U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
-----------------------------
(exact name of Registrant as specified in its charter)
DELAWARE 59-2646820
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(954) 458-7636
(Address of Principal Executive Offices, Zip Code; Telephone Number
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the average bid and asked price of the Common Stock on the OTC Bulletin
Board on March 18, 1999, $0.22, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $46,131,151. Shares of Common Stock
held by each officer and director and by each person known by the Registrant to
own 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $0.0001 par
value, was 301,340,183 on March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ADVANCED VIRAL RESEARCH CORP.
FORM 10-K
Year Ended December 31, 1998
TABLE OF CONTENTS
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Page
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PART I............................................................................................................1
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ITEM 1. BUSINESS......................................................................................1
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ITEM 2. DESCRIPTION OF PROPERTY......................................................................16
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ITEM 3. LEGAL PROCEEDINGS............................................................................16
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................17
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PART II..........................................................................................................18
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................18
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.........................................................19
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................................................21
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ITEM 8. FINANCIAL STATEMENTS.........................................................................25
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................................................25
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PART III ........................................................................................................25
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............................................25
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ITEM 11. EXECUTIVE COMPENSATION.......................................................................26
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................30
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................31
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ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.............................................................31
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PART I
ITEM 1. 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 is an anti-viral peptide-nucleic acid
complex preparation. Reticulose has not been approved for sale or use, nor are
applications pending for approval for sale or use with the Food and Drug
Administration of the United States Department of Health and Human Services
("FDA") or anywhere in the world. The Company is in the developmental stage, and
has not as yet commenced any commercial operations. The Company is dependent on
registration and/or approval by applicable regulatory authorities of Reticulose
in a developed or developing country, of which there can be no assurance, in
order to commence commercial operations.
The Company'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, the
Company has also granted distribution rights for Reticulose in certain foreign
countries. In 1995, the Company retained Shalom Hirschman, M.D. as its
President. Since becoming President of the Company, Dr. Hirschman has monitored
the testing of Reticulose and has recently performed certain analyses of
Reticulose with Company personnel, which analyses the Company 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 prohibits, among other things, any shipment of Reticulose in the
United States 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 the Company,
organized the Company 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. The Company 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. The Company does not know what the actual cost
of such trials would be. If the Company needs additional financing to fund such
human clinical trials, there can be no assurance that additional financing will
be available to the Company. No assurance can be given that any new Notice of
Claimed Investigational Exemption for a New Drug ("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, or that the FDA would
approve the sale of Reticulose in the United States if any application were to
be made by the Company.
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. An NDA must be submitted to the FDA for new
drugs that have not been previously
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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.
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
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description of the drug substance, its physical and chemical characteristics;
its stability; the process controls used during manufacture and packaging; and
such specifications and analytical methods as are necessary to assure the
identity, strength, quality and purity of the drug substance as well as the
bioavailability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
On September 20, 1984, Bernard Friedland, former President and current
Chairman of the Board of the Company, 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 the
Company can establish that the proposed formulation of Reticulose is the same as
the formulation of Reticulose referenced in those publications. In addition, the
FDA required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage from and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that the
information assure the proper identification, quality, purity and strength of
Reticulose and a description of the physical, chemical and microbiological
characteristics of Reticulose. On September 11, 1987, the Company 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, the Company submitted an amendment to the IND, which
attempted to address the FDA's concerns. In response to the March 1992
submission, the Company 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 the Company. In June 1995, the Company received further
correspondence from the FDA which stated, among other things, that the Company's
prior submissions to the FDA did not provide an adequate response to the FDA's
earlier request for preclinical information and accordingly the Company's IND
was "inactivated."
The Company has not formally responded to the 1992 deficiency letters
or the 1995 deficiency letter, nor have any of the studies cited in those
letters been undertaken. In February 1998, the Company contracted with GloboMax
LLC of Hanover, Maryland to advise the Company in its preparation of an IND to
be filed with the FDA, and to otherwise assist the Company through the FDA
process with the objective of obtaining full approval for Reticulose in the
United States. Pursuant to the agreement with GloboMax LLC, the Company 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 the Company has the resources to complete the FDA approval process. The
Company may allocate certain funds from the exercise of currently outstanding
options and warrants for the purpose of filing a new IND with the FDA, 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 the Company. 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
the Company.
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In connection with its activities outside the United States, the
Company 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 the Company'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 the Company will be able to generate material sales revenues. The
Company received a grant of authority from the Bahamian Port Authority on
October 15, 1992 confirming the right of the Company'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 the Company expended approximately $2.5 million on testing and research and
development activities.
Testing in the United States. On September 20, 1984, the Company's IND
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 the Company's IND, the Company was required
among other things, to demonstrate that the Company'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, the
Company 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 the Company
originally believed that due to the early safety record and published reports of
human use that the FDA would permit the initial Phase I trials in humans after
approximately six months. If sufficient funds are available from the sale or
exercise of securities or other sources, the Company 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 the Company
but could be considerable. The Company may file a new IND with the FDA as
opposed to amend its prior IND.
Topical Safety Study. In October 1997, the Company 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, the Company
advanced approximately $170,000 for such study.
Canadian Contract. During the period from 1992 to 1995, the Company had
been seeking approval in Canada for controlled distribution of Reticulose. The
Company submitted an application for a limited study on 24 patients with
Kaposi's Sarcoma, a condition associated with AIDS, the approval of which
application was pending in 1995. However, due to delay in obtaining the approval
for this study and after receiving deficiency letters from the Health Protection
Branch of the Health and Welfare Department of Canada, the Company withdrew the
application to have such study commence.
Plata Partners Limited Partnership. On March 20, 1992, the Company
entered into an agreement with Plata Partners Limited Partnership ("Plata"), a
Michigan limited partnership unaffiliated with the company (the "Plata
Agreement"), pursuant to which Plata agreed at its expense, to perform a
demonstration on ten patients of both sexes from 18 to 45 years of age for 45
days, without control group, at Campus #1 University C.B.E.P., University of
Santo Domingo, Santo Domingo, Dominican Republic in accordance with a certain
agreed upon protocol (the "Protocol") to assess the efficacy of a treatment
using Reticulose incorporated in the Protocol against AIDS (the
"Demonstration").
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The Protocol provides, among other things, that the treatment consists of
Reticulose along with vitamin and protein supplements. The preliminary and final
results of the Demonstration were previously reported by the Company in its
Reports on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on July 10, 1992 and November 6, 1992.
The Demonstration was conducted on the patients from May 1992 through
July 1992. The Demonstration was supervised by Angelo A. Chinnici, M.D., and
administered by medical doctors certified to practice in the Dominican Republic.
A videotape has been produced by Plata memorializing the Demonstration, which
videotape was delivered to the Company in August 1992. On August 12, 1992 the
Company received from Plata a translated written transcript of a press
conference (the "Press Conference") called and conducted by Plata in Santo
Domingo, Dominican Republic on August 7, 1992 (the "Transcript"). The Press
Conference was held by Plata following the completion and the release of
preliminary results of the Demonstration.
The Transcript, a copy of which has been filed with the Company's
Report on Form 8-K with the Commission on August 14, 1992, provides, among other
things, statements from Dr. Joaquin Perez-Mendez, the Director of the Program
for Control of Sexually Transmitted Diseases (Procets) a governmental
organization in the Dominican Republic, who participated in the administration
of the Demonstration, Dr. Charles Dunlop, 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, the Company has not independently verified or otherwise
substantiated the accuracy or completeness of the Transcript or the Press
Articles. The Demonstration conducted by Plata was not a double-blind study.
However, 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, the Company is currently not pursuing the registration certificate in
the Dominican Republic.
The Company has also been made aware that certain newspaper articles
appeared in Spanish language newspapers (published in the Dominican Republic)
regarding the Press Conference (the "Press Articles") and interviews with Drs.
Perez-Mendez and Alcantara, which reported that the preliminary results of the
Demonstration were "very encouraging" and that the "laboratory results
subsequent to the treatment, reveal a more than 50 percent reconversion of the
cell immunological system in almost all of the patients being maintained with
relatively little favorable change in the only patient who did not complete the
treatment." According to certain of the Press Articles, certain of the doctors
attending the Demonstration stated: "Although it [(the Demonstration)] does not
have the representativeness which a study of this caliber requires, precisely
due to the small number of patients involved in the same, and above all due to
the fact that it did not rely on a control group which permits us to make some
significant comparisons, basically it is a good job of research and the results
[are] clearly excellent."
The Company received from Plata certain written information, certain
copies of which are incorporated by reference into the Company's Reports on Form
8-K delivered for filing to the Commission on July 10, and July 23, 1992 (the
"Plata Statement"). The Plata Statement reports, among other things, certain
positive preliminary results of the Demonstration (the "Results"), including the
fact that all patients showed weight gain, as well as resolution of malaise,
joint pain, and diarrhea and that those patients initially presented with
herpetic lesions showed clearing and well healed vesicles, there was a decrease
in lymphotenopathy in the majority of patients, and their oral thrush was
greatly improved.
In August 1992, the Company received from Lionel Resnick, M.D.,
F.A.A.D., F.A.C.P., Chief, Retrovirology Laboratories, Departments of
Dermatology and Pathology, Mount Sinai Medical Center of Greater Miami, in
Miami, Florida, written correspondence relating to the Demonstration generally
stating that, based upon his review of the results of the Demonstration, a
"dramatic" clinical improvement was documented over the forty-five day period of
the study and there were significant changes in laboratory surrogate markers
consistent with beneficial drug effects, although he noted that enthusiasm
regarding the Demonstration should be tempered by the lack of a homogeneous
study population and defined clinical endpoints.
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In October 1992, the Company received from Anthony J. Mangia, M.D.,
certified by Plata to be an expert in the area of AIDS research, further written
correspondence relating to the Demonstration (the "Mangia Correspondence"). As
an independent observer, Dr. Mangia visited the Demonstration site, reviewed
scientific data regarding the in vitro activity of Reticulose against various
viruses, interviewed the study physicians, examined some of the patients, and
reviewed the written results of the Demonstration. The Mangia Correspondence
basically stated that Reticulose may be an effective alternative treatment for
AIDS patients, based on a review of the data provided, that the results of the
Demonstration appear to indicate that Reticulose is tolerated well, with no
significant adverse reactions. The Mangia Correspondence also indicated that the
patients Dr. Mangia examined had experienced an improvement in symptoms and a
sense of well being by the time the Demonstration had concluded.
The Mangia Correspondence does, however, contain several criticisms of
the Demonstration, including, among other things, the brevity of the
Demonstration, the lack of stratification according to CD 4 count, the small
number of subjects, the inclusion of nutritional supplements along with the
Reticulose, and the lack of pre- and post-treatment weights and performance
status evaluation of the subjects. The Mangia Correspondence concluded that the
results of the Demonstration appear to indicate that further studies in animals
and humans appear to be warranted, and suggested that such further studies need
to be better controlled and performed on a larger scale with more sophisticated
methods than the Demonstration.
The Company received from Plata a copy of a report dated September 30,
1992, from Angelo A. Chinnici, M.D. regarding the Demonstration (the "Chinnici
Report"), with respect to the hypothesis, objectives, methodology, clinical
tracking and procedures involved in the Demonstration. Among other things, the
Chinnici Report noted that the majority of the subjects involved experienced a
dramatic clinical improvement, such as reduction in oral thrush, reduction in
herpetic lesions, and improvement in certain dermatological conditions such as
seborrheic dermatitis and eczema. The most dramatic change was observed in the
number of CD 4 and CD 8 lymphocytes, as well as in the CD 4 and CD 8 ratio,
where nine of the ten patients experienced an increase in the CD 4 cells. The
Chinnici Report further noted that the administration of Reticulose, among other
things, produced no adverse side affects, significant anemia, nor any decrease
in the subjects' white blood cell count, may cause a halt to viral replication
and may produce endogenous interferon, which improves a patient's condition.
However, The Chinnici Report also indicated, among other things, that the
Demonstration was limited in that the subjects were treated for a short period
of time and there was no control group. The Company has not independently
verified any of the statements contained in either the Mangia Correspondence or
the Chinnici Correspondence.
The Company 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, the Company believes the Demonstration will not significantly
impact the Company's ability to obtain approval for the marketing, sales or
distribution of Reticulose anywhere in the world.
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.
Argentina Agreements. On December 27, 1993, the Company entered into an
agreement with Juan Carlos Flichman, M.D., Permanent Advisor to the Argentine
Association Against Sexually Transmitted Diseases, whereby Dr. Flichman agreed
to conduct a double blind study of Reticulose in Argentina of (i) 40 patients
who have been diagnosed with acute Hepatitis "B" and (ii) 20 patients diagnosed
with Hepatitis "C" (the "Argentina Study"). The treatment of acute Hepatitis "B"
patients was expected to last for approximately 20 days, followed by a 60/90 day
observation period and of Hepatitis "C" patients was expected to last for 180
days, also followed by a 60/90 day observation period. Dr.
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Flichman, however, indicated to the Company 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, the Company 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, the
Company entered into an exclusive distribution agreement with DCT, whereby the
Company granted to DCT, subject to certain conditions precedent, the exclusive
right to market and sell Reticulose in certain South American countries,
including Argentina and other MERCOSUR States; this agreement was superseded by
another exclusive distribution agreement as of April 1, 1996. Pursuant to the
1996 Agreement, the HPV Clinical Trial commenced and is being conducted pursuant
to a protocol developed by Dr. Flichman. The purpose of the HPV Clinical Trial
is to assess the efficacy of Reticulose on HPV. The protocol calls for, among
other things, a study to be performed with clinical and laboratory follow-up on
20 patients between the ages of 18 and 50 years of age. The HPV Clinical Trial
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, the Company 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
the Company regarding the methodology and results of the HPV Clinical Trial (the
"HPV Report"). On April 22, 1996, the Company was informed by DCT that the HPV
Clinical Trial had commenced on April 15, 1996. In September 1996, the Company
received from Dr. Flichman the HPV 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 the Company, the Company delivered
to the principals of DCT Common Stock purchase options (the "DCT Options") to
acquire 2,000,000 shares of the Company's Common Stock for a period of one year
from the date of the delivery of the HPV Report, at an exercise price of $.20
per share. Pursuant to several amendments, the DCT options are now exercisable
through April 30, 1999 at an exercise price of $.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 $.20 per share.
In June 1994, DCT S.R.L. and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to certain
conditions, the exclusive right to market and sell Reticulose in Argentina,
Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT Agreement"). During the
quarter ended June 30, 1997, the Company entered into an agreement with DCT (the
"HIV-HPV Agreement") whereby the Company agreed to provide to DCT or its
assignees up to $600,000 to cover the costs of a double blind placebo controlled
study in approximately 150 patients to assess the efficacy of Reticulose for the
treatment of persons diagnosed with the HIV virus (AIDS) and HPV (the "HIV-HPV
Study"). 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 the Company for all amounts expended in connection with
the HIV-HPV Study. As of December 31, 1998, the Company 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, 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,
as of December 31, 1998, the
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Company 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 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 $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, 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 $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, the
Company has advanced approximately $79,200 which has been accounted for as
research and development expense.
In July 1998, the Company 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, the Company had
advanced approximately $55,000 for such studies, which have been accounted for
as research and development expense.
Hirschman Study. The Company in late 1995 issued a grant of $30,188 to
the Mount Sinai School of Medicine, New York City, New York, for 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 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"). The Company 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
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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, the Company has expended
approximately $365,000 to cover the costs of the Barbados Study. Based on
information received from the coordinators of the Barbados Study, the Company is
uncertain as to the costs to be incurred in connection with the Barbados Study
and has not been informed as to when further results from the Barbados Study
will be forthcoming.
In connection with the Barbados Study, in July 1998, the Company
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, the Company has advanced
approximately $5,000 for such study which has been accounted for as research and
development expense.
National Cancer Institute Study. In March 1997, the Company entered
into a Material Transfer Agreement - Cooperative Research and Development
Agreement (the "NCI Agreement") with certain governmental agencies (including
the FDA) represented by The National Cancer Institute (collectively, the
"Government Agencies"). The purpose of the NCI Agreement is for Dr. Howard
Young, Section Chief, Laboratory of Experimental Immunology, Division of Basic
Sciences, The National Cancer Institute, to determine the molecular mechanism by
which Reticulose may specifically enhance transcription of the gamma interferon
gene. The Company intends to supply Reticulose to the Government Agencies for
the purpose of research by the Government Agencies in accordance with a research
plan attached to the NCI Agreement, subject to the conditions stated in the NCI
Agreement. The NCI Agreement provides for non-disclosure by the Government
Agencies and an understanding that the Company and the Government Agencies will
enter into licenses to one another on terms to be negotiated in the future, in
the event the research produces an invention. Either the Company or the
Government Agencies may terminate the NCI Agreement upon 30 days prior written
notice to the other. The NCI Agreement states that the Government Agencies "[do]
not directly or indirectly endorse any product or service provided, or to be
provided, whether directly or indirectly related to either this [agreement] or
to any patent or other intellectual property license or agreement which
implements this [agreement] by its successors, assignees, or licensees. The
[Company] shall not in any way state or imply that this [agreement] is an
endorsement of any such product or service by the U.S. Government or any of its
organizational units or employees." Pursuant to an agreement dated March 19,
1998, the NCI Agreement has been extended for an additional one year period and
provides for the continued study of the basic mechanisms of immune responses,
the investigation of anti-tumor activity of Reticulose and its effect on
rheumatoid arthritis.
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
March 1999 the efforts of the Company or any of its representatives have
produced no material benefits to the Company regarding the Company's ability to
have Reticulose sold commercially anywhere in the world. The Company has entered
into Exclusive Distribution Agreements with five separate entities whereby the
Company has granted exclusive rights to distribute Reticulose in the countries
of China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man,
British West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant these agreements, the
distributors are obligated to cause Reticulose to be approved for commercial
sale in such countries and upon such approval, to purchase from the Company
certain minimum quantities of Reticulose to maintain the exclusive distribution
rights. The
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marketing plans of the Company for Reticulose are still dependent upon
registration of Reticulose for sale in the various jurisdictions where its
distributors are seeking approvals. See "-Exclusive Distribution Agreements."
There can be no assurance that the Company or any distributor will ever
secure registration of Reticulose and the Company to date has received no
information that would lead it to believe that it will be positioned to sell
Reticulose commercially anywhere in the world in the immediate future. To date,
the only application for registration of Reticulose which has been filed is an
application requesting that Reticulose be available for sale in Argentina, 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 the Company is awaiting the results of a test requested by the
government of Argentina which will demonstrate the effect of Reticulose on
certain animals. The Company initially targeted its sales and marketing efforts
to those countries where Reticulose was previously marketed by its prior owners
for a number of years as an anti-viral agent in the treatment of Asian
Influenza, Viral Pneumonia, Virus Infectious Hepatitis, Mumps, Encephalitis,
Herpes Simplex and Herpes Zoster. Those countries included Singapore, Hong Kong,
Malaysia, Taiwan, the Philippines and Malta. Registration of Reticulose will be
required in such countries as well as in the other countries comprising the
distributors' territories before any significant sales may begin. The
registration of Reticulose for sale in these countries has been frustrated due
to the Company's inability to obtain the registration and approval to sell
Reticulose in the Bahamas, the country of origin, and a general lack of
published data on the efficacy of Reticulose. Until Reticulose is registered and
approved for sale in the United States, in another developed country or in the
other countries included in the distributors' territories, there can be no
assurance that the Company will generate any sales of Reticulose. For the years
ended December 31, 1998, 1997 and 1996, the Company 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. See "-Testing Agreements."
COMPETITION
There are inherent difficulties for any development stage company
seeking to enter an established field, particularly in a field so capital
intensive as the manufacture and sale of pharmaceuticals. The Company, if it is
ever successful in securing FDA 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 the Company now has or will have in the foreseeable future. Accordingly,
such companies are in a far better position to compete than the Company.
Moreover, such companies may succeed in discovering, developing and marketing
anti-viral products that are more effective than Reticulose. The Company at
present is not, and there can be no assurances that the Company will become in
the foreseeable future, a significant factor in the field in which it proposes
to engage. Additionally, small "start-up" firms, such as the Company, with very
limited resources, are at a very serious competitive disadvantage against
established companies. The Company hopes to compete, however, based on cost and
the effectiveness of Reticulose.
EMPLOYEES
The Company has 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 the Company, Bernard Friedland, Chairman of the Board and a
Director of the Company, and William Bregman, Secretary-Treasurer and a Director
of the Company, each devote all of their business time to the day-to-day
business operations of the Company.
Additionally, the Company may hire, as and when needed, and as
available, such sales and technical support staff and consultants for specific
projects on a contract basis. See "Management -- Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
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CONSULTING AGREEMENTS
Leonard Cohen. In September 1992, the Company entered into a consulting
agreement with Leonard Cohen for a one-year term commencing on that date. Prior
to the execution of the agreement, Mr. Cohen had no relationship with the
Company other than as a former holder of the Company's Class C Warrants which
had been redeemed. Mr. Leonard Cohen has no relationship to Matthew Cohen, who
was one of the principals of TRM. Pursuant to the 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 $.13 per
share). As of December 31, 1998, 1,300,000 of such stock options have been
exercised for cash consideration of $156,000.
In July 1994, in consideration for the additional services provided by
Mr. Cohen in connection with the introduction and negotiation of the Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutical Corp. ("C.U.R.E."), a
Delaware corporation, which agreement was terminated as discussed below and
superseded by an agreement with Avix International Pharmaceutical Corp.
("AVIX"), the Company issued to each of Elliot Bauer and Lee Rizzuto options to
acquire an additional 5,000,000 shares of the Company common stock each at $.10
per share, exercisable through May 1, 1996 (the "Bauer and Rizzuto Options").
The Company has been informed that Messrs. Cohen and Bauer are principals of
AVIX. Through December 31, 1998, 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.
Chinnici Agreement. In July 1998, the Company entered into a consulting
agreement with Angelo A. Chinnici, M.D. for a term extending to December 31,
2000 (the "Chinnici Consulting Agreement"). The Chinnici Consulting Agreement
provides for Dr. Chinnici to provide assistance to the Company in connection
with research, development, production, marketing and sale of Reticulose.
Additionally, pursuant to the Chinnici Consulting Agreement, Dr. Chinnici has
agreed to testify before the FDA on behalf of the Company in connection with the
Company's possible application for approval of the testing of Reticulose. The
agreement provides that Dr. Chinnici will receive options to purchase 300,000
shares of Common Stock at an exercise price of $.30 per share for a period of
three years in three equal installments commencing January 1, 1999 and 2000 and
December 15, 2000, respectively.
Hirschman Agreement. In May 1995, the Company entered into a consulting
agreement with Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting services to
the Company through May 1997. The consulting services included the development
and location of pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies in such
industries.
In connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's Common Stock and the option to
acquire 5,000,000 shares of the Company's Common Stock for a period of three
years as per the vesting schedule as referred to in the agreement, at a purchase
price of $.18 per share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a person
unaffiliated with the Company, 100,000 shares of the Company's Common Stock, and
an option to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at a purchase price of $.18 per share. Pursuant to several
amendments, the exercise date of the options granted in connection with the
Company's 1995 consulting agreement with Dr. Hirschman has been extended
through March 23, 2009. As of December 31, 1998, 900,000 shares have been issued
upon exercise of these options for cash consideration of $162,000.
In March 1996 and March 1999 the consulting agreement with Dr.
Hirschman was amended 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
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ending March 23, 2009 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, 2009 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, 2009 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. 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). 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.
In October 1996, the Consulting Agreement with Dr. Hirschman was
terminated and an Employment Agreement with Dr. Hirschman became effective. See
"Management -- Employment Contracts, Termination of Employment and Change-in
Control Arrangements."
Malcolm Santer. In exchange for the services provided by Malcolm
Santer, the Company's plant manager at the Company's manufacturing facility in
Freeport, Bahamas, the Company issued to Mr. Santer: (i) 50,000 shares of Common
Stock valued at $.41 per share in February 1997, (ii) 100,000 shares of Common
Stock valued at $.24 cents per share in September 1997 and (iii) 100,000 shares
of Common Stock valued at $.21 per share in August 1998.
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 the Company and DCT, the Company granted to DCT subject to certain
conditions precedent, the exclusive right to market and sell Reticulose within
the territories of Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile (the
"DCT Agreement"). The term of the DCT Agreement was for a three-year period with
additional three-year renewal terms from the date DCT obtained all approvals,
licenses, permits and registrations (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 $.20 per Share (the "DCT Option"). The Approval has not
been obtained to date. The Company has not terminated the DCT Agreement because
the Company has not identified another source it believes will be more
successful in obtaining 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 the Human Papilloma Virus (HPV) on HIV
patients, the Company agreed that the DCT Option became exercisable.
Termination of Agreements with C.U.R.E. On April 25, 1994, the Company
entered into an Exclusive Distribution Agreement with C.U.R.E. pursuant to which
C.U.R.E. was granted exclusive rights to distribute Reticulose within the
countries of China, Japan, Thailand, Singapore, Hong Kong, Taiwan and Malaysia
the ("C.U.R.E. Territory").
The Exclusive Distribution Agreement with C.U.R.E. was for an initial
term of five years, subject to certain automatic extensions if C.U.R.E.
satisfied its minimum purchase obligations and obtained approval for one or more
countries constituting the C.U.R.E. Territory, within one year from the
Agreement. Because of its failure to obtain any approval, the Company terminated
the rights of C.U.R.E. under this agreement.
As of June 1, 1994, the Company had also entered into an Exclusive
Distribution Agreement with C.U.R.E. Pharmaceutica Central Americas Ltd., a
Delaware corporation and an affiliate of C.U.R.E. ("C.U.R.E. C/A Ltd.").
C.U.R.E. C/A Ltd. was required to purchase a minimum of 20,000 milliliters of
Reticulose during the first year
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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
the Company terminated C.U.R.E.'s exclusive distribution rights, effective May
30, 1995, following acknowledgment by C.U.R.E. and C.U.R.E. C/A Ltd. that
neither had obtained approvals.
Agreements with AVIX and Unistone. As the result of the termination of
agreements with C.U.R.E. and C.U.R.E. C/A Ltd., the Company entered into an
agreement, dated as of June 2, 1995, with AVIX, pursuant to which AVIX has been
granted the exclusive import and distribution rights during a period of five
years from the date that AVIX obtains Approval for any of the countries formerly
within the C.U.R.E. Territory (the "AVIX Far East Agreement"), and a separate
Exclusive Distribution Agreement with AVIX with respect to Mexico, which rights
previously belonged to C.U.R.E. C/A Ltd. AVIX has informed the Company that it
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. The Company has been informed by AVIX that certain of
the principals of AVIX (including Leonard Cohen who is an officer and
shareholder thereof) were formerly principals of C.U.R.E. The terms of the
agreement with AVIX are substantially similar to the agreements with C.U.R.E.
and C.U.R.E. C/A Ltd. except that the territory in the AVIX Agreement does not
include Thailand, Malaysia and Singapore but does include Macao. The Approval
has not been obtained to date.
On December 28, 1995, the Company entered into a separate agreement
with AVIX and Beijing Unistone Pharmaceutical Co., Ltd. ("Unistone"), a company
organized under the laws of the People's Republic of China, with headquarters in
Beijing, China (the "Unistone-AVIX Agreement"). In connection with the
Unistone-AVIX Agreement, the Company and AVIX agreed to utilize the services of
Unistone for the purposes of securing approval to test Reticulose in China, with
the intent of gaining Approval for China. Under the Unistone-AVIX Agreement,
during a period of three years commencing on the date of Approval for China,
Unistone shall be the exclusive distributor and have a limited trademark license
for Reticulose in China. Unistone is obligated to purchase not more than 100,000
doses of 0.5 ml each in bulk form or 20,000 ampules of 0.5 ml doses for purposes
of seeking Approval for China, at least 1,000,000 doses by the first anniversary
of Approval for China, at least 3,000,000 doses during the next 12-month period,
and at least 10,000,000 doses during each subsequent 12-month period, all at a
purchase price of U.S. $1.00 per 0.5 ml dose shipped in bulk, or U.S. $1.26 per
dose if ordered in prepackaged, four-dose 2 ml ampules. This purchase price is
to be reduced by an aggregate of $100,000 on account of a fee to Unistone for
trials and testing of Reticulose for Approval for China. If these annual minimum
purchase requirements are satisfied, the period of the agreement is
automatically extended through the eighth anniversary of the date of Approval.
There are no minimum purchase requirements to be met by AVIX under the
AVIX-Unistone Agreement. In addition, AVIX is obligated to pay Unistone $50,000
for its services in seeking Approval for China. As of December 31, 1997, the
Company had given Unistone, for testing purposes, 1,600 ampules of Reticulose
without charge. Unistone has not fulfilled its obligation under the agreement to
obtain Approval before April 1996. The Company has not terminated the
AVIX-Unistone Agreement because the Company has not identified another source it
believes will be more successful in obtaining Approval.
Under a separate agreement between the Company and AVIX, AVIX shall
receive a royalty equal to 12.5% of the total sales of Reticulose in China,
Japan, Taiwan, Hong Kong and Macao so long as the Company owns any right to
Reticulose. AVIX also is entitled to certain payments by the Company in the
event that the Company sells manufacturing rights for Reticulose.
In July, 1996, the AVIX Far East Agreement was amended to grant AVIX
the additional country of Macao and reflect AVIX's waiver of its rights with
respect to the countries of Singapore, Thailand and Malaysia, as well as AVIX's
penalty rights under the AVIX Far East Agreement that would have vested in the
event that the Company could not produce sufficient quantities of Reticulose
within certain periods of time. The penalty rights were waived, in part, because
AVIX has not yet generated a sufficient demand for Reticulose within its
distribution territory.
The period of time during which AVIX must obtain Approval for any of
the countries in its territory under the AVIX Far East Agreement was extended to
June 1, 1997, subject to AVIX continuing to pay $8,000 per month to the Company.
The Company has not received the $8,000 monthly payment since November, 1996;
the Company has received a total of $40,000 in payments from AVIX. Pursuant to
recent discussions with AVIX regarding the AVIX Far East Agreement, the Company
and AVIX have agreed that, in lieu of the $8,000 monthly payment discussed
above,
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<PAGE>
AVIX will fund studies assessing the efficacy of Reticulose that may be
performed in Mexico. If AVIX is complying with the AVIX Far East Agreement,
including certain annual minimum purchase requirements after Approval is
obtained (see below) of which there can be no assurance, the term is
automatically extended for five additional five year terms. The agreements with
AVIX further provide that the results of all studies, research data,
documentation and research publications regarding Reticulose in which AVIX has
an interest are owned by the Company.
The separate agreement for Mexico requires Approval within one year and
has minimum annual purchase requirement commencing at 20,000 milliliters. The
Company extended the period for AVIX to secure Approval from Mexico because
management of the Company 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 the Company 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, the Company has granted to
Commonwealth, subject to certain conditions precedent, the exclusive right to
market and sell the Company's pharmaceutical drug Reticulose within the
territories of the Channel Islands, The Isle of Man, the British West Indies,
Jamaica, Haiti, Bermuda and Belize (collectively, the "Commonwealth
Territories"), and the right (not exclusive) to import, warehouse, market, sell
and distribute Reticulose within the territory of Saudi Arabia. The term of the
Commonwealth Agreement as to the Commonwealth Territories is for successive
three year periods (each extension period being with the prior mutual consent of
the parties) from the date Commonwealth obtains Approval for any one of the
Commonwealth Territories. The Approval has not been obtained to date.
Pursuant to the Commonwealth Agreement, Commonwealth purchased from the
Company 1,500 ampules of Reticulose at a purchase price of $12.00 per ampule (2
milliliters per ampules) and delivered to the Company $5,000 as a signing
payment (for a total payment of $23,000). Commonwealth has advised the Company
that to date it has sold approximately $1,200 worth of Reticulose in the
Commonwealth Territories. Further, pursuant to the Commonwealth Agreement, in
the event Approval for any of the Commonwealth Territories is obtained,
Commonwealth is obligated to purchase from the Company $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 the
Company $225,000 worth, $822,000 worth and $1,914,000 worth of Reticulose,
respectively, during the first three years from the date of Approval. In
addition, pursuant to the Commonwealth Agreement, the Company has granted to
Commonwealth the right to acquire 3,000,000 shares of the common stock at a
purchase price of $.25 per share at any time and from time to time for a period
of one year from the date that certain tests are conducted and a paper is
published with respect to such test of Reticulose. the Company has been informed
by Commonwealth that certain of the affiliates of Commonwealth were formally
affiliated with Plata.
Agreement with Dormer Laboratories Inc. On November 9, 1993, the
Company entered into an agreement by which it granted to Dormer Laboratories
Inc., a Canadian corporation ("Dormer"), the exclusive rights to import,
warehouse, market, sell and distribute Reticulose within Canada for a period of
five years from the grant of import approval for Canada, provided that Dormer
meets certain Reticulose purchase minimums. Because Approval for Canada was not
obtained by November 9, 1995, the Company had the right to terminate this
agreement on 90 days prior written notice to Dormer. Upon notice by the Company,
the agreement was terminated in August 1998.
14
<PAGE>
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.
Anti-viral agent: An active force or substance capable of weakening or
abolishing the action of a virus.
Carboxyl: The characteristic chemical group of certain organic acids.
Cell: A minute structure, the living, active basis of all plant
and animal organization, composed of a mass of protoplasm,
enclosed in a delicate membrane and containing a nucleus.
HIV: Human Immunodeficiency Virus.
HPV: Human Papilloma Virus (genital warts).
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.
15
<PAGE>
Nucleic acids: Ribonucleic acid (RNA) or deoxyribonucleic (DNA)
protein molecules which determine genetic memory of cells.
These molecules are essential to life.
Papilloma Virus: A circumscribed benign epithelial (nipple, or the
thin skin covering the nipple) tumor projecting from the
surrounding surface; more precisely, a benign epithelial
neoplasm consisting of villous or arborescent outgrowths of
fibrovascular strands covered by neoplastic cells.
Peptide: A compound of two or more amino acids in which the carboxyl
group of one is united with the amino group of the other,
with the elimination of a molecule of water, thus forming a
peptide bond.
Reticulose: An anti-viral peptide-nucleic acid complex preparation,
developed by Vincent M. LaPenta, M.D. specifically to
stimulate the reticulo-endothelial system. (Sources: E.
Podolsky, M.D., "The Reticulo-Endothelial System and Its
Activation by Non-Specific Protein Therapy," The Journal of
Medicine, October 1938; Physicians' Desk Reference to
Pharmaceutical Specialists and Biologicals (Medical
Economics, Inc., Oradell, N.J. c 1961))
Subcutaneous: Beneath the skin; hypodermic.
Viral replication: The duplication of a virus by itself within the body cell
by breaking down the RNA or DNA of the host cell and using
it to make a replicate of itself, while killing the host
cell.
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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 6,100 square feet for executive
offices, including research laboratory space, at 200 Corporate Boulevard South,
Yonkers, New York from an unaffiliated third party (the "Yonkers Lease"). The
term of the Yonkers Lease is five years through April 2002 and the Company's
annual rental obligation under the Yonkers Lease is approximately $85,500.
The Company currently maintains corporate offices at 1250 East
Hallandale Beach Boulevard, Hallandale, Florida 33009, pursuant to a three year
lease agreement, at approximately $14,000 annually. The Bahamian manufacturing
facility, which was acquired on December 16, 1987, is located in Freeport,
Bahamas and consists of a 29,242 square foot site containing a one-story
concrete building of approximately 7,300 square feet and is equipped for all
phases of the testing, production, and packaging of Reticulose. The Bahamian
facility is currently being used to store and produce inventory for testing
purposes.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any material litigation, nor,
to the knowledge of management, is any such litigation currently threatened.
During 1989, the Commission conducted an informal inquiry into certain
of the Company's prior disclosure documents, including its original prospectus,
press releases and annual reports. On December 14, 1989, the Commission, as
plaintiff, filed a civil complaint-for permanent injunction and other equitable
relief (the "Complaint") in the United States District Court, Southern District
of Florida, Miami Division, against the Company, its then President, Bernard
Friedland, and its then Secretary-Treasurer, William Bregman. The
16
<PAGE>
Complaint, a copy of which is filed as an exhibit to the Company's current
report on Form 8-K dated December 14, 1989 which was filed with the Commission
(the "December 1989 Form 8-K"), alleged violations of Sections 5(b)(2) and 17(a)
of the Securities Act of 1933, as amended (the "Securities Act"), Sections l0(b)
and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and Rules l0b-5, 12b-20, 15d-1 and 15d-13 promulgated thereunder.
The Company, Bernard Friedland and William Bregman each, without
admitting or denying the allegations of the Complaint, consented to the entry of
an injunction. Copies of the consents of the Company, Bernard Friedland and
William Bregman are filed as exhibits to the December 1989 Form 8-K. A permanent
injunction was entered in form and also attached as an exhibit to the December
1989 Form 8-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1998,
no matters were submitted to a vote of security holders of the Company.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal United States market in which the Common Stock is traded
is the over-the-counter market. The following table shows the range of reported
low bid and high bid quotations for the Common Stock for each full quarterly
period during the Company's two recent fiscal years ended December 31, 1997 and
1998, and for the portion of the quarter ended March 24, 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 (per share) High Bid (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
January 1, 1999 through March 24, 1999........................0.17 0.35
</TABLE>
The approximate number of holders of record of the Common Stock as of
March 24, 1999 is 2,768 inclusive of those brokerage firms and/or clearing
houses holding shares of Common Stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
The Company has not declared or paid any dividends on its shares of
Common Stock.
For a description of the Company's sale on November 16, 1998 of the
Company's ten-year 7% Convertible Debenture due October 31, 2008 (the "1998
Debenture") and the Company's issuance to certain investors on December 22, 1998
of 4,917,276 shares of Common Stock, and in connection with each transaction,
the Company's issuance of warrants to purchase shares of the Common Stock, see
ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - CAPITAL
RESOURCES."
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data of the Company as of
and for the years ended December 31, 1994, 1995, 1996, 1997, and 1998 have been
derived from the audited financial statements of the Company. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this report.
Selected Statement of Operations Data
<TABLE>
<CAPTION>
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 $0 $0 0 $0
============ ============ ============ ============ ============
Weighted Average Number of Common
Shares Outstanding 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
============ ============ ============ ============ ============
</TABLE>
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<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 2,416 2,512 2,671 2,779 2,964
value $.00001 authorized
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 (3,294,913) (3,696,797) (4,851,537) (8,993,266) (12,978,059)
stage
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
============ ============ ============ ============ ============
- ---------------------
See notes to consolidated financial statements.
</TABLE>
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20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and the financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Report.
RESULTS OF OPERATIONS
During the fiscal years ended December 31, 1998 and 1997, the Company
incurred losses of $3,984,793 and $4,141,729, respectively, compared to
$1,154,740 in 1996. The Company'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 employment of Shalom Z. Hirschman, M.D.
as President and Chief Executive Officer of the Company, 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 the Company'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 the Company'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, the Company collected $0 from the sale of
territorial rights compared to $32,000 in 1996.
There can be no assurance that Reticulose will ever be sold anywhere in
the world.
LIQUIDITY
As of December 31, 1998, the Company had current assets of $1,795,014,
compared to $3,260,930 at December 31, 1997. The Company 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, the Company used cash of $3,364,528 for operating
activities, as compared to $2,179,780 in 1997 and $665,682 in 1996. During 1998,
the Company (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, the
Company expended approximately $675,000 for leasehold improvements and furniture
and equipment at the Company's Yonkers, New York office.
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. The Company also acquired
property and equipment for its New York laboratory. See "Capital Resources" for
a discussion of cash flows provided by financing activities.
Until Reticulose is registered for sale in a developed or developing
country or in one or more of its distributors' territories, sales of Reticulose
are not expected to generate significant revenues. There can be no assurances
that Reticulose will be available for sale in any developed or developing
country or, even if available, that it would generate significant revenues. In
June 1995, the Company received correspondence from the FDA which stated, among
other comments, that the Company's prior submissions to the FDA did not provide
an adequate response to the FDA's earlier request for preclinical information
and accordingly the Company's IND was "inactivated." The Company has taken no
21
<PAGE>
action with regard to such deficiency letters. Although the Company presently
intends to prepare and file a new IND for Reticulose with the FDA, there can be
no assurances as to the timing of such filing, if at all. Because the Company is
only at the preliminary stages of its efforts with regard to the new IND, it is
impossible to determine whether the data from any ongoing studies will be able
to be used by the Company in connection with the new IND or if the new IND will
ever be approved by the FDA. FDA approval to begin human clinical trials of
Reticulose will require significant cash expenditures, the amount of which is
not currently determinable. See ITEM 1. DESCRIPTION OF BUSINESS GOVERNMENT
REGULATION; THE INVESTIGATIONAL NEW DRUG APPLICATION PROCESS.
The Report of the independent certified public accountants of the
Company on the Company's Consolidated Financial Statements included in this
Report includes an explanatory paragraph in Note 2 to the Consolidated Financial
Statements stating that the Company's ability to continue operations is
dependent upon its continued sale of its securities for funds to meet its cash
requirements, which factors raise substantial doubt about the Company's ability
to continue as a going concern. Further, the accountant's report does not
include any adjustment that might result from the outcome of this uncertainty.
The Company has no immediate plan to issue any securities.
CAPITAL RESOURCES
The Company in the past has been dependent upon sales of shares of its
Common Stock and upon the exercise of its warrants issued in the Company's
initial public offering in 1986, all of which have expired and, since the
expiration of the warrants, the Company has been dependent upon the proceeds
from the continued exercise of outstanding stock options for the funds required
to continue operations at present levels and to fund further research and
development activities.
In February 1997 and October 1997, in order to finance research and
development, the Company 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 the Company 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 the Company, $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, the Company
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 $.288, $.576, $.864, $.20, $.23 and $.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.
22
<PAGE>
Based on the terms for conversion associated with the February
Debenture and the October Debenture, there were intrinsic values associated with
the beneficial conversion feature of $413,793 and $1,350,000, respectively.
These amounts have been fully amortized to interest expense with a corresponding
credit to additional paid-in capital.
In February 1998, the Company entered into that certain Concurrent
Agreement with DCT, an Argentine corporation, whereby the Company 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, the Company has advanced approximately $50,000
for this study, which has been accounted for as research and development
expense. In May 1998, the Company entered into the Rheumatoid Arthritis
Agreement with DCT whereby the Company 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, the Company has advanced
approximately $79,200 which has been accounted for as research and development
expenses. In July 1998, the Company 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, the Company had
advanced approximately $55,000 for such studies, which have been accounted for
as research and development expense.
In November 1998 the Company 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 the above
estimated amount, depending upon factors that cannot be predicted by the Company
at this time, including, among others, the future market price of the Common
Stock.
In connection with the issuance of the 1998 Debenture, the Company
issued to RBB two warrants to purchase Common Stock (the "1998 Debenture
Warrants"), 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 $.20 and $.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 March 24, 1999, none of the 1998
Debenture Warrants have been exercised. If the Company's registration statement
covering the resale of the shares underlying the 1998 Debenture and the 1998
Debenture Warrants is not declared effective by the Commission on or before
April 13, 1999, the Company must pay to RBB a graduated sum (depending on the
effective date of the registration statement) of no more than $100,000.
In December 1998 the Company 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 (collectively, the
"Purchase Warrants"), 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 $102,500 was received in January
1999.
Two of the Purchase Warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of Common Stock at exercise prices of $.2040 and
$.2448 per share, respectively. The other two Purchase Warrants entitle the
holders thereof to purchase 200,000 and 200,000 shares of Common Stock at
exercise prices of $.2040 and $.2448 per share, respectively. All four Purchase
Warrants are exercisable at any time and from time to time until December 31,
2003. Each Purchase 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 Purchase Warrant as the excess of the market value of shares
of Common Stock over the warrant exercise price bears to that market value. Each
Purchase 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 Purchase Warrants have been
exercised. If the Company's registration statement covering the resale of the
shares acquired by RBB in December 1998 and the shares underlying the Purchase
Warrants is not declared effective by the Commission on or before May 21, 1999,
the Company must pay to RBB a graduated sum (depending on the effective date of
the registration statement) of no more than $100,000.
23
<PAGE>
If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by the Company from the exercise of options
and warrants, potential grants and/or additional equity, the availability of
which funds there can be no assurance.
The Company 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 the Company'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
Common Stock purchase options or warrants are exercised. If all of the
outstanding Debenture Warrants, the Purchase Warrants, the 1997 Warrants and
Options are exercised, the Company will receive net proceeds of approximately
$8.4 million. Those proceeds will contribute to general and administrative and
working capital and will permit the Company to substantially increase its budget
for research and development and clinical trials and testing and to operate at
significantly increased levels of operation, assuming Reticulose receives
approvals and prospects for sales increase to justify such increased levels of
operation, of which there can be no assurance. However, there can be no
assurance that any additional warrants or options will be exercised. 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 the Company, in
order for the Company to achieve the level of operations contemplated by
management, management anticipates that it will have to limit intentions to
expand operations beyond current levels. The Company 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 the Company's distributors will
ever obtain regulatory approvals to test or market Reticulose in any territory.
In the event that financing is not available, in order to continue operations,
management anticipates that they will have to defer their salaries. Management
does not believe that, at present, debt or equity financing will be readily
obtainable on favorable terms unless and until FDA approval for Phase I clinical
testing is granted or comparable approval is obtained from another developed or
developing country. Because of the uncertainties involved in the process of
gaining approval for commercial drug use on humans, no assurance can be given
that the Company will be able to sell Reticulose.
The Company does not have a patent for Reticulose, although the Company
has two patents for the use of Reticulose as a treatment. In addition, the
Company 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 the Company. There can be no assurance that the
Company will obtain such a patent or, if obtained, that it will be enforceable.
The Company has retained patent counsel for the purpose of pursuing additional
patent protection for Reticulose. However, there is no certainty that patents
will be granted, or if granted, that the patents will be sustained if judicially
attacked, and, if declared valid, that the patents, in fact, will operate to
protect the Company from others copying Reticulose. The Company has relied upon
laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect its rights to Reticulose and the processes
for its manufacture, but there can be no assurance that such efforts and
procedures will continue to be successful and protect the Company from any
competition in the future.
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 be unable to recognize date information
correctly when the year changes to 2000. The Year 2000 issue poses risks for the
Company's information technology systems.
The Company's information technology systems are based upon software
licenses and software maintenance agreements with third party software
companies. Based upon the Company's internal assessments and communications with
its software vendors, all of the software utilized by the Company is Year 2000
compliant software. The Company has used internal personnel to test its software
systems for Year 2000 compliance and such tests yielded positive results.
24
<PAGE>
the Company will continue to monitor its Year 2000 readiness. Also, the Company
does not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to the Company by other manufacturers.
Based on the foregoing, the Company 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 the Company's consolidated financial
position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS.
The Independent Auditors' Report, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company, and further
information concerning them, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <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 the Company since October 1996, was Director of the Division of
Infectious Diseases and Professor of Medicine at Mount Sinai School of Medicine,
New York, New York, from May 1969 until October 1996.
Bernard Friedland, Chairman of the Board of the Company since May 1987,
Director of the Company since July 1985 and President and Chief Executive
Officer of the Company from September 1985 until October 1996, was employed by
Key, Inc. for 29 years, until March 1, 1986, in the Research and Development and
Quality Assurance Departments in Pharmaceuticals, Pharmacology, and
Canceantimetabolites.
William Bregman, Director of the Company since July 1985 and
Secretary-Treasurer of the Company since September 1985, was Vice President of
the Company from September 1985 until May 1987 and Vice President and Secretary
of LTD from August 1984 until July 1989.
Louis J. Silver, Director of the Company since May 1992, has been
self-employed as a free-lance bookkeeper and auditor since 1985. Mr. Silver
previously served as a member of the Board of Directors of the Company during
the periods from May 1987 to July 1987.
25
<PAGE>
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" of the Company as those terms as defined in the rules and regulations
promulgated under the Securities Act. 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
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 the Company does not have a class of securities registered
under Section 12 of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the Board of Directors of the Company attended, which has not in fact been paid
within at least the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, no director, officer or employee of the
Company 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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 ---- ---------- ------- ------- ---------- ------
Officer of the Company since 1997 $325,000 $43,000 $14,604 0 $3,956
October 1996 and consultant ---- ---------- ------- ------- ---------- ------
to the Company from May 1996 $68,750(2) $0 $ 4,825 15,000,000 $4,316
24, 1995 until October 1996. ---- ---------- ------- ------- ---------- ------
Bernard Friedland, President 1998 - - - - -
and Chief Executive Officer ---- ---------- ------- ------- ---------- ------
of the Company through 1997 - - - - -
October 13, 1996 ---- ---------- ------- ------- ---------- ------
1996 $35,000 - $6,500 - -
---- ---------- ------- ------- ---------- ------
</TABLE>
(1) Other Annual Compensation for Dr. Hirschman and Mr. Friedland includes
medical insurance premiums paid by the Company, and the aggregate
incremental cost to the Company of 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, the
Company 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 exercisability of which is subject to
conditions precedent. No other stock options were granted to the named executive
officers during 1998. Other than options to acquire an additional 16,100,000
shares of Common Stock underlying Dr. Hirschman's options, all of which options
are currently exercisable, the Company currently has outstanding (i) three 1997
Warrants which each entitle the holder to
26
<PAGE>
purchase 178,378 shares of Common Stock at exercise prices of $.288, $.576 and
$.864 per warrant share, respectively, (ii) three 1997 Warrants which each
entitle the holder to purchase 600,000 shares of Common Stock,$.20, $.23 and
$.27 per warrant share, respectively, (iii) two Debenture Warrants which entitle
the holder to purchase 375,000 and 375,000 shares of Common Stock at exercise
prices of $.20 and $.24 per warrant share, respectively, (iv) four Purchase
Warrants which entitle the holder to purchase 983,394, 983,394, 200,000 and
200,000 shares of Common Stock at exercise prices of $.2040, $.2448, $.2040, and
$.2448 per warrant share, respectively, and (iv) options to acquire 14,365,415
shares of the Common Stock, none of which are beneficially owned by directors,
officers or employees of the Company.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company'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 any 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 $.18 per share, 4,000,000; shares of Common Stock
at $.19 per share; 4,000,000 shares of Common Stock at $.27 per share; and
4,000,000 shares of Common Stock at $.36 per share, all of which are
currently exercisable. 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 the
Company of at least $15 million.
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 the Company and Shalom Z. Hirschman, M.D. (the "Employment
Agreement"), the Company employs Dr. Hirschman, on a full business time basis as
its President, Chief Executive Officer, Chief Scientific Officer and Chairman of
its Scientific Advisory Board, with duties including supervising day-to-day
operations of the Company, including management of scientific, medical,
financial, regulatory and corporate matters, establishing appropriate
laboratory, executive and other facilities for the Company, and raising
additional capital for the Company. The Employment Agreement includes an
agreement by the Company that Dr. Hirschman will be nominated as a Director of
the Company for the duration of Dr. Hirschman's employment by the Company under
the 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 the Company 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 the
Company "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.
27
<PAGE>
Hirschman may be canceled by the Company. In the event the Employment Agreement
is terminated by Dr. Hirschman "for cause" (as defined therein), the Company 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 the
Company 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 the Company, (b) lease or
purchase for Dr. Hirschman, at his discretion, an automobile selected and to be
used by him, having a list price not in excess of $40,000, and pay for all gas,
oil, repairs and maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile, (c) reimburse Dr. Hirschman for
all of his proven expenses incurred in and about the course of his employment
that are deductible under the current tax law, including, among other expenses,
his license fees, membership dues in professional organizations, subscriptions
to professional journals, necessary travel, hotel and entertainment expenses
incurred in connection with overnight, out-of-town trips that contribute to the
benefit of the Company in the reasonable determination of Dr. Hirschman, and all
other expenses that may be pre-approved by the Board of Directors of the
Company, and (d) provide not less than four weeks paid vacation annually and
such paid sick or other leave as the Company provides to all of its employees.
The Employment Agreement also provides for the payment of $100,000 to Dr.
Hirschman on the date an IND number is obtained by the Company 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 the Company.
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 the
Company or any of its other employees, to bind the Company, to release or
discharge any debt due the Company unless the Company has received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
the Company's assets.
Dr. Hirschman has agreed that he will assign to the Company all patents
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 the Company "for cause" or by Dr. Hirschman otherwise
than "for cause," as specified in that agreement, he will not, directly or
indirectly, compete with the Company for three years after termination or
solicit the Company's employees to leave the service of the Company for one year
after termination.
Pursuant to the execution of the Employment Agreement, the Company
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 $.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 the Company of at least $15 million.
28
<PAGE>
PERFORMANCE GRAPH
Securities and Exchange Commission rules require that a line graph
performance presentation be provided comparing cumulative total shareholder
return with a performance indicator of a broad market index and a nationally
recognized industry index. The graph and table set forth below compare the
cumulative total shareholder return on the Company's Common Stock for 1994
through 1998 with the Dow Jones Pharmaceuticals Index and the Dow Jones Equity
Market Index for the same period. The graph and table assume an investment of
$100 in the Common Stock and each index on December 31, 1993 and the
reinvestment of all dividends.
[GRAPH OMITTED]
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
12/93 12/94 12/95 12/96 12/97 12/98
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
ADVANCED VIRAL RESEARCH CORP. 100 625 533 1,000 625 729
DOW JONES PHARMACEUTICALS 100 115 188 236 366 545
DOW JONES EQUITY MARKET 100 101 139 172 229 294
</TABLE>
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth as at March 24, 1999, certain information
regarding the beneficial ownership of the Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of the Company's
outstanding voting securities; (ii) each of the Company's directors and named
executive officers; and (iii) all directors and officers of the Company as a
group:
<TABLE>
<CAPTION>
Shares of Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1) Percent Owned
- ------------------------------------ ---------------------- -------------
<S> <C> <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%
RBB Bank Aktiengeshellshaft 42,416,667 (6) 12.34%
Burgring 16
8010 Graz, Austria
</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 March 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 March 24,
1999.
(2) Includes shares which may be acquired pursuant to options to purchase
Common Stock exercisable within 60 days after March 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 the Company. 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 the
Company and that Dr. Hirschman shall vote all shares of the Common Stock
owned or voted by him in favor of Messrs. Friedland and Bregman as
directors of the Company. See "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.
30
<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.
(6) Includes approximately 42,416,667 shares issuable upon the conversion of
the 1998 Debenture (which amount may fluctuate depending upon, among other
things, the future market price of the Common Stock) and 750,000 shares
of Common Stock which may be acquired pursuant to the 1998 Debenture
Warrants which are exercisable within 60 days after March 24, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the past three fiscal years, there were no material transactions
between the Company and any of its officers or directors which involved $60,000
or more.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheet, December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 and from Inception (February 20,
1984) to December 31, 1998
Statements of Stockholders' Equity from Inception (February 20,
1984) to December 31, 1998
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 and from Inception (February 20,
1984) to December 31, 1998
Notes to Consolidated Financial Statements
2. Exhibits:
See Exhibits Index. The Exhibits listed in the accompanying Exhibits
Index are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K during and after the fiscal quarter ended December 31,
1998:
1. Report dated November 24, 1998, including Item 5, regarding the
Convertible Debenture to RBB Bank AG dated November 16, 1998. No financial
statements were filed.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 24, 1999 ADVANCED VIRAL RESEARCH CORP.
(Registrant)
By:/s/ Shalom Z. Hirschman, M.D.
------------------------------------
Shalom Z. Hirschman, M.D., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 24, 1999 By:/s/ Shalom Z. Hirschman, M.D.
------------------------------------
Shalom Z. Hirschman, M.D., President
and Chief Executive Officer and Director
Date: March 24, 1999 By:/s/ Bernard Friedland
-------------------------------------
Bernard Friedland, Chairman of the Board
and Director
Date: March 24, 1999 By:/s/ William Bregman
------------------------------------
William Bregman, Secretary -
Treasurer, Director, Principal
Financial and Accounting Officer
Date: March 24, 1999 By:/s/ Louis J. Silver
------------------------------------
Louis J. Silver, Director
32
<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-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets, December 31, 1998 and 1997 F-2
Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 and from
Inception (February 20, 1984) to December 31, 1998 F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 1998 F-4
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-11
Notes to Consolidated Financial Statements F-12
</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-1
<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-2
<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 $ (.00) $ (.00) $ (.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-3
<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-4
<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-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, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------- -------- ----------- -------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
------------- -------- ----------- -------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------- -------- ----------- -------------
Balance, December 31, 1993 $ 236,276,991 $ 2,363 $ 3,416,070 $ (2,854,076)
------------- -------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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-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, 1995 251,181,774 $ 2,512 $ 4,475,875 $ - $ (3,696,797) $ -
Issuance of common stock, exercise of options $.05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
------------ ------ --------- --------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
------------ ------ --------- --------- ---------- --------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
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-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> <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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-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)
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-23
<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-24
<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-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)
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-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 (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-27
<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-28
<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-29
<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-30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit 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 the Company and American Stock Transfer and Trust Company. (1)
4.4 Forms of Common Stock Options and Agreements granted by the Company to TRM Management
Corp. (5)
4.5 Form of Common Stock Option and Agreement granted by the Company to Plata Partners Limited
Partnership. (11)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common Stock granted by the
Company to Leonard Cohen. (6)
4.7 Addendum to Agreement granted by the Company to Shalom Z. Hirschman, M.D. dated March 24,
1996. (10)
4.8 Securities Purchase Agreement dated November 16, 1998, by and between the Company and RBB
Bank AG. (12)(xv)
4.9 7% Convertible Debenture dated November 16, 1998. (12)(xv)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $.20 per share.
(12)(xv)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $.24 per share.
(12)(xv)
4.12 Securities Purchase Agreement dated December 22, 1998, by and between the Company and various
purchasers. (13)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common stock of the Company at
$.2040 per share. (13)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common stock of the Company at
$.2448 per share. (13)
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor of the Company dated
November 16, 1987. (11)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique Medical Actuel and the
Company. (3)
10.3 Letter, dated March 15, 1991 to the Company from Health Protection Branch. (3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and the Company. (14)(i)
<PAGE>
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and the Company. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell Inc. and the Company. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and the Company. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between Lionel Resnick, M.D. and the
Company. (14)(ii)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and the Company. (11)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and
the Company. (14)(iii)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and the Company. (14)(iv)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and the Company,
as amended. (14)(v)
10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel
Islands and the Company. (14)(vi)
10.14 Agreement dated May 24, 1995 between the Company and Deborah Silver. (9)
10.15 Agreement dated May 29, 1995 between the Company and Shalom Z. Hirschman, M.D. (9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International
Pharmaceutical Corp. and the Company. (11)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals. (11)
10.18 Exclusive Distributorship & Limited License Agreement, dated
December 28, 1995, between AVIX International Pharmaceutical Corp.,
Beijing Unistone Pharmaceutical Co., Ltd. and the Company.
(14)(vii)
10.19 Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical
Corp. and the Company. (14)(vii)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and the Company. (14)(viii)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between the Company and Shalom
Z. Hirschman, M.D. (10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International Pharmaceutical Corp.
and the Company. (14)(ix)
10.23 Employment Agreement, dated October 17, 1996, between the Company and Shalom Z. Hirschman,
M.D. (14)(x)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and the
Company. (11)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between the Company and RBB
Bank AG. (14)(xi)
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. (14)(xii)
<PAGE>
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between the Company and RBB
Bank AG. (14)(xiii)
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 the Company and
Shalom Z. Hirschman, M.D.(14)(xiv)
10.30 Consulting Agreement between the Company and Angelo Chinnici, M.D dated July 1, 1998. *
10.31 Consulting Agreement between the Company and GloboMax LLC dated January 18, 1999. *
21 Subsidiaries of Registrant: Advanced Viral Research, Ltd., a Bahamian corporation.
27 Financial Data Schedule for the Company as of and for the year ended December 31, 1998. *
</TABLE>
* Filed herewith.
1. Documents incorporated by reference herein to certain exhibits the
Company's Registration Statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on March 19,
1990.
2. Documents incorporated by reference herein to certain exhibits to the
Company's Registration Statement on Form S-18, File No. 33-2262-A, filed
with the Securities and Exchange Commission on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
4. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
6. Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.
8. Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to the
Company's report on Form 10-QSB for the period ended March 31, 1996.
11. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996.
12. Documents incorporated by reference herein to certain exhibits to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997.
13. Documents incorporated by reference herein to certain exhibits the
Company's Registration Statement on Form S-1, File No. 333-70523, filed
with the Securities and Exchange Commission on January 13, 1999.
14. Incorporated by reference herein to the Company's Reports on Form 8-K and
Exhibits thereto as follows:
(i) A report on Form 8-K dated January 3, 1992.
(ii) A report on Form 8-K dated September 14, 1993.
(iii) A report on Form 8-K dated April 25, 1994.
(iv) A report on Form 8-K dated June 3, 1994.
(v) A report on Form 8-K dated June 17, 1994.
(vi) A report on Form 8-K dated October 25, 1994.
(vii) A report on Form 8-K dated December 28, 1995.
(viii) A report on Form 8-K dated April 22, 1996.
(ix) A report on Form 8-K dated July 12, 1996.
(x) A report on Form 8-K dated October 17, 1996.
<PAGE>
(xi) A report on Form 8-K dated February 21, 1997
(xii) A report on Form 8-K dated March 25, 1997.
(xiii) A report on Form 8-K dated September 26, 1997
(xiv) A report on Form 8-K dated July 21, 1998
(xv) A report on Form 8-K dated November 24, 1998.
CONSULTING AGREEMENT
--------------------
This Consulting Agreement made as of the 1st day of July, 1998 by and
between Advanced Viral Research Corp., a Delaware corporation, with offices
located at 200 Corporate Boulevard South, Suite 4, Yonkers, New York 10701 (the
"Company") and Angelo A. Chinnici, residing at 601 Sunset Avenue, Asbury Park,
New Jersey 07712 (the "Consultant").
W I T N E S S E T H:
--------------------
A. The Company is involved in research and development with respect to
the drug Reticulose and related pharmaceutical products;
B. The Consultant is a licensed physician who has practiced his
profession in several jurisdictions including ____________________ and
________________, from time to time, has had experience in using Reticulose with
respect to the treatment of patients.
C. The Company seeks to obtain the expertise of the Consultant as an
advisor and consultant, from time to time to perform services as more
particularly described herein; and
D. Consultant is willing to serve as Consultant to the Company in
accordance with the provisions of this Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Terms of Agreement. This Agreement shall commence as of the date
hereof and shall continue until December 31, 2000 unless sooner terminated in
accordance with the provisions of this Agreement.
2. Responsibilities of Consultant
2.1 Subject to the terms and conditions hereinafter set forth,
the Company hereby retains the Consultant and the Consultant hereby agrees, to
use his expertise to render assistance to the Company in connection with the
research, development, production, marketing and sale of Reticulose throughout
the world. At the request of the Company from time to time, the Consultant will
travel to those locations within or without the United States where the Company,
directly or indirectly, is involved in the research, manufacturing or testing of
Reticulose. including those locations in which the Company is conducting
clinical trials. Consultant shall devote such time as is necessary and required
to carry out his duties in assisting die Company hereunder. Consultant shall not
have authority to execute any agreements or make any commitments on behalf of
the Company, but Consultant may advise others that he is engaged as a consultant
for the Company. The Consultant shall not be an employee or agent of the
Company; all services will be rendered as an independent contractor. Consultant
shall act in good faith to carry forward the reputation of the
1
<PAGE>
Company and shall take no action which would jeopardize the Company from doing
business anywhere in the world.
2.2 At the request of the Company, Consultant agrees to
testify before the Food and Drug Administration in connection with its
application for approval of Reticulose.
2.3 Consultant agrees to provide the Company with detailed
clinical reports regarding patients observed by Consultant in Santo Domingo,
Dominican Republic and elsewhere if he performs similar services in other
locales.
3. Compensation. The Consultant shall receive compensation for his
services as follows: in option to purchase 300,000 shares of the Company's
Common Stock (par value $.0001 per share) at an exercise price of $.30 per
share. The options shall be exercisable in equal installments on January 1, 1999
and 2000 and December 15, 2000 provided that this Agreement shall be in force on
such dates.
4. Reimbursable Expenses. The Company shall reimburse Consultant for
all out-of-pocket expenses reasonably incurred by him in connection with the
performance of his duties hereunder and the business of the Company upon the
submission to the Company of appropriate receipts and/or other documentation
consistent with Company policy.
5. Property Rights of Parties.
5.1 Consultant shall not disclose any mich trade secrets
directly or indirectly nor use them in any way either during the term of this
Agreement or at any time thereafter except as required in the course of his
consulting. All files, records, documents, drawings. specifications, equipment
and similar items relating to the business of the Company, whether or not
prepared by Consultant, shall remain the exclusive property of the Company and
shall not be removed from the premises of the Company under any circumstances,
except in pursuit of the trade and business of the Company.
5.2 On the termination of this Agreement or whenever requested
by the Company, Consultant shall immediately deliver to the Company all property
in Consultant's possession or under Consultant's control belonging to the
Company, including but not limited to all accounting records, computer terminals
and tapes, disks, or other data storage mechanisms, accounting machines, and all
office furniture and fixtures, supplies and other personal property in the
possession or under the control of Consultant, in good condition, ordinary wear
and tear excepted, and including without limitation all correspondence files,
research data, and patent information or data, of every sort.
5.3 Consultant does not claim any rights or interest in and to
trade secrets, formulas, devices, inventions, processes. patents, applications,
continuations. copyrights, trademarks, compilations of information, records,
specifications, rights, interests and data of any other sort, affecting or
pertaining directly or indirectly to the business of the Company as now
conducted, or to the patents, trade secrets, and other rights now owned by the
Company.
2
<PAGE>
5.4 Consultant agrees that he will promptly and fully inform
and disclose to the Company all inventions. designs, improvements and
discoveries that Consultant may have during the term of this Agreement that
pertain or relate to the business of the Company or to any experimental work
carried on by the Company, whether conceived by Consultant alone or with others
and whether or not conceived during regular working hours. All such inventions,
designs, improvements and discoveries shall be the exclusive property of the
Company. Consultant shall assist the Company in obtaining patents on all such
inventions, designs, improvements and discoveries deemed patentable by the
Company, and shall execute all documents and do all things necessary to obtain
such patents for the Company.
5.5 It is contemplated that Consultant, in the course of his
work, may be engaged in work involving various patents and secret processes
owned by the Company. All experiments, developments, formulas, patterns,
devices, secret inventions arid compilations of information, records, and
specifications regarding such matters are trade secrets, which Consultant shall
not disclose directly or indirectly to anyone other than the Company, or use in
any way, either during the term of this Agreement or at any time after the
termination of this Agreement, except as required in the course and scope of his
engagement.
6. Restrictive Covenant.
6.1 During the term of this Agreement and thereafter for a
further period of three years, the following shall apply.
(a) Consultant shall not directly or indirectly own,
manage, operate, invest in, render services to or otherwise participate in or be
connected with, in any manner, whether as an officer, director. employee,
partner, investor, consultant or otherwise, any business entity which is
primarily engaged in the business of manufacturing, producing, marketing,
promoting or selling pharmaceuticals which can be described as peptide nucleic
acids or selling pharmaceuticals which can be described as peptide nucleic acids
or any other business in which the Company was engaged on the effective date of
the termination of this Agreement or in which the Company or any of its
subsidiaries or affiliates was actively engaged in soliciting during the 180-day
period prior to the effective date of termination of this Agreement with the
Company.
Nothing contained herein shall be deemed to prohibit Consultant from
investing his funds in securities of a company if such securities are listed for
trading on a national stock exchange or traded in the over-the-counter market,
such company is not a competitor of the Company and Consultant's holdings
therein represent less than one (1%) percent of such securities outstanding.
(b) Consultant shall not for himself or an behalf of
any other person, partnership, corporation or entity, directly or indirectly, or
by action in concert with others, (i) call on any customer of the Company for
the purpose of soliciting, diverting or taking away any customer from the
Company or (ii) induce, influence or seek to induce or influence any person who
is engaged as an employee, representative. agent, independent contractor or
otherwise by the Company, to terminate his or her relationship with the Company.
3
<PAGE>
6.2 The parties hereto acknowledge that Consultant's services
are of a special, unique, extraordinary and intellectual character which gives
him peculiar value and that the business of the Company and its subsidiaries is
highly competitive and that violation of any of the covenants provided in
Section 6 of this agreement would cause immediate, immeasurable and irreparable
harm, loss and damage to the Company not adequately compensable by a monetary
award. Consultant acknowledges that the time, geographical area and scope of
activity restrained by the provisions of Section 6 are reasonable and do not
impose a greater restraint than is necessary to protect the goodwill of the
Company's business. Consultant further acknowledges that he and the Company have
negotiated and bargained for the terms of this agreement and that Consultant has
received adequate consideration for entering into this agreement including the
provisions of this Section 6. In the event of any such breach or threatened
breach by Consultant of any one or more of such covenants, the Company shall be
entitled to such equitable and injunctive relief as may be available to restrain
Consultant and any business, firm, partnership, individual, corporation or
entity participating in such breach or threatened breach from the violation of
the provisions hereof. Consultant further agrees that any temporary restraining
order or emergency, preliminary or final may be issued by any court of competent
jurisdiction. To the fullest extent permitted by law, Consultant hereby waives
any right to require the posting of a bond as a condition to the issuance or
maintenance of such order or injunction and agrees that any such order or
injunction may be entered and maintained without the posting of a bond. Nothing
herein shall be construed as Prohibiting the Company from pursuing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Consultant hereunder.
7. Finder's Fee. The Company agrees to Pay the Consultant a Finder's
Fee (as hereinafter defined) for any funds aggregating at least $2M raised by
the company from any sources introduced by the Consultant through the public or
private sale of equity or debt securities with equity features, whether or not
such financing is completed during the term of this Agreement or for a period of
one year subsequent to the date that this Agreement has otherwise terminated.
For purposes of this Section 7. Finder's Fee shall mean an option to purchase
200,000 shares of Common Stock of the Company at the then current market price
per share. The options shall be exercisable in three equal annual installments,
commencing on the first anniversary of the closing of such public or private
sale of equity or debt securities with equity features.
8. Right to Terminate Agreement. Either party may terminate this
Agreement at any time by giving the other party at least thirty (30) days prior
written notice; provided, however, that the obligations of the parties pursuant
to Sections 6 and 7 hereof shall survive termination.
9. Entire Agreement This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no amendment or
modification hereof shall be valid or binding unless made in writing and signed
by the party against whom enforcement thereof is sought.
10. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
telephone facsimile or sent by certified mail, return
4
<PAGE>
receipt requested, or sent by responsible overnight delivery service, postage
and fees prepaid, to the parties hereto at their respective addresses set forth
below. Either of the parties hereto may at any time and from time to time change
the address to which notice shall be sent hereunder by notice to the other party
given under this Section 10. The date of the giving of any notice sent by mail
shall be three business days following the date of the posting of the mail, the
date delivered in person, the next business day following delivery to an
overnight delivery service or the date sent by telephone facsimile, as
applicable.
If to the Company:
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Attn: Shalom Hirschman, M.D.
Telephone: 914-376-7383
Facsimile: 914-376-7368
With a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
250 Park Avenue
New York, New York 10177
Attn: Robert E. Fischer, Esq
If to Consultant:
601 Sunset Avenue
Asbury Park., New Jersey 07712
Telephone:
11. No Assignment. Neither this Agreement nor the right to receive any
payments hereunder may be assigned by Consultant. This Agreement shall be
binding upon Consultant, his heirs, executor s and administrators and upon the
Company, its successors and assigns.
12. No Waiver. No course of dealing nor any delay on the part of the
Company in exercising any rights hereunder shall operate as a waiver of any such
rights. No waiver of any default or breach of this Agreement shall be deemed a
continuing waiver or a waiver of any other breach or default.
13. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the substantive laws of the State of New York
applicable to Agreements entered into and to be performed entirely therein. Any
suit, action or proceeding with respect to this Agreement shall be brought
exclusively in the courts of the State of New York, County of New York or in the
United States District Court for the Southern District of New York.
5
<PAGE>
14. Severability. If any clause, paragraph. section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement. The parties intend that all
clauses, paragraphs, sections or parts of this Agreement shall be enforceable to
the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the panics hereto have caused this Agreement to be
duly executed as of the day and year first above written.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman, M.D.
---------------------------------
Name: Shalom Z. Hirschman, M.D.
Title: President
/s/ Angelo A. Chinnici
---------------------------------
Angelo A. Chinnici
6
CONSULTING AGREEMENT
--------------------
This Agreement is entered into as of the 18th day of January, 1999, by
and between GloboMax LLC (GloboMax), a Maryland limited liability company
located at 7250 Parkway Drive, Suite 430, Hanover, MD 21075, and Advanced Viral
Research Corp. (AVRC), whose address is 200 Corporate Blvd. South, Yonkers, NY
10701.
AVRC desires to retain GloboMax to provide consulting services to AVRC,
and GloboMax is willing to provide such services to AVRC, on the terms and
conditions set forth herein:
1. Consulting Services
GloboMax hereby agrees to provide AVRC services pertaining to AVRC's
IND submission and to perform all work that is necessary to obtain FDA's
approval. In performing the consulting activities as requested by AVRC, GloboMax
shall comply with the written instructions of AVRC, standard operating
procedures mutually approved by AVRC and GloboMax, and relevant professional
standards.
2. Term of Agreement
Subject to the terms hereof, the term of this Agreement shall begin on
January 18, 1999 and continue through December 31, 1999. The term may be
modified or extended only by mutual written agreement of both parties.
3. Progress Reports
GloboMax shall use reasonable efforts to perform all services, to keep
AVRC advised of the progress of the work, to permit representatives of AVRC to
inspect from time to time, during normal business hours, such results of said
services as are susceptible of inspection, and to provide AVRC with such
documentation, reports, specifications, drawings, models, and the like as are
appropriate to the nature of the services to be performed hereunder.
4. Compensation
In consideration for GloboMax's services hereunder, AVRC shall pay
GloboMax on a monthly basis for the actual hours worked and according to the
following rates during the term of the Agreement:
Hourly Rate Service Provider at GloboMax LLC
----------- --------------------------------
$285 President, Senior V.P., V.P., Officer Division
Director, Division/Section Manager
1
<PAGE>
$185 Senior Scientist/Team Leader, Senior Biostatitician,
Senior Programmer, Clinical Services Manager,
Project Manager, QA Auditor
$130 Scientist, Biostatitician, Programmer, Project
Coordinator, QA Coordinator, Clinical Data
Coordinator
$85 Data Analyst, Regulatory Coordinator, Technical
Assistant, Administrative Assistant
GloboMax shall also be reimbursed for reasonable out-of-pocket expenses
incurred by its members and employees, and which have the prior approval of
AVRC. Such expenses include all travel, food and lodging where applicable, and
telephone calls which relate to the services provided hereunder.
5. Payment
Payment shall be made to:
GloboMax, LLC
7250 Parkway Drive, Suite 430
Hanover, MD 21076
Fed. I.D. # 62-2030098
Invoices submitted by GloboMax to AVRC shall describe in detail the
services performed and include receipts for all out-of-pocket expenses. AVRC
shall pay invoices received from GloboMax within thirty (30) days upon receipt
of the invoices. Late payment will incur a 0.05% late fee for every day past
due.
6. Termination
Either party reserves the right forthwith to terminate this Agreement
at any time by providing the other part with thirty (30) days prior written
notice. In the event this Agreement is terminated by AVRC without cause,
GloboMax shall cease further charges upon receipt of the termination notice from
AVRC. However, GloboMax shall be entitled to receive payment for all work and
services performed or committed to third parties up to the effective date of
termination, provided that such services and commitments have been previously
authorized by AVRC, and such commitments cannot be canceled or terminated.
7. Confidentiality
Any confidential information acquired by or disclosed to GloboMax from
AVRC which is clearly identified in writing as confidential, concerning existing
or contemplated products, processes, operations, machines, techniques,
transactions, or know-how, or any information or data developed
2
<PAGE>
or generated pursuant to the performance of this Agreement shall not be
disclosed by GloboMax to others or used for GloboMax's own benefit without the
prior written consent of AVRC. All written documents containing any such AVRC
proprietary/confidential information shall remain the property of AVRC, and all
such documents together with any copies or excerpts thereof shall be promptly
destroyed or returned to AVRC upon request. GloboMax's obligations under this
paragraph shall apply to all such information except that which:
a. is or becomes public domain through no fault of GloboMax, its
directors, officers or employees;
b. was in possession of GloboMax before receipt from AVRC, such
possession being documented prior to the date of such receipt;
c. is lawfully received from a third party having a right to
further disclosure and not under a confidentiality obligation
to AVRC; or
The obligation to hold such information in confidence shall survive the
termination of this Agreement, but shall terminate at the end of five (5) years
from the termination of this Agreement. GloboMax shall not disclose to AVRC, or
induce AVRC to use, any confidential information belonging to others.
8. Publication
GloboMax may not publish any articles or make any presentations
relating to this Agreement or to the services or referring to any date,
information, materials, and results generated as part of the services, in whole
or in part, without the prior written consent of AVRC.
9. Intellectual Property
AVRC's intellectual property rights and trade secrets contained in its
confidential and proprietary information provided to GloboMax shall remain the
property of AVRC.
Each party shall own any intellectual property it creates. To the
extent that the use of such property is necessary to carry out this Agreement,
the other party shall have a non-exclusive, royalty-free license to use such
property for this Agreement.
If intellectual property is jointly created, it shall be jointly owned,
and the parties shall agree in writing on a mechanism for allocating revenues
derived by either party from the use of such property.
10. Indemnification
AVRC shall indemnify, defend, and hold harmless GloboMax, its members
and employees, for any and all damages, costs, expenses, and other liabilities,
including reasonable attorney's fees and court costs, incurred in connection
with any third-party claim, action, or proceeding arising from
3
<PAGE>
any breach of AVRC of any of its obligations hereunder; provided, however, that
AVRC shall have no obligation hereunder with respect to any claim, action or
proceeding to the extent that it arises from the negligence or willful
misconduct of GloboMax or any of its members or employees; or the breach by
GloboMax of any of its obligations under this Agreement.
GloboMax shall indemnify, defend, and hold harmless AVRC, its
directors, officers, employees, or representatives for any and all damages,
costs, expenses, and other liabilities, including reasonable attorney's fees and
court costs, incurred in connection with any third party claim, action or
proceeding arising from (a) any breach by GloboMax of any warranty or obligation
hereunder, or (b) any negligence or willful misconduct of GloboMax or any of its
members or employees, or the breach by GloboMax of any of its obligations under
this Agreement; provided, however that GloboMax shall have no obligation
hereunder with respect to any claim, action, or proceeding to the extent arising
from the negligence or willful misconduct of AVRC or any of its directors,
officers, employees, or representatives, or the breach of AVRC of any of its
obligations under this Agreement.
11. Conflicts
GloboMax represents that it has the legal right to enter into this
Agreement and that it is under no obligation to any third party that
would prevent it from fulfilling its obligations under this Agreement.
12. Assignments
This Agreement is not assignable by GloboMax without the prior written
consent of AVRC, AVRC shall have the right to assign this Agreement to any of
its subsidiaries or affiliates.
13. Severability
Any provision or provisions of this Agreement which shall prove to be
invalid, void, or illegal shall in no way affect or impair or
invalidate any other provisions, and the remaining provisions shall
remain in full force and effect.
14. No Waiver and No Warranties
No waiver or modification of this Agreement or any provision hereof
shall be valid and no evidence of waiver or modification shall be offered or
received in evidence in any proceeding, arbitration or litigation between the
parties hereto arising out of or affecting this Agreement or the rights or
obligations of the parties hereunder, unless such waiver or modification is in
writing duly signed by both parties.
15. Force Majeure
GloboMax shall not be liable for any failure to perform as required by
this Agreement, to the extent such failure to perform is due to circumstances
reasonably beyond GloboMax's control, such
4
<PAGE>
as labor disturbances or labor disputes of any kind, accidents, failure of any
governmental approval required for full performance, civil disorders or
commotion, acts of aggression, acts of God, energy or other conservation
measures, explosions, failure of utilities, mechanical breakdowns, material
shortages, disease, or other such occurrences. Performance shall be excused for
the period of such delay. Notice of the start and stop of any such force majeure
shall be provided to AVRC.
16. Governing Law
This Agreement and the rights and obligations of both parties shall be
governed and construed in accordance with the laws of the State of Maryland,
without giving effect to its choice of law or conflict of laws rules.
17. Publicity
Except as required by law, neither party shall use the name of the
other party nor the name of any employee or agent of the other party in any
advertising, news release, announcement, or other form of publicity concerning
this Agreement without the prior written permission of the other party.
18. Independent Contractor
The status of the parties shall be as independent contractors and not
as employer-employee or principal-agent of the other. The only monetary or
economic obligation of AVRC to GloboMax shall be to provide payment for
GloboMax's services. Neither party shall have the authority to legally bind the
other in contract, debt, or otherwise, nor shall either hold itself out as
having such authority.
19. Order of Precedence
This Agreement represents the entire and only agreement between the
parties hereto with respect to the services being performed hereunder, and takes
precedence over the terms of all prior representations, discussions, proposals,
or agreements relative thereto.
20. Notices
Any notices required to be given or which shall be given under this
Agreement shall be in writing delivered by first class mail addressed to the
parties as follows:
GloboMax LLC Advanced Viral Research Corp.
David Young, Phamr.D., Ph.D. Dr. Shalom Z. Hirschman
President & CEO President & CEO
7250 Parkway Drive, Suite 430 200 Corporate Blvd., South
Hanover, MD 21075 Yonkers, NY 10701
5
<PAGE>
21. Entire Agreement
This Agreement contains the complete understanding between the parties
with respect to the subject matter hereof, and supercedes all other agreements,
whether written or oral, between the parties concerning such subject matter. No
amendments, changes, or supplements to this Agreement, including without
limitation, changes in the services to be performed, total costs, and periods of
performance, shall be effective unless made in writing and signed by authorized
representatives of both parties.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly
executed.
GloboMax LLC Advanced Viral Research Corp.
By: /s/ David Young, Pharm, D., Ph.D. By: /s/ Dr. Shalom Z. Hirschman
--------------------------------- ------------------------------
Name: David Young, Pharm, D., Ph. D. Name: Dr. Shalom Z. Hirschman
--------------------------------- ------------------------------
Title: President & CEO Title: President & CEO
--------------------------------- ------------------------------
Date: January 18, 1999 Date: January 18, 1999
--------------------------------- ------------------------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND 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>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<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> 317,359
<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)
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