreement, Dr. Hirschman receives an annual
salary of $325,000, payable in equal biweekly installments. The 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. The Employment Agreement further provides that AVR
shall (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 AVR, (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 AVR in the reasonable determination of Dr. Hirschman, and all other
expenses that may be pre-approved by the Board of Directors of AVR, and (d)
provide not less than four weeks paid vacation annually and such paid sick or
other leave as AVR provides to all of its employees. The Employment Agreement
also provides for the payment of $100,000 to Dr. Hirschman on the date an IND
number is obtained by AVR from the FDA so that Reticulose may be tested on
humans, so long as such IND number is obtained while Dr. Hirschman is employed
by AVR.
44
<PAGE>
The 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 AVR or
any of its other employees, to bind AVR, to release or discharge any debt due
AVR unless AVR has received payment in full, or to dispose (as collateral or
otherwise) of all or substantially all of AVR's assets.
Dr. Hirschman has agreed that he will assign to AVR all patents he
develops which result from his knowledge acquired while performing his duties
under the Employment Agreement, and that, if his employment under the Employment
Agreement is terminated by AVR "for cause" or by Dr. Hirschman otherwise than
"for cause," as specified in that agreement, he will not, directly or
indirectly, compete with AVR for three years after termination or solicit AVR's
employees to leave the service of AVR for one year after termination.
Pursuant to the execution of the Employment Agreement, AVR ratified a
$100,000 bonus payment made to Dr. Hirschman in February 1998 and the February
1998 grant to Dr. Hirschman of options to acquire 23,000,000 shares of common
stock exercisable at any time and from time to time through February 2008 at
$0.27 per share commencing upon (i) the day an IND number is obtained from and
approved by the FDA so that human research may be conducted using Reticulose;
(ii) the occurrence of a change in control; or (iii) the execution of an
agreement relating to co-marketing pursuant to which one or more third parties
commit to make payments to AVR of at least $15 million.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus
certain information regarding the beneficial ownership of the common stock by
(i) each person who is known by AVR to own beneficially more than 5% of the
Company's outstanding voting securities; (ii) each of AVR's directors and named
executive officers; and (iii) all directors of AVR as a group:
<TABLE>
<CAPTION>
Shares of common stock
Name and Address of Beneficial Owner Beneficially Owned (1) Percent Owned
- ------------------------------------ ---------------------- -------------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 16,100,000(2)(3) 5.07%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Bernard Friedland 39,346,730(3)(4) 13.06%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,705,403(3)(5) 11.85%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Louis J. Silver 501,000 0.17%
5110 S.W. 127th Place
Miami, FL 33175
All officers & directors (4 persons) 91,653,133(2) 28.87%
</TABLE>
(1) The persons named in this table have sole voting power with respect to all
shares shown as beneficially owned by them, except as indicated in other
footnotes to this table. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
common stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days after April 24, 1999,
are deemed outstanding. According to American Stock Transfer & Trust
Company, the transfer agent for the common stock, 301,340,183 shares of the
common stock were outstanding as of the close of business on April 24,
1999.
(2) Represents shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days after April 24, 1999.
(3) The 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 AVR. That agreement, however, does not restrict
or otherwise limit their right to sell their shares to third parties
without restriction. The 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 AVR 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 AVR. See
"- 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
owned by Mr. Friedland and Shirley Friedland, his spouse, as joint tenants,
and (iii) 600,000 shares owned the B&SD Friedland Foundation, a
not-for-profit foundation controlled by Mr. Friedland. Does not include
15,000 shares owned by Shirley Friedland as to which Mr. Friedland
disclaims beneficial ownership.
46
<PAGE>
(5) Includes (i) 22,823,125 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; (ii) 70,000 shares owned by Carol
Bregman, his daughter; (iii) 73,000 shares owned by Janet Berlin, his
daughter, (iv) 70,000 shares owned by Forest Berlin, his grandson, and (v)
70,000 shares owned by Jessica Berlin, his granddaughter.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus by
each of the selling shareholders assuming the full conversion of the 1998
Debenture (based on application of the formula for computing the applicable
conversion price as provided in the 1998 Debenture), the Warrants and the
Options. Unless otherwise indicated below, to the knowledge of AVR, all persons
listed below have sole voting and investment power with respect to the shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Based on the average of the closing bid and ask prices of the
common stock on April 26, 1999, as reported on the OTC Electronic Bulletin Board
($0.23), and an applicable conversion price of $0.1656, full conversion of the
1998 Debenture would yield 9,057,971 shares of common stock.
The information included below is based upon information provided by
the selling shareholders. Because the selling shareholders may offer all, some
or none of their shares, no definitive estimate as to the number of shares that
will be held by the selling shareholders after such offering can be provided and
the following table has been prepared on the assumption that all shares offered
under this prospectus will be sold.
47
<PAGE>
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Position with or Before Offering (1)(2) Shares Being After Offering (3)
Selling Shareholder Relationship to AVR Number % Sold in Offering(2) Number %
- ------------------- ------------------- ------ --- ------------------- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Elliot Bauer 4a Affiliate of AVIX 4,099,500 1.20% 4,099,500 0 0.00%
Cesar Blumtritt, MD 4b Affiliate of DCT 753,333 0.22% 753,333 0 0.00%
Consultant and
Leonard Cohen 4c Affiliate of AVIX 1,700,000 0.50% 1,700,000 0 0.00%
David Duffy 4d Affiliate of Plata 650,000 0.19% 650,000 0 0.00%
Shalom Z. Hirschman, MD 4e President and CEO 16,100,000 4.71% 16,100,000 0 0.00%
Gary Hussian 4f Affiliate of DCT 292,500 0.09% 292,500 0 0.00%
Interfi Capital Group 4g Investor 1,038,015 0.30% 1,038,015 0 0.00%
Henry Kamioner 4h None 1,500,000 0.44% 1,500,000 0 0.00%
Charles Miller 4i Affiliate of Plata 8,100 0.00% 8,100 0 0.00%
Jeffrey & Cheryl Miller 4j Affiliate of Plata 183,300 0.05% 183,300 0 0.00%
Richard Rubin 4k Former legal counsel 1,000,000 0.29% 1,000,000 0 0.00%
Freddie Velez 4l Affiliate of DCT 440,667 0.13% 440,667 0 0.00%
RBB Bank A.G. 5 Investor 12,143,105 3.53% 12,143,105 0 0.00%
Harborview Group, Inc. 6a Investor 3,831,372 1.12% 3,831,372 0 0.00%
Joe Feshbach 6b Investor 857,843 0.25% 857,843 0 0.00%
Russell Kuhn 6c Investor 586,880 0.17% 428,880 158,000 0.05%
Victor Sherman 6d Investor 528,880 0.15% 428,880 100,000 0.03%
Jennifer Brandenburg Smith 6e Investor 171,569 0.05% 171,569 0 0.00%
Jo Sherrin Smith 6f Investor 171,569 0.05% 171,569 0 0.00%
Robert Franklin Smith, Sr. 6g Investor 171,569 0.05% 171,569 0 0.00%
Shelly Marion Smith 6h Investor 271,569 0.08% 171,569 100,000 0.03%
Myron Weiner 6i Investor 438,880 0.13% 428,880 10,000 0.00%
John Zimmerman 6j Investor 641,151 0.19% 536,151 105,000 0.03%
Matt Zimmerman 6k Investor 105,782 0.03% 85,782 20,000 0.01%
Total Shares Being Sold 7 47,685,584 13.88% 47,192,584 493,000 0.14%
========== ====== ========== ======= =====
Total Shares Outstanding (2) 343,615,491
===========
</TABLE>
* Less than 1%
1. As required by regulations of the Commission, the number of shares shown as
beneficially owned include shares which can be purchased within 60 days
after April 26, 1999. The actual number of shares of common stock
beneficially owned is subject to adjustment and could be materially more or
less than the estimated amount indicated depending upon factors which
cannot be predicted by AVR at this time, including, among others, the
market price of the common stock.
2. Assumes the full exercise of the Warrants and the Options and the full
conversion of the 1998 Debenture based on the average of the closing bid
and ask prices of the common stock on April 26, 1999, as reported on the
OTC Electronic Bulletin Board ($0.23) and an applicable conversion price of
$0.1656, full conversion of the 1998 Debenture would yield 9,057,971 shares
of common stock.
3. Assumes that all of the shares are sold by the selling shareholders and no
additional shares of common stock are acquired.
4. Numbers of shares stated include an aggregate of 27,765,415 shares
underlying options registered for the selling shareholders hereunder, as
follows:
(a) options to purchase 4,099,500 shares at $0.13 per share;
(b) options to purchase 753,333 shares at $0.21 per share;
(c) options to purchase 1,700,000 shares at $0.15 per share;
(d) options to purchase 600,000 shares at $0.14 per share and 50,000 shares
at $0.21 per share;
(e) options to purchase 4,100,000 shares at $0.18 per share, 4,000,000
shares at $0.19 per share, 4,000,000 shares at $0.27 per share, and
4,000,000 shares at $0.36 per share;
48
<PAGE>
(f) options to purchase 292,500 shares at $0.21 per share;
(g) options to purchase 926,542 shares at $0.33 per share and 111,473
shares at $0.41 per share;
(h) options to purchase 500,000 shares at $0.19 per share, 500,000 shares
at $0.27 per share, and 500,000 shares at $0.36 per share;
(i) options to purchase 83,300 shares at $0.14 per share and 100,000 shares
at $0.16 per share;
(j) options to purchase 8,100 shares at $0.16 per share;
(k) options to purchase 500,000 shares at $0.27 per share, and
500,000 shares at $0.33 per share;
(l) options to purchase 440,667 shares at $0.21 per share
5. Represents 9,057,971 shares of common stock issued or issuable upon the
full conversion of the 1998 Debenture (which number may fluctuate depending
on the future market price of AVR's common stock) and 3,085,134 shares
underlying certain warrants. Shares held in the name of RBB are held for
the account of foreign investors. RBB represents that no beneficial owner
represents 5% or more of AVR's outstanding securities.
6. Includes the following number of shares of common stock underlying certain
warrants: (a) 980,392 shares; (b) 245,098 shares; (c) 122,508 shares; (d)
122,508 shares; (e) 49,020 shares; (f) 49,020 shares; (g) 49,020 shares;
(h) 49,020 shares; (i) 122,508 shares; (j) 153,186 shares; and (k) 24,508
shares. Shares held in the name of Harborview Group, Inc. are held for the
account of investors. Harborview Group, Inc. represents that no
beneficial owner represents 5% or more of AVR's outstanding securities.
7. Includes 5,451,922 shares of common stock issuable upon exercise of the
Warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between AVR and any of its officers or directors which involved $60,000 or more.
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of AVR consists of 1,000,000,000 shares of
common stock, par value $0.00001 per share. All shares of common stock now
outstanding are fully paid for and non-assessable. The holders of common stock:
o have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by the Board of
Directors of AVR;
o entitled to share ratably in all of the assets of AVR
available for distribution to holders of common stock upon
liquidation, dissolution or winding up of the affairs of AVR;
o do not have preemptive, subscription, or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
o are entitled to one noncumulative vote per share on all
matters which shareholders may vote on at all meetings of
shareholders.
49
<PAGE>
USE OF PROCEEDS
AVR will not receive any of the proceeds from the sale of the shares
offered hereunder by the selling shareholders.
PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling
shareholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the OTC
Bulletin Board, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions), in privately
negotiated transactions or otherwise or in a combination of such transactions at
prices and at terms then prevailing or at prices related to the then current
market price, or at privately negotiated prices. In addition, any shares covered
by this prospectus which qualify for sale pursuant to Section 4(l) of the
Securities Act or Rule 144 promulgated thereunder may be sold under such
provisions rather than pursuant to this prospectus. Without limiting the
generality of the foregoing, the shares may be sold in one or more of the
following types of transactions: (a) a block grade in which the broker-dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, and (e) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the selling shareholders may
arrange for other brokers or dealers to participate in the resales.
In connection with distributions of the shares or otherwise, the
selling shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with selling shareholders. The selling shareholders may also sell shares
short and deliver the shares to close out such short positions. The selling
shareholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares
registered hereunder, which the broker-dealer may resell pursuant to this
prospectus. The selling shareholders may also pledge the shares registered
hereunder to a broker or dealer and upon a default, the broker or dealer may
effect sales of the pledged shares pursuant to this prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
selling shareholders, or any other broker-dealer, is acting as principal or
agent for the selling shareholders, the compensation
50
<PAGE>
to be received by underwriters who may be selected by the selling shareholders,
or any broker-dealer, acting as principal or agent for the selling shareholders
and the compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to this
prospectus (the 'Prospectus Supplement'). Any dealer or broker participating in
any distribution of the shares may be required to deliver a copy of this
prospectus, including the Prospectus Supplement, if any, to any person who
purchases any of the shares from or through such dealer or broker.
AVR has advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included herein they are required
to comply with Regulation M promulgated under the Exchange Act. With certain
exceptions, Regulation M precludes any selling shareholders, any affiliated
purchasers and any broker-dealer or other person who participates in such
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the
marketability of the common stock.
It is anticipated that the selling shareholders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of AVR's common stock.
None of the selling shareholders have entered into any agreements regarding the
sales of the shares being registered.
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for AVR by Berman Wolfe & Rennert, P.A., NationsBank Tower, 35th Floor, 100
Southeast Second Street, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of AVR included in this
prospectus and in the registration statement except as they pertain to periods
unaudited, have been audited by Rachlin Cohen & Holtz, independent certified
public accountants, for the periods indicated in their report appearing
elsewhere in this prospectus, and are included in this prospectus in reliance
upon the report of such firm given upon the authority of such firm as experts in
accounting and auditing.
51
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets, December 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 and from
Inception (February 20, 1984) to December 31, 1998 F-4
Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 and from
Inception (February 20, 1984) to December 31, 1998 F-12
Notes to Consolidated Financial Statements F-13
</TABLE>
<PAGE>
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 sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1998 and for the period from inception (February 20, 1984) to December 31, 1998.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated 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 consolidated 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, 1998 and 1997
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 and for the period from
inception (February 20, 1984) to December 31, 1998 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 LLP
Miami, Florida
February 11, 1999
F-2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 924,420 $ 236,059
Investments 821,047 2,984,902
Inventory 19,729 19,729
Other current assets 29,818 20,240
----------- ------------
Total current assets 1,795,014 3,260,930
Property and Equipment 1,049,593 485,661
Other Assets 460,346 443,251
----------- ------------
Total assets $ 3,304,953 $ 4,189,842
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 279,024 $ 375,606
Current portion of capital lease obligation 38,335 -
----------- ------------
Total current liabilities 317,359 375,606
----------- ------------
Long-Term Liabilities:
Convertible debenture, net 885,002 2,384,793
Capital lease obligation - long-term portion 167,380 -
----------- ------------
Total long-term liabilities 1,052,382 2,384,793
----------- ------------
Deposit on Securities Purchase Agreement 600,000 -
Commitments and Contingencies - -
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 296,422,907 and 277,962,574
shares issued and outstanding 2,964 2,779
Additional paid-in capital 14,325,076 10,512,767
Deficit accumulated during the development stage (12,978,059) (8,993,266)
Subscription receivable - (19,000)
Deferred compensation cost (14,769) (73,837)
----------- ------------
Total stockholders' equity 1,335,212 1,429,443
----------- ------------
Total liabilities and stockholders' equity $ 3,304,953 $ 4,189,842
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 656 $ 2,278 $ 24,111 $ 194,975
Interest 102,043 111,845 46,796 559,297
Other income 293 7,800 32,000 120,093
------------- ------------- ------------- -------------
102,992 121,923 102,907 874,365
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 709,456 817,603 255,660 2,633,467
General and administrative 2,370,427 1,681,436 983,256 8,265,337
Depreciation and amortization 340,098 138,245 18,731 657,283
Interest 667,804 1,626,368 -- 2,296,337
------------- ------------- ------------- -------------
4,087,785 4,263,652 1,257,647 13,852,424
------------- ------------- ------------- -------------
Net Loss $ (3,984,793) $ (4,141,729) $ (1,154,740) $ (12,978,059)
============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.01) $ (.02) $ (.00)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 294,809,073 274,534,277 257,645,815
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <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-5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <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 .05 6,729,850 67 336,475 -
offer on "B" warrants
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-6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <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-7
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock 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-8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock 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-9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock 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>
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-10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock 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, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options $.12 295,000 3 35,397 - - -
Issuance of common stock, exercise of options .14 500,000 5 69,995 - - -
Issuance of common stock, exercise of options .16 450,000 5 71,995 - - -
Issuance of common stock, exercise of options .20 10,000 - 2,000 - - -
Issuance of common stock, exercise of options .26 300,000 3 77,997 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 - - -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Issuance of common stock, for services rendered .21 100,000 1 20,999 - - -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998 - - - - (3,984,793) -
------------ ------ ------------ -------- ------------ ---------
Balance, December 31, 1998 296,422,907 2,964 $ 14,325,076 $ - $(12,978,059) $ (14,769)
============ ====== ============ ======== ============ =========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
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,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(3,984,793) $(4,141,729) $(1,154,740) $(12,978,059)
----------- ----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 340,098 138,245 18,731 657,283
Amortization of deferred interest cost on beneficial
conversion feature and discount on warrants 553,331 1,552,842 - 2,106,098
Amortization of deferred compensation cost 59,068 399,322 287,341 745,731
Loss on sale of property and equipment - 1,425 - 1,425
Issuance of common stock for services 21,000 44,500 175,000 1,437,500
Imputed interest on convertible debenture - 4,768 - 4,768
Changes in operating assets and liabilities:
Increase in other current assets (9,578) (4,159) (3,114) (29,818)
Increase in inventory - - (1,638) (19,729)
Increase in other assets (247,072) (496,126) (27,085) (776,742)
Increase (decrease) in accounts payable and
accrued liabilities (96,582) 328,932 39,823 285,224
Decrease in customer deposits - (7,800) - (7,800)
----------- ----------- ----------- ------------
Total adjustments 620,265 1,961,949 489,058 4,403,940
----------- ----------- ----------- ------------
Net cash used by operating activities (3,364,528) (2,179,780) (665,682) (8,574,119)
----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments (915,047) (3,651,676) (1,247,256) (6,292,979)
Proceeds from sale of investments 3,078,902 2,045,615 347,415 5,471,932
Acquisition of property and equipment (451,734) (307,362) (11,446) (1,143,600)
Proceeds from sale of property and equipment - 1,200 - 1,200
----------- ----------- ----------- ------------
Net cash provided (used) by investing activities 1,712,121 (1,912,223) (911,287) (1,963,447)
----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,500,000 4,000,000 - 5,500,000
Proceeds from deposit on securities purchase agreement 600,000 - - 600,000
Proceeds from sale of securities, net of issuance costs 257,400 266,666 1,573,135 5,378,588
Payments under capital lease (16,602) - - (16,602)
----------- ----------- ----------- ------------
Net cash provided by financing activities 2,340,798 4,266,666 1,573,135 11,461,986
----------- ----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 688,391 174,663 (3,834) 924,420
Cash and Cash Equivalents, Beginning 236,059 61,396 65,230 -
----------- ----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 924,450 $ 236,059 $ 61,396 $ 924,420
=========== =========== =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 6,042 $ - $ -
=========== =========== ===========
Options granted accounted for as deferred compensation cost $ - $ - $ 760,500
=========== =========== ===========
</TABLE>
During 1998, the Company purchased equipment under a capital lease totaling
$222,317.
See notes to consolidated financial statements.
F-12
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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, 1998.
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-13
<PAGE>
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 limited sales generated by the Company have consisted of sales
of RETICULOSE for testing and other purposes. Sales are recorded by
the Company when the product is shipped to customers.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to 1998 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 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 1998 and 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. The Company expects to apply for approval with the FDA by
May 15, 1999. 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-14
<PAGE>
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. Both
stockholders concurrently canceled $86,565 of indebtedness due them
from LTD.
<TABLE>
<CAPTION>
NOTE 4. INVESTMENTS
1998 1997
---- ----
<S> <C> <C>
Held to maturity:
U.S. Government securities $821,047 $2,226,902
Certificates of deposit - 758,000
------------ ----------
$821,047 $2,984,902
============ ==========
</TABLE>
<TABLE>
<CAPTION>
NOTE 5. PROPERTY AND EQUIPMENT
Estimated Useful
Lives (Years) 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 324,083 299,550
Machinery and equipment 5 1,003,768 354,250
--------- -----------
1,362,401 688,350
Less accumulated depreciation 312,808 202,689
---------- -----------
$1,049,593 $ 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, 1998 and 1997 including $17,623 expended in 1987 to
purchase a land lease expiring in 2068. Included with machinery and
equipment is $222,318 of equipment purchased under a capital lease
during 1998. Depreciation expense for equipment under capital lease was
approximately $12,000 in 1998. These amounts are included above.
F-15
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
NOTE 6. OTHER ASSETS
1998 1997
---- ----
<S> <C> <C>
Patent costs $344,319 $202,247
Loan costs, net of accumulated amortization of $341,935
and $111,957 96,250 221,227
Other 19,777 19,777
-------- --------
$460,346 $443,251
======== ========
</TABLE>
Patent development costs are capitalized as incurred. Loan costs relate
to fees paid in connection with the issuance of convertible debentures
(Note 8) and are amortized over the life of the debenture or until
conversion.
NOTE 7. SECURITIES PURCHASE AGREEMENT
On December 22, 1998, the Company entered into a Securities Purchase
Agreement whereby the Company agreed to issue to certain purchasers
4,917,276 shares of common stock for an aggregate purchase price of
$802,500. The agreement also provides for the issuance of four warrants
to purchase a total of 2,366,788 shares of common stock at prices
ranging from $.204 to $.2448 per share at any time until December 31,
2003.
As of December 31, 1998, the Company received $600,000 towards the
total purchase price.
As of January 7, 1999, the remaining $202,500 was received and the
appropriate shares were issued to the purchasers.
See Note 14 regarding pro forma presentation of this transaction.
NOTE 8. 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.
F-16
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
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 1997, RBB exercised its right to convert the principal amount of
the February Debenture into 6,675,982 shares of the Company's common
stock at conversion prices ranging from $.1162 to $.2002 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 with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected holding period of ten years (RBB exercised its right
to convert within one year). This amount has been reflected in the
accompanying consolidated 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 was fully amortized to
interest expense in 1997 with a corresponding credit to additional
paid-in capital.
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 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.
During 1998, RBB exercised its right to convert the remaining
$2,880,000 of the principal amount of the October Debenture into
16,805,333 shares of the Company's common stock at conversion prices
ranging from $.13 to $.23 per share.
F-17
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
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 with the
following assumptions: expected volatility of 20%; a risk free interest
rate of 6% and an expected holding period of ten years (RBB exercised
its right to convert within one year). This amount has been reflected
in the accompanying consolidated financial statements as a discount on
the convertible debenture, with a corresponding credit to additional
paid-in capital, and was fully amortized to interest expense over the
actual conversion period.
Based on the terms for conversion associated with the October
Debenture, there was intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount was 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 was 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 $210,951 for 1998 and $1,139,049 for 1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November 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 November
Debenture until the date of interest payment. The November 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 November Debenture is convertible, at
the option of the holder, into shares of common stock.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of one year. This amount has been reflected in
the accompanying consolidated financial statements as interest expense
related to the convertible debenture.
F-18
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture with a corresponding credit to additional paid-in
capital and is being amortized to interest expense over a one year
period beginning November 16, 1998 (date of debenture), based on
management's expectation of when complete conversion will occur. The
interest expense relative to this item is $52,083 for 1998.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $ -
Unpaid principal balance of October debenture - 2,880,000
Less unamortized discount and deferred interest 614,998 495,207
---------- ----------
Convertible debenture, net $ 885,002 $2,384,793
========== ==========
</TABLE>
NOTE 9. 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 if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
materially adversely affect the Company.
F-19
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Lack of Patent Protection
The Company does not presently have a patent for RETICULOSE but the
Company has two patents for the use of RETICULOSE as a treatment.
The Company currently has 32 patent applications pending with the
U.S. Patent Office. 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 such patents, if obtained, will be enforceable.
Capital Lease
During 1998 the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments
of $4,529 for 60 months commencing on September 1998 and expiring
on July 2003. Future minimum capital lease payments and the net
present value of the future minimum lease payments at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ending December 31:
1999 $ 54,348
2000 54,348
2001 54,348
2002 54,348
2003 31,703
---------
Total minimum lease payments 249,095
Less amount representing interest (43,380)
---------
Present value of net minimum lease payments 205,715
Current maturities (38,335)
---------
$167,380
=========
</TABLE>
Operating Leases
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $14,000 annually. The Company has the option to renew
for an additional three years. Management intends to exercise its
option for the year 2000.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective
May 1, 1999. The new lease adds 10,550 square feet (for a total of
16,650 square feet) and extends its term until April 2005.
Annual rent on the original lease is approximately $85,500. Rent
for the additional facilities is approximately $175,000. Total
rental commitment for the laboratory facilities will be $260,500.
F-20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Operating Leases
The Company leased an auto on October 26, 1996 for 36 months at
$450 per month.
Lease expense for the years ended December 31, 1998, 1997 and 1996
totaled $121,477, $76,351 and $13,315, respectively.
Future minimum lease payments are as follows:
Year ending December 31:
1999 $ 177,000
2000 274,000
2001 260,000
2002 280,000
2003 290,000
Thereafter 580,000
----------
Total $1,861,000
==========
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 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 "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, 1999
at an exercise price of $.14 and $.16, respectively. As of December
31, 1998, there are outstanding Plata Options to acquire 683,300
shares at $.14 per share and Additional Plata Options to acquire
108,100 shares at an exercise price of $.16 per share. Through
December 31, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
F-21
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS
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. Pursuant to several
amendments, the DCT options are exercisable through April 30, 1999
at an exercise price of $.21 per share. As of December 31, 1998,
473,500 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, 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").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $665,000 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.
F-22
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
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 $58,000 and $132,800, 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.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and RETICULOSE with those taking
a three drug cocktail and a placebo. As of December 31, 1998, the
Company has advanced approximately $50,000 for such study which has
been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
RETICULOSE for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$75,000 which has been accounted for as research and development
expenses.
F-23
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $50,000 for such study which has been accounted for
as research and development expense.
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, 1998, the Company has
expended approximately $385,000 to cover the costs of the Barbados
Study. In December 1996, the Company received from the coordinators
of the Barbados Study, a written summary of results of the Barbados
Study (the "Written Summary").
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $5,000 for such study which has been accounted for as
research and development expense.
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. This agreement was extended for an additional one year term
through March 3, 1999 to investigate the anti-tumor activity of
RETICULOSE using kidney tumor model systems. In addition, NCI will
study the effects of RETICULOSE on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
RETICULOSE.
F-24
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
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 and now president of AVRC, 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, 1998, 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, 1998, 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.
F-25
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Hirschman Agreement (Continued)
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).
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 to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
F-26
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
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, 1999), 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 $.15 per
share) (the "September 1992 Cohen Options"). As of December 31,
1998, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares 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, 1999 at an option price of $.13. 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.
F-27
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
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.
Chinnici Agreement
In July 1998, the Company entered into a consulting agreement with
Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
Such agreement calls for Dr. Chinnici to provide assistance in
connection with research, development, production, marketing and
sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
the FDA in connection with an application for approval of
RETICULOSE and will provide detailed clinical reports regarding
patients observed by him. Dr. Chinnici will receive options to
purchase 300,000 shares at an exercise price of $.30 per share. The
options will be exercisable in equal installments on January 1,
1999 and 2000 and December 15, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
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.
Additionally, pursuant to one of the distributions agreements, the
Company granted the distributor the right to acquire 3,000,000 shares
of the Company's common stock at a purchase price of $.25 (which has
been increased to $.26) upon the completion of certain tests and the
publication of a paper with respect to such tests. During May 1998,
300,000 shares of common stock were issued pursuant to exercise of
these options for an aggregate exercise price of $78,000.
F-28
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. 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.
During 1998, the Company issued 18,460,333 shares of common stock for
an aggregate consideration of $3,158,400. The amounts were comprised of
the issuance of common stock pursuant to the exercise of stock options
of 1,555,000 shares for $257,400 and the issuance of common stock in
exchange for consulting services of 100,000 shares for consideration of
$21,000 and the issuance of common stock upon commission of debt of
16,805,333 shares for $2,880,000.
NOTE 11. 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, 1998 and 1997, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $9,700,000 and $6,300,000, which expire in varying
amounts to 2018.
The Company presently has one significant temporary difference between
financial reporting and income tax reporting relating to interest
expense on the beneficial conversion feature of the convertible debt.
The components of the deferred tax asset as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit of net operating loss carryforwards $3,300,000 $2,100,000
Less valuation allowance 3,300,000 2,100,000
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
As of December 31, 1998, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $3,300,000 has been established.
F-29
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. 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, 1998. 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, 1998 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, 1998, 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 13. DEFERRED COMPENSATION COST
As more fully described in Note 9 to these consolidated 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: 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, 1998 and 1997, there were approximately
5,500,000 and 7,000,000 option shares outstanding with a weighted
average exercise price of $0.195 per share.
F-30
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
NOTE 14. PRO FORMA BALANCE SHEET (UNAUDITED)
December 31, 1998
-----------------
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
------
Current assets $1,795,014 $ 202,500 $1,997,514
Property and equipment 1,049,593 - 1,049,593
Other assets 460,346 - 460,346
----------- ----------- -----------
Total assets $3,304,953 $ 202,500 $3,507,453
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities $ 317,359 $ - $ 317,359
Long-term liabilities 1,052,382 - 1,052,382
Deposit on securities purchase agreement 600,000 (600,000) -
Stockholders' equity 1,335,212 802,500 2,137,712
----------- ----------- -----------
Total liabilities and stockholders' equity $3,304,953 $ 202,500 $3,507,453
=========== =========== ===========
Common shares outstanding 296,422,907 4,917,276 301,340,183
=========== =========== ===========
</TABLE>
F-31
<PAGE>
================================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
47,192,584 Shares
of
Common Stock
April __, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by AVR. All amounts shown are estimates, except the Commission
registration fee:
Commission registration fee ....................................$3,017*
Printing and mailing expenses...................................$5,000
Legal fees and expenses .......................................$25,000
Accounting fees and expenses ..................................$10,000
-------
Total.................................................$42,700
* $2,700 of the registration fee has been previously paid.
Item 14. Indemnification of Directors and Officers
Article Ninth of AVR's Certificate of Incorporation contains the
following provision with respect to indemnification of Directors and Officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as
to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person, who has
ceased to be director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
II-1
<PAGE>
expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in
good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to
believe the person's conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith
and in a manner which the person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that
the person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination,
(1) by a majority vote of the directors
II-2
<PAGE>
who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated
by majority vote of such directors, even though less than a quorum, or
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the
stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
AVR's Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of AVR's Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
Item 15. Recent Sales of Unregistered Securities
The following table sets forth AVR's sales of unregistered securities
for past three years. All transactions listed below involved the issuance of
common stock and options to acquire shares of common stock prior to commencement
of the offering described in the foregoing Prospectus. No underwriters were
employed with respect to the sale of any of the securities listed below. All
shares were issued in reliance upon Section 4(2) and/or 3(b) of the Securities
Act.
<TABLE>
<CAPTION>
Securities Issued Purchase Date Acquired Consideration
- ----------------- -------- ------------- -------------
<S> <C> <C> <C>
5,000,000 options Shalom Z. Hirschman, M.D. 4-1-96 Services (Consulting) (1)
exercisable at each of
$0.18, $0.19, $0.27 and $0.36
per share
500,000 options Deborah Silver 4-1-96 Services (Consulting) (1)
exercisable at $0.18 per
share
1,000,000 options Freddie Velez 4-1-96 Services (Consulting) (1)
exercisable at $0.20 per
share
500,000 options Gary Hussian 4-1-96 Services (Consulting) (1)
exercisable at $0.20 per
share
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C> <C>
500,000 options Cesar Blumtritt, M.D. 4-1-96 Services (Consulting) (1)
exercisable at $0.20 per
share
50,000 shares Malcolm Santer 9-4-96 Services (Consulting) (2)
50,000 shares Malcolm Santer 2-26-97 Services (Consulting) (2)
750,000 shares David Sass 3-21-97 .08
375,000 shares Norman Schwartz 3-21-97 .08
375,000 shares Mel Mendelson 3-21-97 .08
1,833,333 shares Matthew Cohen 3-21-97 .08
1,648,352 shares RBB Bank 4-22-97 .20 (3)
894,526 shares RBB Bank 6-6-97 .15 (3)
2,323,580 shares RBB Bank 7-3-97 .12 (3)
1,809,524 shares RBB Bank 8-20-97 .15 (3)
100,000 shares Malcolm Santer 9-8-97 Services (Consulting) (4)
722,701 shares RBB Bank 12-9-97 .16 (5)
1,017,011 shares RBB Bank 1-7-98 .13 (5)
2,512,887 shares RBB Bank 1-14-98 .14 (5)
23,000,000 options Shalom Z. Hirschman, M.D. 2-18-98 (6)
exercisable at $0.27
per share
5,114,218 shares RBB Bank 2-23-98 .15 (5)
190,000 shares Plata 3-5-98 .12 per share
1,498,884 shares RBB Bankhares 3-19-98 .22 (5)
105,000 shares Plata 3-27-98 .12 per share
1,870,869 shares RBB Bankhares 3-31-98 .23 (5)
10,000 shares Freddie Velez 4-3-98 .20 per share
200,000 shares Charles Miller 4-3-98 .14 per share
1,491,485 shares RBB Bankhares 5-4-98 .18 (5)
3,299,979 shares RBB Bankhares 5-5-98 .19 (5)
50,000 shares Charles Miller 5-13-98 .16 per share
200,000 shares Duffy 5-13-98 .14 per share
100,000 shares Charles Miller 5-13-98 .14 per share
100,000 shares Charles Miller 5-18-98 .16 per share
200,000 shares Commonwealth 5-18-98 .26 per share
100,000 shares Commonwealth 5-22-98 .26 per share
100,000 shares Charles Miller 6-22-98 .16 per share
85,000 shares Charles Miller 7-15-98 .16 per share
15,000 shares Charles Miller 7-17-98 .16 per share
25,000 shares Charles Miller 7-22-98 .16 per share
75,000 shares Charles Miller 7-24-98 .16 per share
100,000 shares Malcolm Santer 8-12-98 Services (Consulting)(7)
4,917,276 shares RBB Bank Aktiengesellschaft 12-22-98 .16 per share
</TABLE>
II-4
<PAGE>
- --------------------------
(2) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
have been valued at $0.11 per share.
(3) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
been valued at $0.50 per share and $0.41 per share, respectively.
(4) The conversions were made pursuant to the February 21, 1997 issuance of
convertible debentures.
(5) The 100,000 shares issued for consulting services on 9-8-97 have been
valued at $0.24 per share.
(6) The conversions were made pursuant to the October 1997 issuance of
convertible debentures.
(7) Granted pursuant to Dr. Hirshman's Restated Employment Agreement.
(8) The 100,000 shares issued for consulting services on 8-12-98 have been
valued at $0.21 per share.
[This Space Intentionally Left Blank]
II-5
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Articles of Incorporation of Advanced Viral Research Corp.(2)
3.2 Bylaws of Advanced Viral Research Corp., as amended(1)
3.3 Amendment to Articles of Incorporation of Advanced Viral Research Corp.(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between AVR and American Stock Transfer and Trust Company(1)
4.4 Forms of Common Stock Options and Agreements granted by AVR to TRM Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by AVR to Plata Partners Limited
Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common Stock granted by AVR to
Leonard Cohen(6)
4.7 Addendum to Agreement granted by AVR to Shalom Z. Hirschman, M.D. dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998, by and between AVR and RBB Bank AG.
(11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.20 per
share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.24 per
share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998, by and between AVR and various
purchasers. **
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common stock of AVR at $0.2040
per share. **
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common stock of AVR at $0.2448
per share. **
5.1 Opinion and Consent of the law firm of Berman Wolfe & Rennert, P.A. *
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor of AVR dated November 16,
1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique Medical Actuel and AVR(3)
10.3 Letter, dated March 15, 1991 to AVR from Health Protection Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and AVR(11)(a
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and AVR(4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell Inc. and AVR(7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and AVR(8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between Lionel Resnick, M.D. and
AVR(11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and AVR(12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and
AVR(11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and AVR(11)(d
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and AVR, as
amended(11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel
Islands and AVR(11)(f)
10.14 Agreement dated May 24, 1995 between AVR and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between AVR and Shalom Z. Hirschman, M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International
Pharmaceutical Corp. and AVR(12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and AVR(11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical
Corp. and AVR(11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and AVR(11)(h)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between AVR and Shalom Z.
Hirschman, M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International Pharmaceutical Corp. and
AVR(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between AVR and Shalom Z. Hirschman,
M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and AVR(12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between AVR and Interfi Capital
Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development Agreement, dated March 13,
1997, between National Institute of Health, Food and Drug Administration and the Centers for Disease
Control and Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between AVR and RBB Bank AG.
(11)(m)
10.28 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)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between AVR and Shalom Z.
Hirschman, M.D.(11)(n)
10.30 Agreement between AVR and Angelo Chinnici, M.D. dated July 1, 1999. (14)
10.31 Consulting Agreement between AVR and GloboMax LLC dated January 18, 1999. (14)|
21.1 Subsidiaries of Registrant -- Advance Viral Research Limited, a Bahamian corporation.
23.1 Consent of Rachlin Cohen & Holtz, Independent Certified Public Accountants *
23.2 Consent of the law firm of Berman Wolfe & Rennert, P.A. (See Exhibit 5.1).
23.3 Consent of the law firm of Nottage, Miller & Co. **
27.1 Financial Data Schedule for AVR as of and for the Nine Months Ended September 30, 1997. *
</TABLE>
* Filed herewith.
** Previously filed.
2. Documents incorporated by reference herein to certain exhibits AVR's
registration statement on Form S-1, as amended, File No. 33-33895, filed
with the Securities and Exchange Commission on March 19, 1990.
II-8
<PAGE>
3. Documents incorporated by reference herein to certain exhibits to AVR's
registration statement on Form S-18, File No. 33-2262-A, filed with the
Securities and Exchange Commission on February 12, 1989.
4. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
5. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-K for period ended March 31, 1991.
6. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
7. Documents incorporated by reference herein to certain exhibits to AVR's
report on Form 10-Q for the period ended September 30, 1992.
8. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
9. Documents incorporated by reference herein to certain exhibits to AVR's
report on Form 10-QSB for the period ended March 31, 1993.
10. Documents incorporated by reference herein to certain exhibits to AVR's
report on Form 10-QSB for the period ended June 30, 1995.
11. Documents incorporated by reference herein to certain exhibits to AVR's
report on Form 10-QSB for the period ended March 31, 1996.
12. Incorporated by reference herein to AVR's Reports on Form 8-K and Exhibits
thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
12. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to AVR's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
II-9
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, AVR
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on April 26, 1999.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
--------------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement on Form S-1 has been signed herein below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Shalom Z. Hirschman, M.D President and Chief April 26, 1999
- ----------------------------------- Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and April 26, 1999
- ----------------------------------- director
Bernard Friedland
/s/ William Bregman Secretary-Treasurer, April 26, 1999
- ----------------------------------- Principal Financial and
William Bregman Accounting Officer, director
/s/ Louis J. Silver Director April 26, 1999
- -----------------------------------
Louis J. Silver
</TABLE>
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
5.1 Opinion and Consent of the law firm of Berman Wolfe & Rennert, P.A.
23.1 Consent of Rachlin Cohen & Holtz, Independent Certified Public Accountants
27.1 Financial Data Schedule for AVR as of and for the Year Ended December 31, 1998
</TABLE>
EXHIBIT 5.1
BERMAN WOLFE & RENNERT, P.A.
Attorneys and Counselors
NationsBank Tower at International Place
100 Southeast Second Street, Suite 3500
Miami, Florida 33131-2130
Charles J. Rennert Phone (305) 577-4177
Fax (305) 373-6036
April 29, 1999
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
Gentlemen:
You have requested our opinion, as counsel to Advanced Viral Research
Corp., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-1 (Registration No. 333-70523, as amended (the
"Registration Statement"), filed by the Company with the U.S. Securities and
Exchange Commission (the "Commission").
The Registration Statement relates to an offering of up to 47,192,584
shares (the "Shares") of the common stock of the Company, par value $0.00001 per
share, by certain shareholders, which include:
(i) 4,917,276 shares of common stock held by certain shareholders;
(ii) 9,057,971 shares of the Company's common stock issuable upon
the conversion of a convertible debenture issued in November
1998 (the "Debenture"), which number of shares is subject to
adjustment and could be materially less or more, depending
upon factors that cannot be predicted at this time, including,
among others, the future market price of the Company's common
stock;
(iii) 5,451,922 shares of the Company's common stock issuable upon
the exercise of certain warrants (the "Warrants"); and
(iv) 27,765,415 shares of the Company's common stock issuable upon
the exercise of certain stock options (the "Options").
<PAGE>
We have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records,
certificates and instruments relating to the Company as we have deemed relevant
and necessary to the formation of the opinion hereinafter set forth. In such
examination, we have assumed the genuineness and authenticity of all documents
examined by us and all signatures thereon, the legal capacity of all persons
executing such documents, the conformity to originals of all copies of documents
submitted to us and the truth and correctness of any representations and
warranties contained therein.
We have also consulted with officers and directors of the Company and
have obtained such representations with respect to the matters of fact as we
have deemed necessary or advisable for purposes of rendering the opinion
hereinafter expressed. We have not independently verified the factual statements
made to us in connection therewith, nor the veracity of such representations.
Based upon and subject to the foregoing, we are of the opinion that,
after the Commission has declared the Registration Statement to be effective
(such Registration Statement as is finally declared effective and the form of
Prospectus contained therein being hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively) and when the applicable
provisions of the "Blue Sky" or other state securities laws shall have been
complied with, the Shares covered by the Registration Statement, upon receipt of
payment therefor and the satisfaction of all other conditions as referenced in
the Debenture, the Warrants, the Options and all agreements relating thereto,
will constitute legally issued securities of the Company, fully paid and
non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference of this law firm in the Prospectus
under the heading "LEGAL MATTERS." In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Respectfully submitted,
/s/ BERMAN WOLFE & RENNERT, P.A.
--------------------------------
BERMAN WOLFE & RENNERT, P.A.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this registration statement on Form S-1 of Advanced Viral Research Corp. of our
report dated February 11, 1999 (which report contains an explanatory paragraph
that describes a condition that raises substantial doubt as to the ability of
AVR to continue as a going concern) relating to the consolidated financial
statements of Advanced Viral Research Corp. as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 appearing in
such Prospectus. We also consent to the references to us under the heading
"EXPERTS" in the Prospectus.
/s/ RACHLIN COHEN & HOLTZ LLP
--------------------------------
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
April 27, 1999
EXHIBIT 23.3
Consent of Nottage, Miller & Co.
We hereby consent to the inclusion of references to our law firm in the
Prospectus constituting a part of the Registration Statement on Form S-1 of
Advanced Viral Research Corp. (File No. 333-70253).
/s/ Nottage, Miller & Co.
-------------------------------
Nottage, Miller & Co.
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 924,420
<SECURITIES> 821,047
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,795,014
<PP&E> 1,049,593<F1>
<DEPRECIATION> 312,779
<TOTAL-ASSETS> 3,304,953
<CURRENT-LIABILITIES> 917,359
<BONDS> 0
0
0
<COMMON> 2,964
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,304,953
<SALES> 0
<TOTAL-REVENUES> 102,992
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,087,785
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,984,793)
<INCOME-TAX> (3,984,793)
<INCOME-CONTINUING> (3,984,793)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,984,793)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> PP&E VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
