As filed with the Securities and Exchange Commission on October 20, 1999.
Registration No. 333-70523
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
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(Exact name of Registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
5129
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(Primary Standard Industrial Classification Code Number)
59-2646820
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(I.R.S. Employer Identification No.)
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
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(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
---------------
Copies to:
CHARLES J. RENNERT
Berman Wolfe Rennert Vogel & Mandler, P.A.
NationsBank Tower, Suite 3500
100 Southeast Second Street
Miami, Florida 33131-2130
(305) 577-4177 Phone (305) 373-6036 Fax
---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this registration
statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________ If delivery of the prospectus is expected
to be made pursuant to Rule 434, check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum
Title of each class of Amount to offering price per aggregate offering Amount of
securities to be registered be registered share(1) price(1) registration fee (2)
- --------------------------- ------------- -------- -------- --------------------
<S> <C> <C> <C> <C>
Common stock par 42,432,493 $0.2075 $8,804,742.30 $2,448
value $0.00001 per share
Total Fee $2,448
======
</TABLE>
- -----------------------
(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the average of the closing bid and ask prices of the common
stock on October 13, 1999, as reported on the OTC Electronic Bulletin
Board.
(2) Previously paid.
----------------------------
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
[This Space Intentionally Left Blank]
<PAGE>
Prospectus subject to completion, dated October 20, 1999.
42,432,493 Shares
ADVANCED VIRAL RESEARCH CORP.
Common Stock
The shareholders named on page 42 are selling up to 42,432,493 shares
of our common stock.
Advanced Viral common stock is traded on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On
October 13, 1999 the low and high bid prices for the common stock on the
Bulletin Board were $0.20 and $0.205, respectively.
Investing in our common stock involves substantial risks. See "RISK
FACTORS" beginning on page 4.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
The date of this prospectus is _______, 1999.
The information in this prospectus is not complete and may be changed. The
selling shareholders may not sell these securities until the registration
statement filed with the Securities Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................4
About this Prospectus.............................................................................................8
Where to Find More Information....................................................................................9
Forward-looking Statements May Prove Inaccurate .................................................................9
Market Price of and Dividends on the Common Stock and Related Shareholder Matters................................10
Capitalization...................................................................................................11
Selected Consolidated Financial Data.............................................................................12
Management's Discussion and Analysis of Financial Condition and Results of Operations............................14
Business.........................................................................................................26
Management.......................................................................................................35
Selling Shareholders.............................................................................................43
Certain Relationships and Related Transactions...................................................................45
Description of Common Stock......................................................................................46
Use of Proceeds..................................................................................................46
Plan of Distribution.............................................................................................46
Legal Matters....................................................................................................48
Experts..........................................................................................................48
Index to Financial Statements...................................................................................F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The following summary explains only some of the information in this
prospectus. More detailed information about Advanced Viral Research Corp and the
shares being offered, and financial statements appear elsewhere in this
prospectus.
Advanced Viral Research Corporation
Advanced Viral is a development stage company formed to engage in the
production and marketing, promotion and sale of the pharmaceutical product
Reticulose(TM) for the treatment of certain viral diseases such as:
o human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
o hepatitis B and hepatis C, both liver diseases
o human papilloma virus, or HPV, which causes genital warts
and may lead to cervical cancer;
o rheumatoid arthritis.
Our operations over the last five years have been limited principally
to research, testing and analysis of Reticulose in the United States, either in
vitro (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Reticulose on human patients outside the United States. In connection with these
engagements, we currently have exclusive distribution agreements in place with
various distributors to market and sell Reticulose, subject to each distributor
obtaining regulatory approval, in the following countries: Mexico, China, Japan,
Hong Kong, Macao, and Taiwan (AVIX International Pharmaceutical Corp., a New
York corporation); Channel Islands, Isle of Man, British West Indies, Jamaica,
Haiti, Bermuda, Belize and Saudi Arabia (Commonwealth Pharmaceuticals, a
corporation organized under the laws of Cayman Islands, British West); and
Argentina, Bolivia, Paraguay, Uruguay, Brazil, and Chile (DCT S.R.L., an
Argentine corporation).
Shalom Z. Hirschman, M.D., our President, has monitored the testing of
Reticulose and has recently performed certain analyses of Reticulose with our
laboratory personnel, which we believe may be used in connection with the FDA
approval process. In addition, we have recently contracted with GloboMax LLC of
Hanover, Maryland to advise us in our preparation and filing of an IND with the
FDA, and to otherwise assist us through the FDA process with the objective of
obtaining full approval for the manufacture and commercial distribution of
Reticulose in the United States.
In October 1999, we established The Advanced Viral Research Institute,
a division created to allow our senior scientists to pursue basic biomedical
research in an academically- oriented environment that will foster individual
scientific inquiry and creativity. The Research
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<PAGE>
Institute will pursue scientific research which may lead to marketable
pharmaceuticals for our company.
Our offices are located at 1250 East Hallandale Beach Boulevard, Suite
501, Hallandale, Florida 33009 and 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Hallandale, Florida is (954) 458-7636 and
our telephone number in Yonkers, New York is (914) 376-7383.
<TABLE>
<CAPTION>
Summary of the Offering
<S> <C>
Securities Offered...........................................42,432,493 shares of common stock
Common stock outstanding after the offering..................340,707,252 shares (1)
OTC Bulletin Board symbol....................................ADVR
Estimated Net Proceeds.......................................The net proceeds of the sale of the shares
will be received directly by each selling
shareholder. No proceeds will be
received by us from the sale of the
shares offered by this prospectus. See
"Use of Proceeds."
Risk Factors.................................................This offering involves a high degree of
risk. See "Risk Factors" on page 4.
</TABLE>
- ------------------
(1) Does not include approximately 25,568,014 shares issuable upon the
conversion of certain convertible debentures or the exercise of certain
warrants not covered by the registration statement of which this prospectus is a
part.
2
<PAGE>
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Summary Statement of Operations Data
Years Ended December 31
--------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Net revenues $84,852 $68,483 $102,907 $121,923 102,992
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710)
Net loss per common share ($0.00) ($0.00) ($0.00) ($0.02) ($0.02)
Weighted average # of shares 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
Summary Balance Sheet Data
December 31
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ -----
Total Assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
Long-term debt - - - $2,384,793 1,625,299
Stockholders' equity per common share $0.00 $0.00 $0.01 $0.01 $0.00
Shares outstanding at year end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907
</TABLE>
3
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RISK FACTORS
Our securities are highly speculative. You shouldn't purchase them
unless you can afford to lose your entire investment. You should consider very
carefully the following risk factors before you decide to purchase our
securities.
o Because our shares are 'penny stocks,' you may be unable to resell
them in the secondary market.
Our common stock is subject to the Securities Enforcement and Penny
Stock Reform Act of 1990, which requires additional disclosure relating to the
market for penny stocks in connection with trades in any stock defined as a
penny stock. Commission regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
In addition, because our securities do not meet the exceptions to the
penny stock regulations cited above, trading in our securities is covered by
Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for securities
that are not listed on The Nasdaq Stock Market or any national securities
exchange. Under this rule, broker/dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities also
are exempt from this rule if the market price is at least $5.00 per share.
Because our securities are subject to the regulations applicable to
penny stocks, which limit the ability of broker/dealers to sell our securities
and thus the ability of purchasers to sell our securities in the secondary
market, the market liquidity for our securities may be limited. In addition,
certain states may have rules and regulations that impose additional sales
practice requirements on broker-dealers who sell the common stock.
2. We are solely dependent on the commercial success of our product
Reticulose, which has not been approved for use in clinical trials in
the United States, and may never be approved for commercial use. If we
are unable to commercialize Reticulose, our business and results of
operations will never materialize.
We have invested a significant portion of our time and financial
resources since our inception in the development of Reticulose and anticipate
that for the foreseeable future our ability to achieve profitability will be
solely dependent on its successful commercialization. Reticulose has not been
registered or approved for commercial distribution by the Food and Drug
Administration of the United States Department of Health and Human Services, or
any other applicable foreign government body. We are dependent upon obtaining
regulatory approval of Reticulose for sale and use in the United States, in
other developed countries, or alternatively in one or more of our distributors'
territories in order to have the potential for commercial
4
<PAGE>
distribution and sales of Reticulose. Many factors could negatively affect the
success of our efforts to develop and commercialize Reticulose, including:
o failure to receive FDA approval to commence clinical trials of
Reticulose in the United States;
o failure to receive regulatory approval outside the United
States;
o significant delays and costs involved in commencing and
conducting clinical trials;
o negative, inconclusive or otherwise unfavorable results from
clinical trials;
o an inability to obtain, or delay in obtaining, regulatory
approval for the commercialization of Reticulose;
o an inability to manufacture Reticulose in commercial
quantities at acceptable cost; and
o a failure to achieve market acceptance of Reticulose.
Since 1962, when Reticulose was reclassified as a "new drug" by the
FDA, the FDA has not permitted Reticulose to be marketed 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 until a new
drug application, or NDA, for Reticulose is approved by the FDA. FDA approval of
an NDA first requires clinical testing of Reticulose in human trials, which
cannot be conducted until we first satisfy the regulatory protocols and the
substantial preapproval requirements imposed by the FDA upon the introduction of
any new or unapproved drug product pursuant to a notice of claimed
investigational exemption for a new drug, or IND.
We are not sure if or when we will submit the new IND to the FDA. Even
if the IND is submitted, the FDA may not approve it, which will prevent us from
commencing clinical testing in the United States on human subjects. However,
even if the FDA approves the IND, additional financing necessary to fund the
first phase of human clinical trials in the absence of grants or other subsidies
may not be available to us. Furthermore, if the results of the human clinical
trials do not prove that Reticulose is safe or effective in treating viruses of
any variety on a wide scale or any other basis, the FDA will not approve an NDA
for Reticulose.
Outside the United States, an important obstacle is the lack of a free
sales certificate for Reticulose. A free sales certificate is a document
typically issued by a country in which a pharmaceutical product is manufactured
which certifies that such country permits the "free sale" of such product in
such country. Most countries require that a pharmaceutical product be at least
registered and certified for free sale in the country in which it is
manufactured before allowing the registration of such product for use in that
country. However, the Bahamas, where our
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<PAGE>
manufacturing facility is located, has no procedures currently in place to issue
a "free sales certificate" for any therapeutic drug, including Reticulose. If we
do not obtain a free sales certificate or other equivalent document from the
Bahamas or another country, it is possible that we will not be able to meet
registration requirements in the countries which require that a pharmaceutical
product be at least registered and certified for free sale in the country in
which it is manufactured before it may be commercially sold or distributed. If
we are unable to commercialize Reticulose, our business and results of
operations will not materialize and we will not be positioned to generate
revenue from the sale of Reticulose, our only product. See "Business --
Competition," "-- Research, Development and Testing" and "--Government
Regulation."
3. Because Reticulose has gained limited medical acceptance, and has not
been approved for sale by regulatory authorities, we may never generate
revenues from sales of Reticulose, our only product, and thus you could
lose all or a substantial portion of your investment.
We have a very limited operating history, insignificant operating
revenues and must be considered promotional and still in our early developmental
stage. We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable. From inception through June 30,
1999, we had an accumulated deficit of $15,516,808. Reticulose is our sole
product, and it is neither widely known nor accepted by the medical community
nor approved for use in the United States for any purpose by the FDA, commercial
or otherwise. In fact, two articles published in 1962 in recognized medical
journals have questioned the anti-viral effect of Reticulose on mumps,
encephalitis and herpes simplex utilizing tissue culture; on herpes simplex in
students; and on lansing polio and mouse adapted and egg adapted influenza: A.
C. Kempe, "Failure to Demonstrate Antiviral Activity of Reticulose," American
Journal of Diseases of Children, Vol. 103, May 1962, and Behbehani, "The Effect
of Reticulose on Viral Infections of Experimental Animals," Southern Medical
Journal, Vol. 55, February 1962.
The only revenues we have received from sales of Reticulose are
insignificant revenues related to distribution of the drug for testing purposes.
Without FDA and other regulatory approvals, timely or otherwise, we will be
unable to generate sales through our distribution agreements through the
marketing of Reticulose in their territories. There is nothing at this time upon
which to base any assumption that we will either generate operating revenues or
will ever be able to operate on a profitable basis from sales of Reticulose. Our
shareholders and holders of options and warrants may lose all or a substantial
portion of their investment.
4. Given the complexity and expense of complying with government
regulations, we might not be able to raise additional capital needed to
finance necessary research, development and other operating expenses as
needed.
We have incurred substantial research, product development, and
regulatory expenses, and we will need to raise additional capital in the near
future to permit us to meet the considerable costs of the full range of
continued research and development and testing of Reticulose. Unless we are able
to generate sufficient revenue or raise additional funds when
6
<PAGE>
needed, it is likely that we will be unable to continue our planned activities,
even if we are making progress with our research and development projects.
However, the longer the duration of the regulatory approval process, the more
unlikely it is that we will be able to raise such funds on favorable terms or at
all, or that any funds raised will be sufficient to complete the FDA approval
process to achieve our goal of commercial distribution in the United States and
elsewhere. The extensive delays and costs of complying with governmental
regulation decreases the likelihood that we will have adequate funds to finance
the necessary clinical studies and related costs, which will further impede
and/or prevent our ability to compete with larger companies in our industry. In
addition, the extent of potentially adverse government regulations which might
arise from future legislation or administrative action cannot be predicted.
5. It is unlikely that our company will be able to continue as a going
concern for more than nine months, without a significant improvement in
our financial condition.
Our company has incurred material operating losses for each year since
its inception, and our independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1998
includes an explanatory paragraph regarding our ability to continue as a going
concern. Our ability to continue operations is dependent upon our continued sale
of our securities for funds to meet our cash requirements, and as a result our
ability to continue as a going concern is doubtful. While we plan to file an IND
for Reticulose with the FDA in the near future, there is no guarantee that
approval by the FDA or any other regulatory authority, or additional financing
from the sale of our securities, will translate into any material change in our
financial condition.
6. The exercise or conversion of our outstanding convertible securities
could have a significant negative impact on the market price of our
common stock.
As of the date of this prospectus, in addition to the 303,192,035
shares of our common stock currently outstanding, the following securities are
outstanding:
o Stock options to purchase an aggregate of 32,813,295 shares of
common stock at exercise prices ranging from $0.11 to $0.36
o Warrants to purchase an aggregate of 7,378,450 shares of
common stock at prices ranging from $0.20 to $0.864
o Convertible debentures currently estimated to be convertible
into an aggregate of approximately 24,641,566 shares assuming
an average closing price of $0.2075 based on the average of
the closing bid and ask of our common stock on October 13,
1999.
If all the options, warrants, and convertible debentures were fully
exercised and converted, as the case may be, there would be outstanding an
additional 63,083,311 shares of common stock. The sale or availability for sale
of this number of shares of common stock in the public market could depress the
market price of
7
<PAGE>
the common stock. Additionally, the sale or availability for sale of this number
of shares may lessen the likelihood that additional equity financing will be
available to us, on favorable or unfavorable terms.
7. Our business could be harmed if we lose the services of the key
personnel upon whom we depend.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of our three full-time executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. The loss or unavailability to us of the services of
Bernard Friedland or Dr. Hirschman, President and Chief Executive Officer, could
have a material negative impact on our business prospects and any potential
earning capacity, and, therefore, we have obtained "key-man" insurance on the
lives of Mr. Friedland and Dr. Hirschman in the amounts of $400,000 and
$1,000,000, respectively. If our level of operations significantly increase, the
business may depend upon our abilities to attract and hire additional management
and staff employees. It is possible that we will be unable to secure such
additional management and staff when necessary. See "Management -- Executive
Officers and Directors" for further information concerning the extent, nature
and scope of management's business experience.
8. The voting control held by present management could significantly
impact our business.
As of the date of this prospectus, our current officers and directors
beneficially owned 91,653,133 shares of our common stock, or approximately 29%
of the 303,192,035 shares of common stock deemed outstanding on such date for
the purposes of the percentage calculation, including certain shares underlying
options held by Dr. Hirschman. As there are no cumulative voting rights, current
management, by virtue of their stock ownership, can be expected to influence
substantially the election of our board of directors and thereby continue to
impact substantially our business, affairs and policies. See "Principal
Shareholders" and "Description of Securities."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission to register with the Commission the
resale of the shares issued or issuable to the selling shareholders as provided
in this prospectus. As permitted by the Commission's rules, this prospectus does
not contain all of the information you can find in the registration statement or
the exhibits to the registration statement. This prospectus summarizes some of
the documents that are exhibits to the registration statement, and you should
refer to the exhibits for a more complete description of the matters covered by
those documents.
We have not authorized anyone to give any information regarding the
offering of the shares that is different from what is contained in this
prospectus. This prospectus is not an offer
8
<PAGE>
to sell or a solicitation of anyone to whom it would be unlawful to make an
offer of solicitation. You should not assume that the information contained in
this prospectus is accurate as of any time after the date of this prospectus,
and neither the mailing of this prospectus to our shareholders nor the issuance
of the shares should create any implication to the contrary.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and special reports with the Commission. The
annual reports contain financial information about Advanced Viral that has been
audited and reported on, with an opinion expressed by an independent auditor.
These filings are available on the Commission's website: http://www.sec.gov.
Hard copies are available at the Commission's public reference facilities at the
following addresses:
- 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549;
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661; and
- 7 World Trade Center, 13th Floor, New York, New York, 10007.
Call the Commission at 1-800-SEC-0330 with questions about its public
reference facilities. To contact us, use the following information:
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(954) 458-7636
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Statements contained in this prospectus that are not historical facts
may constitute forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
discussed. Words such as "expects," "may," "will," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions identify
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, such expectations may prove
to be inaccurate, we may be unable to attain the projected or estimated
financial information set forth in this prospectus, and/or the assumptions from
which such projected or estimated information is derived may be incomplete.
Important factors that could cause actual results to differ materially from such
expectations are disclosed in this prospectus, including those factors discussed
in "Risk Factors."
We advise you that all cautionary remarks are meant to qualify all
forward-looking statements attributable to our company or persons acting on our
behalf. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of
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new information, future events or otherwise. In light of these risks,
uncertainties, and assumptions, the forward-looking events discussed in this
prospectus might not occur.
MARKET PRICE OF AND DIVIDENDS ON THE COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The principal United States market in which our 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 our common stock for each full quarterly
period during the two recent fiscal years ended December 31, 1997 and 1998, and
for the first and second quarters of 1999, as reported on the National
Association of Securities Dealers, Inc.'s OTC Bulletin Board. The high and low
bid prices for the periods indicated reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Low Bid High Bid
(per share) (per share)
----------- -----------
<S> <C> <C>
First Quarter 1997..........................................0.26 0.47
Second Quarter 1997.........................................0.16 0.31
Third Quarter 1997..........................................0.15 0.33
Fourth Quarter 1997.........................................0.175 0.345
First Quarter 1998..........................................0.18 0.4375
Second Quarter 1998.........................................0.245 0.46
Third Quarter 1998..........................................0.16 0.30
Fourth Quarter 1998.........................................0.155 0.23
First Quarter 1999..........................................0.175 0.35
Second Quarter 1999.........................................0.202 0.322
</TABLE>
SHAREHOLDERS
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,833 inclusive of those brokerage firms and/or
clearing houses holding shares of common stock for their clientele (with each
such brokerage house and/or clearing house being considered as one holder).
DIVIDEND POLICY
We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future
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operations and expansion and do not plan for the reasonably foreseeable future
to pay dividends to holders of our common stock. Any decision as to the future
payment of dividends will depend on our results of operations and financial
position and such other factors as our board of directors in its discretion
deems relevant.
CAPITALIZATION
The following table sets forth the actual capitalization derived from
our financial statements as of June 30, 1999, and an adjusted capitalization
to reflect the issuance of an additional 64,935,163 shares of common stock
pursuant to:
o the issuance of 1,851,852 shares of our common stock pursuant
to a private placement in July 1999.
o the full conversion of the RBB Debenture and Focus Debentures
assuming an average closing price of $0.2075 based on the
average of the closing bid and ask of our common stock on
October 13, 1999.
o the full exercise of certain warrants; and
o the full exercise of certain stock options.
The capitalization information set forth in the table below is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this prospectus and should be read in conjunction
with such Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Actual Pro Forma(1) Pro Forma As Adjusted
----------------- ----------- ---------------------
<S> <C> <C>
Long-term Debt:
Convertible debenture issued in November 1998........................ $1,481,965 1,481,965 -
2,000,000
Convertible debentures issued in August 1999 ........................ - -
Stockholders' Equity (Deficiency):
Common stock, $0.00001 par value; 1,000,000,000 shares authorized;
301,340,183 shares outstanding Actual; 303,192,035 shares
outstanding Pro Forma; 366,275,346 shares outstanding Pro Forma
As Adjusted...................................................... $3,013 3,032 $3,663
Additional paid-in-capital........................................... $15,621,665 $16,121,646 $29,889,492
Deficit accumulated during the development stage.....................($15,636,808) ($15,636,808) ($15,636,808)
Discount on warrants ................................................ ($444,724) ($444,724) ($444,724)
Total Stockholders' Equity (Deficiency)................................. ($456,854) $43,146 $13,811,623
(1) Gives effect to the issuance of (a) 1,851,852 shares of common stock
pursuant to a private placement in July 1999 and (b) convertible debentures
to Focus Investors in August 1999.
</TABLE>
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 and for the six months
ended June 30, 1999 have been derived from our audited financial statements. The
selected consolidated financial data set forth below should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Selected Statement of Operations Data
-------------------------------------
Years Ended December 31 Six Months Ended
------------------------------------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ----- ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $22,402 $27,328 $24,111 $2,278 $656 $ 4,590
Interest 7,450 16,155 46,796 111,845 102,043 21,489
Other income 55,000 25,000 32,000 7,800 293 -
------------ ------------- -------------- ------------- ------------ ------------
84,852 68,483 102,907 121,923 102,992 26,079
Costs and Expenses:
Research and development 30,040 34,931 255,660 817,603 1,659,456 767,380
General and administrative 478,984 420,757 983,256 1,681,436 1,420,427 1,056,932
Depreciation and amortization 16,665 14,679 18,731 138,245 340,098 148,556
Interest -- -- -- 1,626,368 1,240,721 139,043
------------ ------------- -------------- ------------- ------------ ------------
525,689 470,367 1,257,647 4,263,652 4,660,702 2,111,911
------------ ------------- -------------- ------------- ------------ ------------
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710) $2,085,832)
============ ============= ============== ============= ============ ============
Net loss per share of common
stock - basic and diluted ($0.00) ($0.00) ($0.00) ($0 .02) ($0.02) ($0.01)
============ ============= ============== ============= ============ ============
Weighted Average Number of Common
Shares Outstanding 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073 298,881,549
============ ============= ============== ============= ============ ============
</TABLE>
- --------------------------------
See notes to consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Selected Balance Sheet Data
---------------------------
December 31
---------------------------------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ----- ----------------
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $211,203 $65,230 $61,396 $236,059 $924,420 $ 95,618
Investments 5,000 479,000 1,378,841 2,984,902 821,047 ---
Inventory --- 18,091 19,729 19,729 19,729 19,729
Other current assets 10,163 12,967 16,081 20,240 29,818 45,606
------------ ------------ ------------ ------------ ----------- -------------
Total current assets 226,366 575,288 1,476,047 3,260,930 1,795,014 160,953
Property and Equipment 224,098 214,494 207,209 485,661 1,049,593 1,090,339
Other Assets 1,800 6,459 33,544 443,251 460,346 496,570
------------ ------------ ------------ ------------ ----------- -------------
Total assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953 $1,747,862
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and other $40,244 $14,651 $54,474 $375,606 $279,024 $ 505,797
Capital lease payable-current portion --- --- --- --- 38,355 39,993
------------ ------------ ------------ ------------ ----------- -------------
Total current liabilities 40,244 14,651 54,474 375,606 317,379 545,790
------------ ------------ ------------ ------------ ----------- -------------
Long-Term Debt:
Convertible debenture, net --- --- -- 2,384,793 1,457,919 1,481,965
Capital lease payable-long term portion --- --- --- --- 167,380 146,961
------------ ------------ ------------ ------------ ----------- -------------
Total Long-Term Debt --- --- --- 2,384,793 1,625,299 1,628,926
------------ ------------ ------------ ------------ ----------- -------------
Deposit on securities purchase agreement --- --- --- --- 600,000 ---
------------ ------------ ------------ ------------ ----------- -------------
Deposit on exercise of options --- --- --- --- --- 30,000
------------ ------------ ------------ ------------ ----------- -------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares, par 2,416 2,512 2,671 2,779 2,964 3,013
value $0.00001 authorized
Additional paid-in capital 3,704,517 4,475,875 7,003,351 10,512,767 14,325,076 15,621,665
Subscription receivable --- --- (19,000) (19,000) --- (15,636,808)
Deficit accumulated during the development (3,294,913) (3,696,797) (4,851,537) (8,993,266) (13,550,976) (444,724)
stage
Deferred compensation cost --- --- (473,159) (73,837) (14,769) ---
------------ ------------ ------------ ------------ ----------- -------------
Total stockholders' equity 412,020 781,590 1,662,326 1,429,443 762,295 (456,854)
------------ ------------ ------------ ------------ ----------- -------------
Total liabilities and stockholders' equity $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953 $1,747,862
============ ============ ============ ============ =========== =============
Shares outstanding at period end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907 303,340,183
============ ============ ============ ============ =========== =============
- ---------------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read along with our Consolidated Financial Statements and
Notes thereto included elsewhere in this prospectus.
OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has
been engaged primarily in research and development activities. We have not yet
generated significant operating revenues, and as of June 30, 1999 we had
incurred a cumulative net loss of $15,636,808. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Reticulose. All of our research and
development efforts have been devoted to the development of Reticulose.
In order to commence clinical trials for regulatory approval of
Reticulose in the United States, we must submit an IND with the FDA. Filings
with foreign regulatory agencies are required to continue or begin new clinical
trials outside the United States. We have recently contracted with GloboMax LLC
of Hanover, Maryland to assist us in our preparation and filing of the IND with
the FDA, and to otherwise assist us through the FDA process with the objective
of obtaining full approval for the manufacture and commercial distribution of
Reticulose in the United States. The IND will seek approval to conduct a study
testing the effectiveness of Reticulose on human subjects with AIDS and other
diseases. In the IND we intend to include, among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be
conducted on humans; and
o information assuring the identification, quality and purity of
Reticulose and a description of the physical, chemical and
microbiological characteristics of Reticulose.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Reticulose as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in considering the IND
application, if it is ever filed. FDA approval to begin human clinical trials of
Reticulose pursuant to an approved IND will require significant cash
expenditures, the amount of which is not currently determinable. Furthermore, we
unable to assess the probability of whether Reticulose will ever be approved for
commercial distribution by any country.
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that
14
<PAGE>
will be conducted at those institutions will depend upon our financial status.
Because our research and development expenses and clinical trial expenses will
be charged against earnings for financial reporting purposes, we expect that
losses from operations will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 and June 30, 1998
For the three month periods ended June 30, 1999 and June 30, 1998, we
incurred losses of $1,176,036 ($0.01 per share) and $1,151,916 ($0.01 per
share), respectively. For the six month periods ended June 30, 1999 and June 30,
1998, we incurred losses of $2,085,832 ($0.01 per share) and $2,249,754 ($0.01
per share), respectively. Our decreased losses during 1999 are principally due
to a combination of decreased amortization of loan costs related to our
convertible debentures (discussed below) included in depreciation and
amortization ($148,556 for the six months ended June 30, 1999 vs. $541,823 for
the six months ended June 30, 1998), and increased research and development
expense ($767,380 for the six months ended June 30, 1999 vs. $380,764 for the
six months ended June 30, 1998). The increased research and development expense
resulted from the employment of additional research professionals at the
Yonkers, New York office (approximately $230,000 and $445,000 for the three and
six months ended June 30, 1999, compared to approximately $130,000 and $240,000
for the three and six months ended June 30, 1998) and rent and operating costs
associated with the Yonkers, New York laboratory (approximately $75,000 and
$130,000 for the three and six months ended June 30, 1999, compared to
approximately $70,000 and $120,000 for the three and six months ended June 30,
1998). Administrative expenses and the lack of sales revenues also contributed
to our losses.
Non-employee compensation expense for the three and six months ended
June 30, 1998 was $15,000 and $30,000, respectively, compared to $0 and $15,000
for the three and six months ended June 30, 1999, respectively.
We had sales of $2,191 and $0 during the three month periods ended June
30, 1999 and June 30, 1998, respectively, and $4,590 and $0 during the six month
periods ended June 30, 1999 and June 30, 1998, respectively. All sales during
these periods were to distributors purchasing Reticulose for testing purposes.
Interest income was $5,680 and $27,926 for the three month periods ended June
30, 1999 and June 30, 1998, respectively, and $21,489 and $57,223 for the six
month periods ended June 30, 1999 and June 30, 1998, respectively. There can be
no assurance that Reticulose will ever be sold for commercial distribution
anywhere in the world.
Years Ended December 31, 1998, 1997 and 1996
During the fiscal years ended December 31, 1998 and 1997, we incurred
losses of $4,557,710 and $4,141,729, respectively, compared to $1,154,740 in
1996. Our 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:
15
<PAGE>
o General and Administrative Expenses. General and
administrative expenses increased from $983,256 in 1996 to
$1,681,436 and $1,420,427 in 1997 and 1998, respectively. The
increase in general and administrative expense from 1996 to
1997 resulted from the amortization of deferred compensation
costs of approximately $400,000 associated with options
granted to non-employees and recorded as compensation expense
in accordance with SFAS No. 123, and approximately $325,000
for Dr. Hirschman's salary during his first full year as
President and Chief Executive Officer. The decrease in general
and administrative expense from 1997 to 1998 resulted from the
amortization of deferred compensation costs associated with
options granted to non-employees and recorded as compensation
expense ($340,000), and also from the fact that 50% of Dr.
Hirschman's salary ($162,500) was accounted for as research
and development expense in 1998. Non-employee compensation
expense for the years ended 1996, 1997 and 1998 was $60,000,
$420,000 and $460,000, respectively. The rental and operating
costs associated with the Yonkers laboratory for the years
ended 1996, 1997 and 1998 were charged to general and
administrative expense as follows: $0, $57,000 and $315,000.
o Research and Development Expense. Research and development
expense increased from $255,660 in 1996, to $817,603 in 1997,
to $1,659,456 in 1998, as a result of approximately $500,000
in expenses associated with the Argentine testing agreements
in 1997 and 1998, and the increased expenses in 1998
associated with the opening and maintenance of the Yonkers,
New York laboratory associated with the employment of
additional research professionals). The costs of personnel and
laboratory supplies associated with the Yonkers laboratory for
the years ended 1996, 1997 and 1998 were charged to research
and development expense as follows: $0, $60,000 and $634,000.
o Depreciation and Amortization: Depreciation and Amortization
increased from 1996 to 1997 as a result of the amortization of
loan costs in connection with the February 1997 and October
1997 convertible debentures of $112,000. Depreciation and
Amortization increased from 1997 to 1998 as a result of the
amortization of loan costs in connection with the October 1997
and November 1998 convertible debentures of $230,000 and
depreciation of furniture and equipment acquired for the
Yonkers office and laboratory in the amount of $110,000.
o Interest Charges. The increased losses for 1997 and 1998 also
resulted from interest charges from the beneficial conversion
feature associated with convertible debentures issued in 1997
($1,500,000 and $1,100,000 in 1997 and 1998, respectively).
o Lack of Sales Revenue. 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.
16
<PAGE>
The decrease in sales revenue from 1996 is due to the fact
that in 1996, we sold ampules of Reticulose outside the United
States to independent organizations solely for testing
purposes. In 1997 and 1998, the majority of the research and
development was conducted by our laboratory personnel,
accordingly, sales to outside entities for testing purposes
were nominal. Interest income was $102,043 and $111,845 in
1998 and 1997, respectively, compared to $46,796 in 1996. In
1998 and 1997, we collected $0 from the sale of territorial
rights compared to $32,000 in 1996.
LIQUIDITY
June 30, 1999 vs. December 31, 1998
As of June 30, 1999 and December 31, 1998, we had current assets of
$160,953 and $1,795,014, respectively. We had total assets of $1,747,862 and
$3,304,953 at June 30, 1999 and December 31, 1998, respectively. The decrease in
current and total assets was primarily attributable to the use of investment
capital to fund increased operating expenditures.
June 30, 1999 vs. June 30, 1998
During the six months ended June 30, 1999, we used cash of $1,726,785
for operating activities, as compared to $1,634,420 for the six months ended
June 30, 1998. During the six months ended June 30, 1999, we:
o incurred non-cash expenses of approximately of $123,000
relating to amortization of loan costs ($52,500) and discount
on warrants ($73,460);
o expended approximately $717,000 for payroll and related costs;
o obtained approximately $232,500 in proceeds from the sale of
securities;
o expended approximately $390,000 in professional and
consulting fees;
o expended approximately $137,000 for additions to machinery and
equipment at our Yonkers, New York office; and
o expended approximately $85,000 in laboratory supplies.
During the six months ended June 30, 1999, cash flows provided by
investing activities were primarily due to the sales of investments which were
available from the proceeds of the issuance of the convertible debenture in 1998
and shares of common stock in 1999. See "Capital Resources" for a discussion of
cash flows provided by financing activities.
As of June 30, 1999, we expended the following amounts for research and
development in connection with the following ongoing studies being conducted
abroad:
17
<PAGE>
o $50,000 has been advanced to DCT in connection with a study
being conducted in Argentina by DCT 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, pursuant to an agreement
entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a
controlled study in 30 patients to determine the effectiveness
of Reticulose for the treatment of rheumatoid arthritis in
humans, pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of
Reticulose in inhibiting the mutation of the AIDS virus on
patients in Argentina, pursuant to an agreement entered in
July 1998.
Years Ended December 31, 1998, 1997 and 1996
As of December 31, 1998, we had current assets of $1,795,014, compared
to $3,260,930 at December 31, 1997. We 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, we used cash of $3,364,528 for operating activities, as
compared to $2,179,780 in 1997 and $665,682 in 1996. During 1998, we:
o incurred non-cash expenses of approximately $230,000 and
$285,000, respectively, relating to amortization of loan costs
and discount on warrants relating to convertible debentures
issued in 1997;
o incurred non-cash expenses of approximately $667,000 relating
to amortization of deferred interest;
o expended approximately $316,000 in legal and consulting fees;
o expended approximately $210,000 in laboratory supplies;
o expended approximately $1,100,000 for payroll and related
costs;
o expended approximately $675,000 for leasehold improvements and
furniture and equipment at our Yonkers, New York office; and
o obtained approximately $1,300,000 in proceeds from the sale of
the convertible debenture issued in 1998.
18
<PAGE>
During 1998, cash flows provided by investing activities was primarily
due to the sales of investments which were available from the proceeds of the
issuance of the convertible debentures in 1997.
Projected Expenses
During 1999, we expect to spend approximately $1,000,000 on research
and development related activities, including:
o approximately $300,000 in the preparation of the IND;
o approximately $325,000 in connection with laboratory research,
equipment, supplies and electronics;
o approximately $300,000 in overseas research of Reticulose; and
o approximately $75,000 in preparing the manufacturing facility
in the Bahamas for FDA inspection and in accordance with good
manufacturing practices standards.
Management anticipates that we will be required to sell additional
securities to obtain the funds necessary to further our research and development
activities.
Under the terms of an agreement with several purchasers entered in
December 1998, pursuant to which such purchasers purchased an aggregate of
4,917,276 shares of common stock and warrants to purchase an additional
2,366,788 shares of common stock, we are required to file with the Commission a
registration statement to register the common stock issued under the purchase
agreement, and upon exercise of the warrants to allow the resale of such common
stock to the public. Because the registration statement was not declared
effective by the Commission on or before May 21, 1999, the agreement provides
that we pay a penalty of $30,000 for each full calendar month or portion thereof
lapsed after such date, until the registration statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate. As of the date hereof, the agent for the purchasers has not requested
payment of the penalty, and we are negotiating with such agent to have the
penalty waived.
Under the terms of an agreement with several purchasers entered in June
1999, pursuant to which such purchasers purchased an aggregate of 1,851,852
shares of common stock and warrants to purchase an additional 926,528 shares of
common stock, we are required to file with the Commission a registration
statement to register the common stock issued under the purchase agreement, and
upon exercise of the warrants to allow the resale of such common stock to the
public. The registration statement must be filed on or prior to December 28,
1999. If the registration statement is not declared effective by the Commission
prior to such date, we must pay the purchasers a penalty of $10,000, on a pro
rata basis, for each full calendar month lapsed after such date, and a pro rated
amount of said $10,000 based on a month of 30 or 31 days (as applicable to the
month in which the registration statement is declared effective), provided,
however, that total penalties shall not exceed $20,000 in the aggregate.
19
<PAGE>
Under the terms of a securities purchase agreement with Focus Investors
LLC dated August 3, 1999 pursuant to which Focus Investors purchased 7%
convertible debentures and related warrants, we are required to file with the
Commission a registration statement to register shares of the common stock
issuable upon conversion of the debentures and upon exercise of the warrants to
allow the purchaser to resell such common stock to the public. The purchase
agreement provides that, if the registration statement is not filed or declared
effective prior to a certain date, or if the number of shares qualified for
trading on the OTC Bulletin Board or reserved for issuance is insufficient for
issuance upon the conversion of the debentures and the exercise of the warrants,
or if a blackout event occurs (as described in the agreement, each of these
events referred to as a "default"), we will be required to pay the purchaser a
penalty for each 30 day period during which a default shall be in effect equal
to $40,000, pro rated for the number of days during each period the defaults
were pending. To the extent the periodic amounts for all default periods exceed
$100,000 in the aggregate, the excess amount shall be paid in shares of common
stock, as set forth in the agreement. The agreement further provides that until
the registration statement has been filed and becomes effective, we will not
file any other registration statement without the written consent of Focus
Investors.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that our ability
to continue operations is dependent upon the continued sale of our securities
for funds to meet our cash requirements, which raise substantial doubt about our
ability to continue as a going concern. Further, the accountant's report does
not include any adjustments that might result from the outcome of this
uncertainty. Although we may not be successful in doing so, we plan to eliminate
or remedy the deficiencies in our financial condition through the issuance of
additional securities for cash.
20
<PAGE>
CAPITAL RESOURCES
We have been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. The following table
summarizes sales of our securities since February 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Gross Security Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Issued Exercisable Into Exercise Price Expiration Date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
-------------------------------------------------------------------------------
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
- ------------------------------------------------------------------------------------------------------------------
August 1997 $3,000,000 Debenture 17,577,354 shares $0.13-0.23 per share Fully converted
-------------------------------------------------------------------------------
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
- ------------------------------------------------------------------------------------------------------------------
November 1998 $1,500,000 Debenture 10,040,161 shares $0.1494 per share (1) October 31, 2008
---------------------------------------------------------------
Warrants 375,000 shares $0.20 per share
---------------------------------------------------------------
375,000 shares $0.24 per share
- ------------------------------------------------------------------------------------------------------------------
January 1999 $802,500 Shares 4,917,276 n/a n/a
-------------------------------------------------------------------------------
Warrants 1,183,394 shares $0.2040 per share December 31,
2003
---------------------------------------------------------------
1,183,394 shares $0.2448 per share
- ------------------------------------------------------------------------------------------------------------------
July 1999 $500,000 Shares 1,851,852 n/a n/a
- ------------------------------------------------------------------------------------------------------------------
Warrants 463,264 shares $0.324 per share June 30, 2004
---------------------------------------------------------------
463,264 shares $0.378 per share
-------------------------------------------------------------------------------
August 1999 $2,000,000 Debentures 12,851,406 $0.1556 per share (1) August 3, 2009
-------------------------------------------------------------------------------
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) Assumes the full conversion of the debenture based upon the closing bid
price on October 13, 1999 of $0.2075, and an applicable conversion price of
$0.1494 for the RBB debenture and $0.1556 for the Focus debentures.
Securities Issued in 1997.
In February 1997 and October 1997, in order to finance research and
development, we sold $1,000,000 and $3,000,000, respectively, principal amount
of our ten-year 7% convertible 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
21
<PAGE>
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 us
under the February 1997 debenture, $330,000, $134,000, $270,000 and $266,000,
respectively, of the principal amount of the February 1997 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 1997 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 us, $120,000, $133,000, $341,250, $750,000,
$335,750, $425,000, $275,000 and $620,000, respectively, of the October 1997
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 1997 debenture was fully converted.
In connection with the issuance of the 1997 debentures, we issued to
RBB six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from August
30, 1997 through August 30, 2007, 600,000 shares of the common stock. The
exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and
$0.27 per warrant share, respectively. Each such 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 such 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 of October 15, 1999, none
of the warrants have been exercised.
Securities Issued in 1998.
In November 1998 we sold $1,500,000 principal amount of our 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. Accrued interest under the convertible 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
convertible 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 convertible 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 us at this
time, including the future market price of the common stock and the potential
conversion of accrued interest into shares of common stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense.
22
<PAGE>
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock , each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of October 15, 1999, none of such warrants
had been exercised.
The fair value of the warrants issued in connection with the
convertible debenture was estimated to be $48,000 ($0.064 per warrant) based
upon a financial analysis of the terms of such warrants using the Black-Sholes
pricing model with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one year. This
amount has been reflected in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
In December 1998 pursuant to a securities purchase agreement, we sold
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) two warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harborview Group consisting of two warrants to purchase an aggregate 400,000
shares of common stock, in a private offering transaction pursuant to Section
4(2) of the Securities Act, for an aggregate purchase price of $802,500, of
which $600,000 was received on December 31, 1998, and $202,500 was received in
January 1999. Two of the warrants entitle the holders to purchase 983,394 and
983,394 shares of common stock at exercise prices of $0.2040 and $0.2448 per
share, respectively. The other two warrants entitle the holders to purchase
200,000 and 200,000 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. All four warrants are exercisable at any time
and from time to time until December 31, 2003. Each warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under that warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of October 15, 1999, none
of such warrants had been exercised.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares in connection with the securities purchase agreement,
was estimated to be $494,000 ($0.0208 per warrant) based upon a financial
analysis of the terms of such warrants using the Black-Sholes Pricing Model with
the following assumptions: expected volatility of 20%, and a risk free interest
rate of 6% through the December 31, 2003 expiration date.
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Securities Issued in 1999.
In July 1999 pursuant to a securities purchase agreement, we sold
1,851,852 shares of common stock, and warrants to purchase an aggregate of
925,926 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act, for an aggregate purchase price of $500,000,
received in July 1999. The warrants entitle the holders to purchase 463,264 and
463,264 shares of common stock at exercise prices of $0.324 and $0.378 per
share, respectively. The warrants are exercisable at any time and from time to
time until June 28, 2004. 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 of October 15, 1999, none of the warrants
had been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%, and a risk free interest rate
of 5.75% through the June 30, 2004 expiration date.
Pursuant to a securities purchase agreement dated August 3,1999 in a
private offering transaction under Section 4(2) of the Securities Act, we sold
to Focus Investors LLC an aggregate of 20 units for an aggregate gross purchase
price of $2 million, each unit consisting of $100,000 principal amount of our
ten-year 7% convertible debentures due August 3, 2009, and series W warrants to
purchase 50,000 shares of our common stock exercisable until August 3, 2004.
Accrued interest under the convertible 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 convertible 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 convertible 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 us at this time, including
the future market price of the common stock and the potential conversion of
accrued interest into shares of common stock.
The exercise price of the series W warrants is $0.2461 per warrant
share. The warrants provide that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; The series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of October 15, 1999, none of such
warrants had been exercised.
If we do not obtain FDA or other approvals for Reticulose, we will have
to obtain funds from the exercise of options and warrants, potential grants
and/or additional equity. It is not likely that such funds will be available in
any significant amount, if at all.
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We are 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 our two offices and
our Bahamian facility, and anticipate that we can continue operations for at
least nine months with our current liquid assets, including the proceeds from
the recent sale of the convertible debenture and other securities if no stock
options or warrants are exercised. If all of the stock options and warrants are
exercised, we will receive net proceeds of approximately $8.4 million. Those
proceeds will contribute to general and administrative and working capital and
will permit us to substantially increase our 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 we cannot be
certain. 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, we cannot be certain that the recent trading
levels will be sustained or that any additional options or warrants will be
exercised. If less than 25% or none of the outstanding options and warrants are
exercised, and we obtain no other additional financing, in order for us to
achieve the level of operations contemplated by management, management
anticipates that we will have to limit intentions to expand operations beyond
current levels. We are currently seeking debt financing, licensing agreements,
joint ventures and other sources of financing, but the likelihood of obtaining
such financing on favorable terms, if at all, is small. Furthermore, we cannot
predict whether or when any of our distributors will ever obtain regulatory
approvals to test or market Reticulose in any territory and generate revenue for
our company. Management anticipates that they will have to defer their salaries
if financing is not available in order to continue operations,. 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 large uncertainties involved in the FDA
approval process for commercial drug use on humans, we cannot predict when or if
we will ever be able to sell Reticulose commercially.
We have three patents for the use of Reticulose as a treatment. In
addition, we have filed 34 patent applications with the united States Patent
Office, including one for Reticulose as a product. We cannot be certain that
other companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to ours. We cannot be
certain that we will obtain such a patent or, if obtained, that it will be
enforceable. We have retained patent counsel for the purpose of pursuing
additional patent protection for Reticulose. However, we are uncertain that any
patents will be granted, or if granted, that such patents will be sustained if
questioned, and, if declared valid, that the patents, in fact, will operate to
protect us from the replication of Reticulose by competitors. We have relied
upon laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect our rights to Reticulose and the processes
for its manufacture, but we are uncertain as to whether such efforts and
procedures will continue to be successful and protect us from any competition in
the future.
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YEAR 2000 COMPLIANCE
The 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 our information
technology systems.
Our information technology systems are based upon software licenses and
software maintenance agreements with third party software companies. Based upon
our internal assessments and communications with our software vendors, all of
the software we use is Year 2000 compliant software. We have used internal
personnel to test our software systems for Year 2000 compliance and such tests
yielded positive results. We will continue to monitor our Year 2000 readiness.
Also, we do not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to us by other manufacturers.
Based on the foregoing, we believe that we 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 our consolidated financial position, results of
operations or cash flows.
BUSINESS
OVERVIEW
Advanced Viral was formed in July 1985 to engage in the production and
marketing, promotion and sale of a pharmaceutical drug with the trade name
"Reticulose." Under the Federal Food, Drug, and Cosmetic Act, as amended in
1962, the FDA classified Reticulose as a "new drug" requiring FDA approval prior
to any sale in the United States. Reticulose has not been approved for sale or
use by the FDA or any foreign government body, and thus we have not as yet
commenced any commercial operations. We are dependent on registration and/or
approval by applicable regulatory authorities of Reticulose in order to commence
commercial operations.
Our 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. The FDA has not approved human clinical trials for
Reticulose in the United States. We 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 we
cannot be certain. We do not know what the actual cost of such trials would be.
If we need additional financing to fund such human clinical trials, we cannot be
certain that additional financing will be available to us.
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GOVERNMENT REGULATION
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. After testing in animals, an IND application must be filed
with the FDA to obtain authorization for human testing. 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 a new drug application, or NDA, to
the FDA. No action can be taken to market Reticulose, or any therapeutic drug
product, in the United States until an appropriate NDA has been approved by the
FDA.
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
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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 data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the bioavailability of the drug products made from the substance. NDA's
contain lists of all components used in the manufacture of the drug product and
a statement of the specifications and analytical methods for each component.
Also included are studies of the toxicological actions of the drug as they
relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
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investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
On September 20, 1984, Bernard Friedland, our former President and
current Chairman of the Board, as sponsor, submitted to the FDA an IND to
conduct a study testing the effectiveness of Reticulose on human subjects with
AIDS, as well as certain other 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 we
could establish that the proposed formulation of Reticulose is the same as the
formulation of Reticulose referenced in those publications. In addition, the FDA
required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage form and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that the
information assure the proper identification, quality, purity and strength of
Reticulose and a description of the physical, chemical and microbiological
characteristics of Reticulose. On September 11, 1987, we 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.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
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 our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have 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, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Reticulose in the United States.
Pursuant to the agreement with GloboMax LLC, we are obligated to pay for
services on an hourly basis, at prescribed rates. We cannot be certain as to the
costs or the timing of the filing of the new IND or whether we have the
resources to complete the FDA approval process. We 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, we cannot be certain that any of the
currently outstanding options or warrants will be exercised. We cannot be
certain 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 we submitted a
proper NDA. It is not known at this time how extensive the phase II and phase
III clinical trials will be, if they are conducted. We are uncertain
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as to whether 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 us.
In connection with our activities outside the United States, we are
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 our 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. We cannot be certain
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, we do not expect that we will be able
to generate material sales revenues. We received a grant of authority from the
Bahamian Port Authority on October 15, 1992 confirming the right of our
subsidiary, Advance Viral Research, Ltd., a Bahamian corporation, to carry on
the manufacture and export sale of ethical pharmaceutical products. See
"-Marketing And Sales."
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through December 31,
1998 we expended approximately $2.7 million on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. In 1995, we retained Shalom
Hirschman as our President. As President, Dr. Hirschman established our research
facility in Yonkers, New York, monitored the testing of Reticulose and recently
performed certain analyses of Reticulose with our laboratory personnel, which
analyses we believe may be used in connection with the FDA approval process. We
currently are funding research and testing to:
o determine the safety of the topical use of Reticulose on
animals and cultured human cells;
o assess the effectiveness of the topical application of
Reticulose on HPV and certain cancer causing proteins of HPV.
Recent laboratory testing has indicated that Reticulose may
inhibit the expression of a protein of HPV which causes
cervical cancer;
o assess the effectiveness of Reticulose for the treatment of
persons diagnosed with HIV or AIDS and HPV;
o assess the effectiveness of the topical application of
Reticulose for the treatment of persons diagnosed with herpes
labialis/genital infections;
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o compare the results of treatment of persons diagnosed with
AIDS taking a three drug cocktail and Reticulose with those
taking a three drug cocktail and a placebo;
o determine the effectiveness of Reticulose for the treatment of
rheumatoid arthritis in humans;
o study the effects of Reticulose in inhibiting the mutation of
the AIDS virus in humans; and
o study the basic molecular mechanisms of Reticulose with
respect to transcription of the gamma interferon gene, immune
responses, and anti-tumor activity.
We are not certain that our studies detailing the results of the above
research and testing will positively impact the FDA's decision to approve a new
IND for Reticulose or approve of the marketing, sales or distribution of
Reticulose within the United States. As a result, we are not certain that such
studies will enhance our ability to obtain approval for the marketing, sales or
distribution of Reticulose anywhere in the world.
MARKETING AND SALES
Except for limited sales (approximately $4,500 during the first six
months of 1999) of Reticulose for testing and other purposes, Reticulose is not
sold commercially anywhere in the world. As of the date of this prospectus, the
our efforts or the efforts of any of our representatives have produced no
material benefits to us regarding our ability to have Reticulose sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with five separate entities granting exclusive rights to distribute
Reticulose in the countries of China, Japan, Hong Kong, Macao, Taiwan, Mexico,
Channel Islands, Isle of Man, British West Indies, Jamaica, Haiti, Bermuda,
Belize, Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile.
Pursuant to these agreements, the distributors are obligated to cause Reticulose
to be approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Reticulose to maintain the
exclusive distribution rights. Our marketing plans for Reticulose are still
dependent upon registration of Reticulose for sale in the various jurisdictions
where our distributors are seeking approvals.
We are uncertain as to whether we or any distributor will ever secure
registration of Reticulose, and to date we have received no information that
would lead us to believe that we will be positioned to sell Reticulose
commercially anywhere in the world in the immediate future. To date, the only
application for registration of Reticulose which has been filed is an
application requesting that Reticulose be permitted to be sold in Argentina,
which was filed in March 1998. The completion of this application to secure
approval to sell Reticulose in Argentina is dependent upon the results of a test
requested by the government of Argentina which will demonstrate the effect of
Reticulose on certain animals. We initially targeted our 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
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pneumonia, viral 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 our 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 effectiveness 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, we cannot be certain that we will generate any sales
of Reticulose. For the years ended December 31, 1998, 1997 and 1996, we reported
no commercial sales except limited sales for testing purposes ($656, $2,278, and
$24,111, respectively). Reticulose is not legally available for commercial sale
anywhere in the world, except for testing purposes. See "-Research, Development
and Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council of
the Bahamas had refused our subsidiary's request for a "free sales certificate"
for Reticulose. A free sales certificate is a document typically issued by a
country in which a pharmaceutical product is manufactured which certifies that
such country permits the "free sale" of such product in such country. Most
countries require that a pharmaceutical product be at least registered and
certified for free sale in the country in which it is manufactured before
allowing the registration of such product for use in that country. However, the
Bahamas has no procedures currently in place to issue a "free sales certificate"
for any therapeutic drug, including Reticulose. If we do not obtain a free sales
certificate or other equivalent document from the Bahamas or another country, or
if we do not receive FDA approval, it is possible that we will not be able to
meet registration requirements in the countries which require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Reticulose, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Reticulose. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, hepatitis and
other viruses. We anticipate that we will face intense and increasing
competition as new products enter the market and advanced technologies become
available. Our competitors' products may be more effective, or more effectively
marketed and sold, than Reticulose. Competitive products may render Reticulose
obsolete or noncompetitive before we can recover the expenses of developing and
commercializing Reticulose. Furthermore, the development of a cure or new
treatment methods for the diseases we are targeting could render Reticulose
noncompetitive, obsolete or uneconomical. Many of our competitors:
o have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products,
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o have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products,
o have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Reticulose should be added to such cocktails in order
to enhance their effectiveness. Among the companies with significant commercial
presence in the AIDS market are Glaxo Wellcome, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma. In
addition, Glaxo Wellcome, in collaboration with Biochem Pharma, is pursuing
development of Lamivudine, a nucleoside analogue to treat hepatitis B infection.
This compound was recently approved for marketing in the United States, China
and several other countries and represents significant potential competition for
Reticulose as a treatment for hepatitis B.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Reticulose, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV. We
cannot assess the impact products developed by our competitors or advances in
other methods of the treatment of HPV will have on the commercial viability of
Reticulose.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed phase III trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for Reticulose as a treatment for rheumatoid arthritis.
Three antiviral products are presently sold in the United States for
the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
Wellcome Inc.) which contains acyclovir and is administered orally, topically,
or intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals)
which contains famcyclovir and is administered orally, and Valtrex(R)
(manufactured by Glaxo Wellcome, Inc.) which contains valacyclovir and is also
administered orally. These products represent significant competition for
Reticulose as a treatment for genital herpes.
33
<PAGE>
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Reticulose, we will
face competition based on the safety and effectiveness of Reticulose, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Reticulose, we
expect to compete primarily on the basis of product performance and price with a
number of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have 25 full-time employees, consisting of our three executive
officers, 18 employees involved in research, and four administrative employees.
Dr. Hirschman, our President and Chief Executive Officer and a director, Bernard
Friedland, our Chairman of the Board and a director, William Bregman, our
Secretary, Treasurer and a director, and Alan Gallantar, our Chief Financial
Officer, each devote all of their business time to our day-to-day business
operations.
Additionally, we 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."
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 63 President, Chief Executive Officer,
Chief Scientific Officer, Director
Bernard Friedland 73 Chairman of the Board of Directors
William Bregman 77 Vice President, Secretary, Treasurer,
Director
Alan Gallantar 41 Chief Financial Officer
Louis J. Silver 70 Director
</TABLE>
Shalom Z. Hirschman, M.D., President, Chief Executive Officer and a
director 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 since May 1987, director since
July 1985 and President and Chief Executive Officer 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 since July 1985 and Secretary-Treasurer since
September 1985, was Vice President from September 1985 until May 1987 and Vice
President and Secretary of our subsidiary, Advance Viral Research, Ltd., from
August 1984 until July 1989.
Alan Gallantar, Chief Financial Officer since October 1999, was
treasurer and controller from March 1998 to September 1999 of AMBI Inc., a
nutraceutical company, senior vice president and chief financial officer from
1992 to 1997 of Bradley Pharmaceuticals, Inc., a pharmaceutical manufacturer,
and vice president and divisional controller from 1989 to 1991 for PaineWebber
Incorporated. From 1985 to 1989, Mr. Gallantar was second vice president at The
Chase Manhattan Bank, N.A. and from 1983 to 1985, was a senior accountant at
Philip Morris, Incorporated. From 1979 to 1983 Mr. Gallantar was a senior
accountant in the audit department of Deloitte & Touche.
Louis J. Silver, director 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 during the periods from May 1987 to July 1987.
35
<PAGE>
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" 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 shareholders and until their successors have been elected and have
qualified.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the board of directors attended, which has not in fact been paid within at least
the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, none of our directors, officers or employees
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 All Other
Name and Other Annual Options/ Compensation
Principal Position Year Salary Bonus Compensation (1) SARs (3) (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 since October 1996
and consultant from May 24,
1995 until October 1996.
1997 $325,000 $43,000 $14,604 0 $3,956
1996 $68,750(2) $0 $ 4,825 15,000,000 $4,316
Bernard Friedland, President 1998 - - - - -
and Chief Executive Officer
through October 13, 1996
1997 - - - - -
1996 $35,000 - $6,500 - -
</TABLE>
- --------------------------------
(1) Other Annual Compensation for Dr. Hirschman and Mr. Friedland include
medical insurance premiums paid by us on his behalf, and aggregate
incremental cost to us of Dr. Hirschman's automobile lease, gas, oil,
repairs and maintenance.
(2) Under the Hirschman 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.
36
<PAGE>
(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, us with
respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, we granted Dr. Hirschman options to acquire
23,000,000 shares of common stock, the exerciseability of which is subject to
conditions precedent. In October, 1999, we granted to Mr. Gallantar options to
acquire 4,547,880 shares of common stock, exercisable in 1/3 increments on
October 1, 2000, 2001, and 2002, until October 1, 2009. No other stock options
were granted to the named executive officers during 1998. Other than Dr.
Hirschman's and Mr. Gallantar's stock options, we currently have outstanding:
o Three warrants to purchase 178,378 shares of common stock at
exercise prices of $0.288, $0.576 and $0.864 per warrant
share, respectively;
o Three warrants to purchase 600,000 shares of common
stock,$0.20, $0.23 and $0.27 per warrant share, respectively;
o Two warrants to purchase 375,000 and 375,000 shares of common
stock at exercise prices of $0.20 and $0.24 per warrant share,
respectively;
o Four warrants to purchase 983,394, 983,394, 200,000 and
200,000 shares of common stock at exercise prices of $0.2040,
$0.2448, $0.2040, and $0.2448 per warrant share, respectively;
and
o Two warrants to purchase 463,264 and 463,264 shares of common
stock at exercise prices of $0.324 and $0.378 per warrant
share, respectively; and
o Twenty warrants to purchase an aggregate of 1,000,000 shares
of common stock at an exercise price of $0.2461 per warrant
share; and
o options to acquire 12,165,415 shares of the common stock, none
of which are beneficially owned by directors, officers or
employees of Advanced Viral.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 1998 held by the named executive officers. No options were exercised during
the year ended December 31, 1998 by the named executive officers.
37
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in
Last Fiscal Year And Year-end Option Values
-------------------------------------------
Number of Securities Value of Unexercised In-the-
Shares Underlying Unexercised Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End
Name Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 0 $0 16,100,000 / 23,000,000 $267,800 / $0 (2)(3)
Bernard Friedland 0 $0 0 / 0 $0 / $0
</TABLE>
- --------------------------------
(1) The difference between the average of the high and low bid prices per
share of the common stock as reported by the Bulletin Board on the
date of exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per
share of the common stock as reported by the Bulletin Board on
December 31, 1998, $0.218, and the exercise or base price.
(3) As of December 31, 1998, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share, 4,000,000; shares of common
stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
share; and 4,000,000 shares of common stock at $0.36 per share, all of
which are currently exercisable. In addition, Dr. Hirschman held options to
purchase 23,000,000 shares of common stock at $0.27 per share which become
exercisable through February 2008 upon the earlier to occur of the day an
IND number is obtained from and approved by the FDA so that human research
may be conducted using Reticulose, the occurrence of a change in control,
or the execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to Advanced Viral of at
least $15 million.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
Hirschman Employment Agreement
Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf. The agreement includes an agreement
that Dr. Hirschman will be nominated as a director for the duration of Dr.
Hirschman's employment with us under the agreement, and voting agreements
regarding the election of Messrs. Friedland, Bregman and Dr.
Hirschman as directors. See "Principal Shareholders."
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2000 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
38
<PAGE>
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$325,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to 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 a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
o 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
us;
o 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;
o 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 us in the reasonable determination of Dr.
Hirschman, and all other expenses that may be pre-approved by
our board of directors; and
o provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
The agreement also provides for the payment of $100,000 to Dr. Hirschman on the
date we obtain an IND number 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 us.
The 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 Advanced Viral or any
of our other employees, to bind us, to release or discharge any debt due us
unless we have received payment in full, or to dispose (as collateral or
otherwise) of all or substantially all of our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise
39
<PAGE>
than "for cause," as specified in that agreement, he will not, directly or
indirectly, compete with us for three years after termination or solicit our
employees to leave our employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at any time and from time to time through February 2008 at $0.27 per
share commencing upon:
o the day an IND number is obtained from and approved by the FDA
so that human research may be conducted using Reticulose;
o the occurrence of a change in control; or
o the execution of an agreement relating to co-marketing
pursuant to which one or more third parties commit to make
payments to us of at least $15 million.
Gallantar Employment Agreement
Advanced Viral entered into an Employment Agreement dated as of October
1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is employed as
our Chief Financial Officer on a full business time basis. Under the agreement,
the term of Mr. Gallantar's employment continues until October 1, 2002. The
agreement may be terminated during the first 90 days of the Agreement in our
sole discretion, at which time Mr. Gallantar will be paid a severance of
$87,000. If the agreement is terminated by us for cause, Mr. Gallantar will have
no accrued right to receive any bonus for the year in which his employment is
terminated, all unvested stock options will be cancelled, and any vested stock
options will terminate 90 days after the effective date of termination. If the
agreement is terminated by Advanced Viral not for cause, we are required to pay
to Mr. Gallantar all accrued and unpaid compensation, and all stock options
granted as of the date of the agreement shall become 100% vested. Upon such
termination not for cause, all options which became vested as a result of this
provision may be exercised by Mr. Gallantar until 90 days after the effective
date of termination. If Mr. Gallantar elects to terminate this agreement as a
result of a change in control, he will be paid his base salary for the remaining
term of the agreement, and all stock options granted on the date of the
agreement will become 100% vested and exercisable until 90 days after the
effective date of termination. If Mr. Gallantar elects to terminate this
agreement for any other reason, he will be paid all unaccrued and unpaid base
salary, and he will have the right to exercise any vested stock until 90 days
after the effective date of termination. All payments made to Mr. Gallantar in
connection with the termination of the agreement are subject to reduction to the
extent they exceed 2.99 times the "base amount" as determined under Section 280G
of the Internal Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of
40
<PAGE>
the board of directors. As of the date of the agreement, Mr. Gallantar received
options to purchase an aggregate of 4,547,880 shares of our common stock. The
options expire on October 1, 2009, and are exercisable in three increments of
1,515,960 on the October 1, 2000, 2001 and 2002, respectively. The agreement
further provides that:
o Mr. Gallantar and his family are entitled to receive the same
benefits generally given to other senior executives of
Advanced Viral.
o Mr. Gallantar is entitled to 15 working days of vacation
during the first year and 20 days of vacation during each year
thereafter, subject to certain exceptions.
o Mr. Gallantar will receive a non-accountable automobile
allowance of $500 per month, provided however, that he is be
responsible for all costs of acquiring and maintaining the
automobile.
o We will reimburse Mr. Gallantar for certain professional
license and membership fees up to a maximum of $5,000 per year
in the aggregate, and all other expenses incurred in the
performance of his duties with the prior approval of the Chief
Executive Officer.
o If Mr. Gallantar relocates his primary residence to
Westchester County, New York, or New York City prior to the
second anniversary of the agreement, we will pay reasonable
moving, legal and brokerage fees or costs incurred by him in
connection with such relocation up to a maximum of $15,000.
The agreement provides that Mr. Gallantar 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 Advanced Viral, to bind us
under any note, mortgage or other monetary obligation, to release or discharge
any debt due us unless we have received payment in full, or to dispose (as
collateral or otherwise) of a substantial amount of our assets. Furthermore, Mr.
Gallantar agreed that he will assign to us all intellectual property rights
developed by him which result from the knowledge he acquired while performing
his duties under the agreement. Finally, he has agreed that he will not,
directly or indirectly, compete with us for five years after termination of his
employment or solicit our employees to leave our employ for one year after
termination.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus
certain information regarding the beneficial ownership of the common stock by
each person who is known by us to own beneficially more than 5% of the our
outstanding voting securities, each of our directors and named executive
officers, and all our directors 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) 5.04%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Bernard Friedland 39,346,730 (3)(4) 12.98%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,705,403 (3)(5) 11.78%
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
Alan Gallantar 0 0.00%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
All officers & directors (4 persons) 91,653,133 (2) 28.71%
</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 from the date hereof
are deemed outstanding. According to American Stock Transfer & Trust
Company, the transfer agent for the common stock, 303,192,035 shares of the
common stock were outstanding as of the close of business on October 15,
1999.
(2) Includes shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days from the date hereof.
42
<PAGE>
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that
agreement, shall vote all shares of the common stock owned or voted by them
in favor of Dr. Hirschman as a director of Advanced Viral. That agreement,
however, does not restrict or otherwise limit their right to sell their
shares to third parties without restriction. The Hirschman employment
agreement also provides that Dr. Hirschman, during that term, shall take no
action which shall preclude Messrs. Friedland and Bregman from being
nominees as directors of Advanced Viral 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 Advanced Viral. See "- Employment
Contracts, Termination of Employment and Change-in- Control Arrangements."
(4) Includes 1,000,000 shares of the common stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants;) 20,000,000 shares owned by
Mr. Friedland and Shirley Friedland, his spouse, as joint tenants; and
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.
(5) Includes 22,823,125 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 70,000 shares owned by Carol Bregman,
his daughter; 73,000 shares owned by Janet Berlin, his daughter; 70,000
shares owned by Forest Berlin, his grandson; and 70,000 shares owned by
Jessica Berlin, his granddaughter.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus by
each of the selling shareholders assuming the full exercise of certain warrants
and stock options. Unless otherwise indicated below, to our knowledge all
persons listed below have sole voting and investment power with respect to the
shares of common stock, except to the extent authority is shared by spouses
under applicable law. The information included below is based upon information
provided by the selling shareholders. Because the selling shareholders may offer
all, some or none of their shares, no definitive estimate as to the number of
shares that will be held by the selling shareholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares offered under this prospectus will be sold.
43
<PAGE>
<TABLE>
<CAPTION>
SELLING SHAREHOLDER TABLE
Position with or Shares Owned Shares Being Shares Owned
Relationship to Before Offering (1)(2) Sold in After Offering (3)
Selling Shareholder Advanced Viral Number % Offering(2) Number %
- ------------------- -------------- ------ --- ----------- ------ --
<S> <C> <C> <C> <C> <C> <C>
Elliott Bauer 4a Affiliate of AVIX 4,099,500 1.19% 4,099,500 0 0.00%
Cesar Blumtritt, MD 4b Affiliate of DCT 753,333 0.22% 753,333 0 0.00%
Leonard Cohen 4c Consultant and 1,700,000 0.49% 1,700,000 0 0.00%
Affiliate of AVIX
David Duffy 4d Affiliate of Plata 650,000 0.19% 650,000 0 0.00%
Shalom Z. Hirschman, 4e President and CEO 16,100,000 4.66% 16,100,000 0 0.00%
MD
Gary Hussian 4f Affiliate of DCT 292,500 0.08% 292,500 0 0.00%
Interfi Capital Group 4g Investor 1,538,015 0.44% 1,538,015 0 0.00%
Henry Kamioner 4h None 1,500,000 0.43% 1,500,000 0 0.00%
Charles Miller 4i Affiliate of Plata 8,100 0.00% 8,100 0 0.00%
Jeffrey & Cheryl Miller 4j Affiliate of Plata 183,300 0.05% 183,300 0 0.00%
Richard Rubin 4k Former legal counsel 1,000,000 0.29% 1,000,000 0 0.00%
Freddie Velez 4l Affiliate of DCT 440,667 0.13% 440,667 0 0.00%
Alan Gallantar 4m Chief Financial 4,547,880 1.32% 4,547,880 0 0.00%
Officer
RBB Bank A.G. 5 Investor 2,335,134 0.68% 2,335,134 0 0.00%
Harborview Group 6a Investor 3,831,372 1.11% 3,831,372 0 0.00%
Joe Feshbach 6b Investor 857,843 0.25% 857,843 0 0.00%
Russell Kuhn 6c Investor 586,880 0.17% 428,880 158,000 0.05%
Victor Sherman 6d Investor 528,880 0.15% 428,880 100,000 0.03%
Jennifer Brandenburg 6e Investor 171,569 0.05% 171,569 0 0.00%
Smith
Jo Sherrin Smith 6f Investor 171,569 0.05% 171,569 0 0.00%
Robert Franklin Smith, Sr. 6g Investor 171,569 0.05% 171,569 0 0.00%
Shelly Marion Smith 6h Investor 271,569 0.08% 171,569 100,000 0.03%
Myron Weiner 6i Investor 438,880 0.13% 428,880 10,000 0.00%
John Zimmerman 6j Investor 641,151 0.19% 536,151 105,000 0.03%
Matt Zimmerman 6k Investor 105,782 0.03% 85,782 20,000 0.01%
Selling Shareholders 42,925,493 12.42% 42,432,493 493,000 0.14%
Total Shares
Total Shares Outstanding 7 345,624,528
after Offering ===========
</TABLE>
- --------------------------------
* Less than 1%
1. As required by regulations of the Commission, the number of shares shown as
beneficially owned include shares which can be purchased within 60 days
from the date hereof. The actual number of shares of common stock
beneficially owned is subject to adjustment and could be materially more or
less than the estimated amount indicated depending upon factors which
cannot be predicted by us at this time, including, among others, the market
price of the common stock.
2. Assuming the full exercise of the warrants and stock options.
3. Assumes that all of the shares are sold by the selling shareholders and no
additional shares of common stock are acquired.
4. Numbers of shares stated include an aggregate of 27,765,415 shares
underlying options registered for the selling shareholders under this
prospectus, as follows:
(a) options to purchase 4,099,500 shares at $0.13 per share;
(b) options to purchase 753,333 shares at $0.21 per share;
(c) options to purchase 1,700,000 shares at $0.15 per share;
(d) options to purchase 600,000 shares at $0.14 per share and 50,000
shares at $0.21 per share;
(e) options to purchase 4,100,000 shares at $0.18 per share , 4,000,000
shares at $0.19 per share, 4,000,000 shares at $0.27 per share, and
4,000,000 shares at $0.36 per share;
(f) options to purchase 292,500 shares at $0.21 per share;
(g) options to purchase 500,000 shares at $.20 per share, 926,542 shares
at $0.33 per share and 111,473 shares at $0.41 per share;
(h) options to purchase 500,000 shares at $0.19 per share, 500,000 shares
at $0.27 per share, and 500,000 shares at $0.36 per share;
(i) options to purchase 83,300 shares at $0.14 per share and 100,000 shares
at $0.16 per share;
(j) options to purchase 8,100 shares at $0.16 per share;
(k) options to purchase 500,000 shares at $0.27 per share, and
500,000 shares at $0.33 per share;
(l) options to purchase 440,667 shares at $0.21 per share.
(m) options to purchase 4,547,880 shares at $0.24255 per share, exercisable
in increments of 1,515,960 shares on October 1, 2000, 2001 and 2002,
until October 1, 2009.
5. Represents 2,355,134 shares underlying certain warrants.
6. Includes the following number of shares of common stock underlying certain
warrants: (a) 980,392 shares; (b) 245,098 shares; (c) 122,508 shares; (d)
122,508 shares; (e) 49,020 shares; (f) 49,020 shares; (g) 49,020 shares;
(h) 49,020 shares; (i) 122,508 shares; (j) 153,186 shares; and (k) 24,508
shares.
7. Assumes the full exercise of stock options and warrants listed in footnotes
4-6 above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between Advanced Viral and any of our officers or directors which involved
$60,000 or more.
44
<PAGE>
DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common
stock, par value $0.00001 per share. All shares of common stock now outstanding
are fully paid for and non-assessable. The holders of common stock:
o have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
o entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
o do not have preemptive, subscription, or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
o are entitled to one noncumulative vote per share on all
matters which shareholders may vote on at all meetings of
shareholders.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares
offered under this prospectus by the selling shareholders.
PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling
shareholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the OTC
Bulletin Board, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions) or other
market on which our common stock may be listed at the time of sale, including
the American Stock Exchange, in privately negotiated transactions or otherwise
or in a combination of such transactions at prices and at terms then prevailing
or at prices related to the then current market price, or at privately
negotiated prices or at fixed prices that may be changed. In addition, any
shares covered by this prospectus which qualify for sale pursuant to Section
4(l) of the Securities Act or Rule 144 promulgated thereunder may be sold under
such provisions rather than pursuant to this prospectus. Without limiting the
generality of the foregoing, the shares may be sold in one or more of the
following types of transactions:
o a block grade in which the broker-dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
45
<PAGE>
o purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers, and
o face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or
dealers engaged by the selling shareholders may arrange for
other brokers or dealers to participate in the resales.
In connection with distributions of the shares or otherwise, the
selling shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with selling shareholders. The selling shareholders may also sell shares
short and deliver the shares to close out such short positions. The selling
shareholders may also enter into option, swaps, derivatives or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the shares registered hereunder, which the broker-dealer may resell pursuant
to this prospectus. The selling shareholders may also pledge the shares
registered hereunder to a broker or dealer and upon a default, the broker or
dealer may effect sales of the pledged shares pursuant to this prospectus.
From time to time the selling shareholders may be engaged in short
sales, short sales against the box, puts and calls and other hedging
transactions in our securities, and may sell and deliver the shares in
connection with such transactions or in settlement of securities loans. These
transactions may be entered into with broker-dealers or other financial
institutions. In addition, from time to time, a selling shareholder may pledge
its shares pursuant to the margin provisions of its customer agreements with its
broker-dealer. Upon delivery of the shares or a default by a selling
shareholder, the broker-dealer or financial institution may offer and sell the
pledged shares from time to time.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
selling shareholders, or any other broker-dealer, is acting as principal or
agent for the selling shareholders, the compensation to be received by
underwriters who may be selected by the selling shareholders, or any
broker-dealer, acting as principal or agent for the selling shareholders and the
compensation to be received by other broker-dealers, if the compensation of such
other broker-dealers is in excess of usual and customary commissions, will, to
the extent required, be set forth in a
46
<PAGE>
supplement to this prospectus. Any dealer or broker participating in any
distribution of the shares may be required to deliver a copy of this prospectus,
including the prospectus supplement, if any, to any person who purchases any of
the shares from or through such dealer or broker.
We have advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included in this prospectus they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any selling shareholders, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
It is anticipated that the selling shareholders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time under this prospectus, such sales, or the
possibility of such sales, may have a depressive effect on the market price of
our common stock. None of the selling shareholders have entered into any
agreements regarding the sales of the shares being registered.
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for Advanced Viral by Berman Wolfe Rennert Vogel & Mandler, P.A.,
NationsBank Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida
33131.
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz, LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
47
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Certified Public Accountants.........................................................F-1
Consolidated Financial Statements Years Ended 1998, 1997 and 1996
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
Consolidated Financial Statements Three and Six Months Ended June 30, 1999
Balance Sheets, June 30, 1999 and December 31, 1998..................................................F-31
Statements of Operations for the Three and Six Months Ended June 30, 1999
and 1998 and from Inception (February 20, 1984) to June 30, 1999.................................F-32
Statements of Stockholders' Equity from Inception (February 20, 1984)
to June 30, 1999.................................................................................F-33
Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998 and from Inception (February 20, 1984) to June 30, 1999.................................F-41
Notes to Consolidated Condensed Financial Statements.................................................F-42
</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.
As described in Note 14 to the financial statements, the Company has restated
certain amounts in the 1998 financial statements to record the amortization of
the beneficial conversion feature associated with the November Debenture based
on the date the debenture first became convertible.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 11, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
(Restated)
<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 1,457,919 2,384,793
Capital lease obligation - long-term portion 167,380 --
------------ ------------
Total long-term liabilities 1,625,299 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 (13,550,976) (8,993,266)
Subscription receivable -- (19,000)
Deferred compensation cost (14,769) (73,837)
------------ ------------
Total stockholders' equity 762,295 1,429,443
------------ ------------
Total liabilities and stockholders' equity $ 3,304,953 $ 4,189,842
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (Restated)
<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 1,659,456 817,603 255,660 3,583,467
General and administrative 1,420,427 1,681,436 983,256 7,315,337
Depreciation and amortization 340,098 138,245 18,731 657,283
Interest 1,240,721 1,626,368 -- 2,869,254
------------- ------------- ------------- -------------
4,660,702 4,263,652 1,257,647 14,425,341
------------- ------------- ------------- -------------
Net Loss $ (4,557,710) $ (4,141,729) $ (1,154,740) $ (13,550,976)
============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.02) $ (0.02) $ (.00)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 294,809,073 274,534,277 257,645,815
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
------------- ------------- ------------- --------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
------------- ------------- ------------- --------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
------------- ------------- ------------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
------------- ------------- ------------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
------------- ------------- ------------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ .03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, period ended December 31, 1987 -- -- -- (258,663)
------------ ----------- ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------ ----------- ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------ ----------- ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .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>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
------------ -------- ----------- --------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
------------ -------- ----------- --------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
------------ -------- ----------- --------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ -------- ----------- --------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Subscription Development
Share Shares Amount Capital Receivable Stage
----- ------ ------ ------- ---------- -----
<S> <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)
------------ ------- ----------- ------ ------------
(CONTINUED TABLE)
Deferred
Compensation
Cost
----
<S> <C>
Balance, December 31, 1993 $ --
Issuance of common stock, for consulting services --
Issuance of common stock, exercise of options --
Issuance of common stock, exercise of options --
Net loss, year ended December 31, 1994 --
-----
Balance, December 31, 1994 --
-----
Issuance of common stock, exercise of options --
Issuance of common stock, exercise of options --
Issuance of common stock, exercise of options --
Issuance of common stock, for consulting services --
Issuance of common stock, for consulting services --
Net loss, year ended December 31, 1995 --
-----
Balance, December 31, 1995 --
-----
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875
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
Subscription receivable -- -- --
Net loss, year ended December 31, 1996 -- -- --
------------ ------- ----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
------------ ------- ----------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<C> <C> <C>
Balance, December 31, 1995 $ -- $ (3,696,797) $ --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for services rendered -- -- --
Options granted -- -- (473,159)
Subscription receivable (19,000) -- --
Net loss, year ended December 31, 1996 -- (1,154,740) --
--------- ---------- ---------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
--------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
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 -- -- --
Imputed interest on convertible debenture -- -- 4,768
Net loss, year ended December 31, 1997 -- -- --
------------ -------- ------------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
------------ -------- ------------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<C> <C> <C>
Balance, December 31, 1996 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, February debenture -- -- --
Beneficial conversion feature, October debenture -- -- --
Warrant costs, February debenture -- -- --
Warrant costs, October debenture -- -- --
Amortization of deferred compensation cost -- -- 399,322
Imputed interest on convertible debenture -- -- --
Net loss, year ended December 31, 1997 -- (4,141,729) --
--------- ------------ ----------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
--------- ------------ ----------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
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 -- -- --
Write off of subscription receivable -- -- (19,000)
Net loss, year ended December 31, 1998, as Restated -- -- --
------------ ------ -------------
Balance, December 31, 1998, as Restated 296,422,907 2,964 $ 14,325,076
============ ====== =============
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1997 $ (19,000) $(8,993,266) $ (73,837)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost -- -- 59,068
Write off of subscription receivable 19,000 -- --
Net loss, year ended December 31, 1998, as Restated -- (4,557,710) --
--------- ------------ ---------
Balance, December 31, 1998, as Restated $ -- $(13,550,976) $ (14,769)
========= ============ =========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (4,557,710) $ (4,141,729) $ (1,154,740) $(13,550,976)
------------ ------------ ------------ ------------
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 1,126,248 1,552,842 -- 2,679,015
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 1,193,182 1,961,949 489,058 4,976,857
------------ ------------ ------------ ------------
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
============ ============ ============
During 1998, the Company purchased equipment under a capital lease totaling
$222,317.
</TABLE>
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. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to apply
for approval with the FDA by May 15, 1999. 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
NOTE 5. PROPERTY AND EQUIPMENT
Estimated Useful
Lives (Years) 1998 1997
------------- ---- ----
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. The Fair value of these warrants is estimated to be $494,138
($.209 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 five years.
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.
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. Since conversion can occur immediately
upon issuance of the debenture, this amount has been recognized as
interest expense.
<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 42,081 495,207
----------- ----------
Convertible debenture, net $1,457,919 $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.
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.
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)
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>
Year ending December 31:
<S> <C> <C>
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.
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.
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
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, has 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.
NOTE 14. RESTATEMENT
The accompanying financial statements for 1998 have been restated to
record as interest expense, the amortization of the beneficial
conversion feature associated with the November Debenture (Note 8)
based on the date the debenture first became convertible. The effect of
the restatement was to increase net loss for year ended December 31,
1998 by $572,917 ($.01 per share). The net effect of the restatement
represents a non-cash interest charge to operations.
F-29
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. RESTATEMENT (Continued)
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
As
Previously As
Reported Restatement Restated
-------- ----------- --------
<S> <C> <C> <C>
Convertible Debenture, net $ 885,002 $ 572,917 $ 1,457,919
============ ========= ==============
Deficit accumulated during the development
stage $(12,978,059) $(572,917) $ (13,550,976)
============ ========= ==============
Interest expense $ 667,804 $ 572,917 $ 1,240,721
============ ========= ==============
Net loss $ (3,984,793) $(572,917) $ (4,557,710)
============ ========= ==============
Net loss per share of common stock - basic
and diluted ($.01) ($.01) ($.02)
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
June 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 95,618 $ 924,420
Investments -- 821,047
Inventory 19,729 19,729
Other current assets 45,606 29,818
------------ ------------
Total current assets 160,953 1,795,014
Property and Equipment 1,090,339 1,049,593
Other Assets 496,570 460,346
------------ ------------
Total assets $ 1,747,862 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 505,797 $ 279,024
Current portion of capital lease obligation 39,993 38,335
------------ ------------
Total current liabilities 545,790 317,359
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 1,481,965 1,457,919
Capital lease obligation - long-term portion 146,961 167,380
------------ ------------
Total long-term liabilities 1,628,926 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement -- 600,000
------------ ------------
Deposit on Exercise of Options 30,000 --
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 301,340,183 and 296,422,907
shares issued and outstanding 3,013 2,964
Additional paid-in capital 15,621,665 14,325,076
Deficit accumulated during the development stage (15,636,808) (13,550,976)
Discount on warrants (444,724) --
Deferred compensation cost -- (14,769)
------------ ------------
Total stockholders' equity (deficit) (456,854) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,747,862 $ 3,304,953
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-31
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Inception
(February 20,
Three Months Ended Six Months Ended 1984) to
June 30, June 30, June 30,
-------- -------- --------
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 2,191 $ -- $ 4,590 $ -- $ 199,565
Interest 5,680 27,926 21,489 57,223 580,786
Other income -- -- -- 100 120,093
------------- ------------- ------------- ------------- -------------
7,871 27,926 26,079 57,323 900,444
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 409,464 210,618 767,380 380,764 4,350,847
General and administrative 618,529 572,845 1,056,932 1,078,259 8,372,269
Depreciation and amortization 85,199 365,396 148,556 541,823 805,839
Interest 70,715 30,983 139,043 306,231 3,008,297
------------- ------------- ------------- ------------- -------------
1,183,907 1,179,842 2,111,911 2,307,077 16,537,252
------------- ------------- ------------- ------------- -------------
Net Loss $ (1,176,036) $ (1,151,916) $ (2,085,832) $ (2,249,754) $ (15,636,808)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 298,881,545 282,767,657 298,881,545 282,767,657
============= ============= ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
F-32
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
------------- ------------- ------------- --------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
------------- ------------- ------------- --------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
------------- ------------- ------------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
------------- ------------- ------------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
------------- ------------- ------------- --------
</TABLE>
See notes to consolidated condensed financial statements.
F-33
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ .03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, period ended December 31, 1987 -- -- -- (258,663)
------------- ----------- ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------- ----------- ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------- ----------- ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .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 condensed financial statements.
F-34
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
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 condensed financial statements.
F-35
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070
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 -- -- --
------------ ------------ ------------
Balance, December 31, 1994 241,616,991 2,416 3,704,517
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 -- -- --
------------ ------------ ------------
Balance, December 31, 1995 251,181,774 2,512 4,475,875
------------ ------------ ------------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1993 $ -- $ (2,854,076) $ --
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Net loss, year ended December 31, 1994 -- (440,837) --
------------ ------------ ------
Balance, December 31, 1994 -- (3,294,913) --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, for consulting services -- -- --
Net loss, year ended December 31, 1995 -- (401,884) --
------------ ------------ ------
Balance, December 31, 1995 -- (3,696,797) --
------------ ------------ ------
</TABLE>
See notes to consolidated condensed financial statements.
F-36
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875
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
Subscription receivable -- -- --
Net loss, year ended December 31, 1996 -- -- --
------------ ------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
------------ ------- -----------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1995 $ -- $ (3,696,797) $ --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for services rendered -- -- --
Options granted -- -- (473,159)
Subscription receivable (19,000) -- --
Net loss, year ended December 31, 1996 -- (1,154,740) --
-------- ------------ ----------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
-------- ------------ ----------
</TABLE>
See notes to consolidated condensed financial statements.
F-37
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
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 -- -- --
Imputed interest on convertible debenture -- -- 4,768
Net loss, year ended December 31, 1997 -- -- --
------------ ------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
------------ ------- -----------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1996 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, February debenture -- -- --
Beneficial conversion feature, October debenture -- -- --
Warrant costs, February debenture -- -- --
Warrant costs, October debenture -- -- --
Amortization of deferred compensation cost -- -- 399,322
Imputed interest on convertible debenture -- -- --
Net loss, year ended December 31, 1997 -- (4,141,729) --
---------- ------------- -----------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
---------- ------------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
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 -- -- --
Write off of subscription receivable -- -- (19,000)
Net loss, year ended December 31, 1998 -- -- --
------------ ------- ------------
Balance, December 31, 1998 296,422,907 2,964 14,325,076
------------ ------- ------------
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1997 $ (19,000) $(8,993,266) $ (73,837)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost -- -- 59,068
Write off of subscription receivable 19,000 -- --
Net loss, year ended December 31, 1998 -- (4,557,710) --
--------- ----------- ---------
Balance, December 31, 1998 -- (13,550,976) (14,769)
--------- ----------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076
Issuance of common stock, securities purchase .16 4,917,276 49 802,451
agreement
Warrants Costs, securities purchase agreement -- -- 494,138
Amortization of warrant costs, securities purchase
agreement -- -- --
Amortization of deferred compensation cost -- -- --
Net loss, six months ended June 30, 1999 -- -- --
------------ -------- -------------
Balance, June 30, 1999 301,340,183 $ 3,013 $ 15,621,665
============ ======== =============
(CONTINUED TABLE)
Deficit
Accumulated
during the Deferred Discount
Development Compensation on
Stage Cost Warrants
----- ---- --------
<C> <C> <C>
Balance, December 31, 1998 $(13,550,976) $ (14,769) $ --
Issuance of common stock, securities purchase -- -- --
agreement
Warrants Costs, securities purchase agreement -- -- (494,138)
Amortization of warrant costs, securities purchase
agreement -- -- 49,414
Amortization of deferred compensation cost -- 14,769 --
Net loss, six months ended June 30, 1999 (2,085,832) -- --
------------ --------- ---------
Balance, June 30, 1999 $(15,636,808) $ -- $(444,724)
============ ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
F-40
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Six Months Ended (February 20,
June 30, 1984) to
-------- June 30,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,085,832) $ (2,249,754) $(15,636,808)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization of loan costs 148,556 541,823 805,839
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 210,951 2,679,015
Amortization of discount on warrants 73,460 -- 73,460
Amortization of deferred compensation cost 14,769 29,534 760,500
Issuance of common stock for services -- -- 1,437,500
Other -- -- (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (15,787) (3,382) (45,606)
Increase in inventory -- -- (19,729)
Increase in other assets (88,724) (63,393) (865,465)
Increase (decrease) in accounts payable and
accrued liabilities 226,773 (100,199) 511,997
------------ ------------ ------------
Total adjustments 359,047 615,334 5,335,904
------------ ------------ ------------
Net cash used by operating activities (1,726,785) (1,634,420) (10,300,904)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,700,902 6,292,979
Expenditures for property and equipment (136,803) (303,577) (1,280,403)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities 684,244 2,303,325 (1,279,203)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- -- 5,500,000
Proceeds from deposit on exercise of options 30,000 -- 30,000
Proceeds from sale of securities, net of issuance costs 202,500 225,400 6,181,088
Payments under capital lease (18,761) -- (35,363)
------------ ------------ ------------
Net cash provided by financing activities 213,739 225,400 11,675,725
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (828,802) 894,305 95,618
Cash and Cash Equivalents, Beginning 924,420 236,059 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 95,618 $ 1,130,364 $ 95,618
============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-41
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at June 30, 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of June 30, 1999 and
results of operations for the three months and the six months ended
June 30, 1999 and 1998 and cash flows for the six months ended June
30, 1999 and 1998. All such adjustments are of a normal recurring
nature. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full
year. The statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at June 30, 1999 have been prepared in conformity with
generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company is dependent upon registration of Reticulose for sale
before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA.
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 and debt
financing 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 equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
1999 and 1998, the Company obtained equity and debt financing and
may seek additional financing as the need arises. No assurance can
be given that the Company will be able to sustain its operations
until FDA approval is granted or that any approval will ever be
granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to
submit an application for approval with the FDA in the near future.
The consolidated condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of Reticulose. The Company has not as yet
received any notice of claim from such parties.
F-42
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of Reticulose. Although the Company is
unaware of any such claims or threatened claims since Reticulose
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of Reticulose. As of the date
hereof, the Company does not have product liability insurance for
Reticulose. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
have a material adverse effect on the Company.
Lack of Patent Protection
The Company does not presently have a patent for Reticulose but the
Company has three patents for the use of Reticulose as a treatment.
The Company currently has 34 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.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Reticulose incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through December 31,
1999 at an exercise price of $.15 and $.17, respectively. As of
June 30, 1999, there are outstanding Plata Options to acquire
683,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through June 30, 1999, 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-43
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
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.
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, Dr. Flichman delivered the Written
Report 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 December 31, 1999 at an
exercise price of $.21 per share. As of June 30, 1999, 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 advanced
approximately $665,000, which is accounted for as research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
F-44
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. 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 $132,000, respectively. Such expenses are
accounted for as research and development expense. 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 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 June 30, 1999, 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
$85,000, which has been accounted for as research and development
expense.
F-45
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. 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 June 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
In April 1999, the Company advanced $47,750 for expenses in
connection with the drug approval process in Argentina.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Reticulose in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of June 30, 1999, the Company has
expended approximately $390,000 to cover the costs of the Barbados
Study.
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 June 30, 1999, the Company has advanced
approximately $10,000 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 was
to 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-46
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. 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, 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 June 30, 1999, 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, 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. As of June 30, 1999, 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-47
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. 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
do 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.
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
F-48
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
Cohen Agreement and the remaining 500,000 shares of which were
issuable upon Mr. Cohen completing 50 hours of consulting service
to the Company. The Company issued the first 500,000 shares to Mr.
Cohen in October 1992 and the remaining 500,000 shares to Mr. Cohen
in February 1993. Further pursuant to the September 1992 Cohen
Agreement, the Company granted to Mr. Cohen the option to acquire,
at any time and from time to time through September 10, 1993 (which
date has been extended through December 31, 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 $.16 per share) (the "September 1992 Cohen Options").
As of June 30, 1999, 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"). Through June 30, 1999, 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 December 31, 1999 at an option
price of $.14.
Globomax Agreement
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to AVRC's Ind submission and to perform
all work that is necessary to obtain FDA's approval. The contract
expires on December 31, 1999 but may be extended by mutual written
agreement of both parties. The Company has incurred approximately
$110,000 in services to Globomax through June 30, 1999.
F-49
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Reticulose in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Reticulose to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Reticulose
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
NOTE 3. SECURITIES PURCHASE AGREEMENTS
Convertible Debentures
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 "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, 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 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 Common Stock, respectively. As of May 5,
1998, the October Debenture was fully converted.
F-50
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants are $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants was
estimated to be $37,000 ($.021 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes
Pricing Model. This amount has been reflected in the accompanying
financial statements as interest expense related to the convertible
February Debenture. Based on the terms for conversion associated
with the February Debenture, there was an intrinsic value
associated with the beneficial conversion feature of $413,793. This
amount has been fully amortized to interest expense with a
corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the
Company issued to RBB three warrants (the "October Warrants") to
purchase Common Stock, each such October Warrant entitling the
holder to purchase, from the date of grant through August 30, 2007,
600,000 shares of the Common Stock. The exercise price of the three
October Warrants are $0.20, $0.23 and $0.27 per warrant share,
respectively. The fair value of the three October Warrants was
established to be $106,571 ($.178 per warrant), $97,912 ($.163 per
warrant) and $87,472 ($.146 per warrant), respectively, based upon
a financial analysis of the terms of the warrants using the
Black-Sholes Pricing Model. This amount has been reflected in the
accompanying financial statements as a discount on the convertible
debenture, with a corresponding credit to additional paid-in
capital, and is being amortized over the expected term of the notes
which at December 31, 1997 was 120 months. In May 1998, the
remaining unamortized discount of $276,957 was amortized upon full
conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $1,350,000. This amount has been
treated as deferred interest expense and recorded as a reduction of
the convertible debenture liability with a corresponding credit to
additional paid-in capital and has been 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.
F-51
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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 is being amortized to interest expense in the
accompanying consolidated financial statements.
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
recorded as interest expense in 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Less unamortized discount and deferred interest 18,035 42,081
----------- -----------
Convertible debenture, net $1,481,965 $1,457,919
=========== ===========
</TABLE>
On August 3, 1999, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture and warrants to purchase 50,000 shares of the Company's
common stock. The 7% convertible debenture is due August 3, 2009
and the warrants are exercisable through August 3, 2004.
Other
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an
aggregate purchase price of $802,500. Such agreement also provided
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. The fair value of these
warrants was estimated to be $494,138 ($.209 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 five years. This amount is being amortized to
interest expense in the accompanying consolidated financial
statements.
F-52
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
Included in general and administrative expenses for the period
ended June 30, 1999 is $120,000, which may be payable by the
Company as additional financing costs related to the effective date
of a registration statement covering the resale of certain
securities sold by the Company.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provides for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($.04 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 five
years. This amount will be amortized to interest expense.
F-53
<PAGE>
================================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
42,432,493 Shares
of
Common Stock
_____, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by Advanced Viral. All amounts shown are estimates, except the Commission
registration fee:
Commission registration fee...................................$5,000 *
Printing and mailing expenses.................................$5,000
Legal fees and expenses......................................$50,000
Accounting fees and expenses.................................$10,000
-------
Total...............................................$70,000
Previously paid.
Item 14. Indemnification of Directors and Officers
Article Ninth of our Certificate of Incorporation contains the
following provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person, who has
ceased to be director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director,
II-1
<PAGE>
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a)
II-2
<PAGE>
and (b) of this section. Such determination shall be made , with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a
quorum, or (2) by a committee of such directors designated by majority
vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (4) by the stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
Item 15. Recent Sales of Unregistered Securities
The following table sets forth our sales of unregistered securities for
past three years. All transactions listed below involved the issuance of common
stock and options to acquire shares of common stock prior to commencement of the
offering described in the foregoing prospectus. No underwriters were employed
with respect to the sale of any of the securities listed below. All shares were
issued in reliance upon Section 4(2) and/or 3(b) of the Securities Act.
<TABLE>
<CAPTION>
Securities Issued Purchaser Date Acquired Consideration
- ----------------- --------- ------------- -------------
<S> <C> <C> <C>
5,000,000 options exercisable at Shalom Z. Hirschman, M.D. 4-1-96 Services (Consulting) (1)
each of $0.18, $0.19, $0.27 and
$0.36 per share
500,000 options exercisable at Deborah Silver 4-1-96 Services (Consulting) (1)
$0.18 per share
II-3
<PAGE>
1,000,000 options exercisable at Freddie Velez 4-1-96 Services (Consulting) (1)
$0.20 per share
500,000 options at $0.20 per share Gary Hussian 4-1-96 Services (Consulting) (1)
500,000 options at $0.20 per share Cesar Blumtritt, M.D. 4-1-96 Services (Consulting) (1)
50,000 shares Malcolm Santer 9-4-96 Services (Consulting) (2)
50,000 shares Malcolm Santer 2-26-97 Services (Consulting) (2)
750,000 shares David Sass 3-21-97 .08 per share
375,000 shares Norman Schwartz 3-21-97 .08 per share
375,000 shares Mel Mendelson 3-21-97 .08 per share
1,833,333 shares Matthew Cohen 3-21-97 .08 per share
1,648,352 shares RBB Bank 4-22-97 .20 per share (3)
894,526 shares RBB Bank 6-6-97 .15 per share (3)
2,323,580 shares RBB Bank 7-3-97 .12 per share (3)
1,809,524 shares RBB Bank 8-20-97 .15 per share (3)
100,000 shares Malcolm Santer 9-8-97 Services (Consulting) (4)
722,701 shares RBB Bank 12-9-97 .16 per share (5)
1,017,011 shares RBB Bank 1-7-98 .13 per share (5)
2,512,887 shares RBB Bank 1-14-98 .14 per share (5)
23,000,000 options at $0.27 per Shalom Z. Hirschman, M.D. 2-18-98 (6)
share
5,114,218 shares RBB Bank 2-23-98 .15 per share (5)
190,000 shares Plata 3-5-98 .12 per share
1,498,884 shares RBB Bank 3-19-98 .22 per share (5)
105,000 shares Plata 3-27-98 .12 per share
1,870,869 shares RBB Bank 3-31-98 .23 per share (5)
10,000 shares Freddie Velez 4-3-98 .20 per share
200,000 shares Charles Miller 4-3-98 .14 per share
1,491,485 shares RBB Bank 5-4-98 .18 per share (5)
3,299,979 shares RBB Bank 5-5-98 .19 per share (5)
50,000 shares Charles Miller 5-13-98 .16 per share
200,000 shares Duffy 5-13-98 .14 per share
100,000 shares Charles Miller 5-13-98 .14 per share
II-4
<PAGE>
100,000 shares Charles Miller 5-18-98 .16 per share
200,000 shares Commonwealth 5-18-98 .26 per share
100,000 shares Commonwealth 5-22-98 .26 per share
100,000 shares Charles Miller 6-22-98 .16 per share
85,000 shares Charles Miller 7-15-98 .16 per share
15,000 shares Charles Miller 7-17-98 .16 per share
25,000 shares Charles Miller 7-22-98 .16 per share
75,000 shares Charles Miller 7-24-98 .16 per share
100,000 shares Malcolm Santer 8-12-98 Services (Consulting)(7)
7% Convertible Debenture RBB Bank 11-16-98 $1,500,000
375,000 warrants RBB Bank 11-16-98 .20 per share
375,000 warrants RBB Bank 11-16-98 .24 per share
2,450,980 shares Harborview Group, Inc. 12/22/98 .16 per share
1,380,392 warrants Harborview Group, Inc. 12/22/98 .2440 and .2448 per share
122,549 Jennifer Brandenburg Smith 12/22/98 .16 per share
49,020 warrants Jennifer Brandenburg Smith 12/22/98 .2440 and .2448 per share
122,549 Jo Sherrin Smith 12/22/98 .16 per share
49,020 warrants Jo Sherrin Smith 12/22/98 ..2440 and .2448 per share
612,745 Joe Feshbach 12/22/98 .16 per share
245,098 warrants Joe Feshbach 12/22/98 .2440 and .2448 per share
382,965 John Zimmerman 12/22/98 .16 per share
153,186 warrants John Zimmerman 12/22/98 .2440 and .2448 per share
61,274 Matt Zimmerman 12/22/98 .16 per share
24,508 warrants Matt Zimmerman 12/22/98 .2440 and .2448 per share
306,372 Myron Weiner 12/22/98 .16 per share
122,508 warrants Myron Weiner 12/22/98 .2440 and .2448 per share
122,549 Robert Franklin Smith, Sr. 12/22/98 .16 per share
49,020 warrants Robert Franklin Smith, Sr. 12/22/98 .2440 and .2448 per share
306,372 Russell Kuhn 12/22/98 .16 per share
122,508 warrants Russell Kuhn 12/22/98 .2440 and .2448 per share
122,549 Shelly Marion Smith 12/22/98 .16 per share
49,020 warrants Shelly Marion Smith 12/22/98 .2440 and .2448 per share
306,372 Victor Sherman 12/22/98 .16 per share
122,508 warrants Victor Sherman 12/22/98 .2440 and .2448 per share
370,370 shares Kwong Wai Au 6-30-99 .27 per share
277,778 warrants Kwong Wai Au 6-30-99 .324 and .378 per share
925,926 shares Michael Berman 6-30-99 .27 per share
463,564 warrants Michael Berman 6-30-99 .324 and .378 per share
II-5
<PAGE>
555,556 shares Pak-Lin Law 6-30-99 .27 per share
185,186 warrants Pak-Lin Law 6-30-99 .324 and .378 per share
7% Convertible Debentures Focus Investors LLC 8-3-99 $2,000,000 (aggregate)
1,000,000 warrants Focus Investors LLC 8-3-99 .2461 per share
4,547,880 shares Alan Gallantar 10-1-99 .24255 per share (8)
</TABLE>
- --------------------------
(1) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
have been valued at $0.11 per share.
(2) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
been valued at $0.50 per share and $0.41 per share, respectively.
(3) The conversions were made pursuant to the February 21, 1997 issuance of
convertible debentures.
(4) The 100,000 shares issued for consulting services on 9-8-97 have been
valued at $0.24 per share.
(5) The conversions were made pursuant to the October 1997 issuance of
convertible debentures.
(6) Granted pursuant to the Hirshman employment agreement.
(7) The 100,000 shares issued for consulting services on 8-12-98 have been
valued at $0.21 per share.
(8) Granted pursuant to the Gallantar employment agreement.
[This Space Intentionally Left Blank]
II-6
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Articles of Incorporation of Advanced Viral Research Corp.(2)
3.2 Bylaws of Advanced Viral Research Corp., as amended(1)
3.3 Amendment to Articles of Incorporation of Advanced Viral Research
Corp.(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between Advanced Viral and American Stock Transfer
and Trust Company(1)
4.4 Forms of Common Stock Options and Agreements granted by Advanced
Viral to TRM Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by Advanced Viral
to Plata Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common
Stock granted by Advanced Viral to Leonard Cohen(6)
4.7 Addendum to Agreement granted by Advanced Viral to Shalom Z.
Hirschman, M.D. dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998, by and
between Advanced Viral and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998, by and
between Advanced Viral and various purchasers. **
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of Advanced Viral at $0.2040 per share. **
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of Advanced Viral at $0.2448 per share. **
II-7
<PAGE>
Exhibit
Number Description
- ------ -----------
4.15 Securities Purchase Agreement dated June 23, 1999, by and between
Advanced Viral and various purchasers. **
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of Advanced Viral at $0.324 per share. **
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of Advanced Viral at $0.378 per share. **
4.18 Securities Purchase Agreement dated August 3, 1999, by and between
Advanced Viral and Focus Investors, LLC. **
4.19 7% Convertible Debenture dated August 3, 1999. **
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of
common stock at $0.2461 per share. **
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel &
Mandler, P.A. *
10.1 Declaration of Trust by Bernard Friedland and William Bregman in
favor of Advanced Viral dated November 16, 1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique
Medical Actuel and Advanced Viral(3)
10.3 Letter, dated March 15, 1991 to Advanced Viral from Health Protection
Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and
Advanced Viral(11)(a
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and
Advanced Viral(4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell
Inc. and Advanced Viral(7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen
and Advanced Viral(8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between
Lionel Resnick, M.D. and Advanced Viral(11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc.
and Advanced Viral(12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between
C.U.R.E. Pharmaceutical Corp. and Advanced Viral(11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between
C.U.R.E. Pharmaceutica Central Americas Ltd. and Advanced Viral(11)(d
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between
DCT S.R.L. and Advanced Viral, as amended(11)(e)
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and Advanced Viral(11)(f)
10.14 Agreement dated May 24, 1995 between Advanced Viral and Deborah
Silver(9)
10.15 Agreement dated May 29, 1995 between Advanced Viral and Shalom Z.
Hirschman, M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between
AVIX International Pharmaceutical Corp. and Advanced Viral(12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2,
1995 with Commonwealth Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December
28, 1995, between AVIX International Pharmaceutical Corp., Beijing
Unistone Pharmaceutical Co., Ltd. and Advanced Viral(11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and Advanced Viral(11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and Advanced
Viral(11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between
Advanced Viral and Shalom Z. Hirschman, M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX
International Pharmaceutical Corp. and Advanced Viral(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between Advanced Viral
and Shalom Z. Hirschman, M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and
Advanced Viral(12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between
Advanced Viral and Interfi Capital Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development
Agreement, dated March 13, 1997, between National Institute of
Health, Food and Drug Administration and the Centers for Disease
Control and Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between
Advanced Viral and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative
Research and Development Agreement, dated March 4, 1998, between
National Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (13)
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between
Advanced Viral and Shalom Z. Hirschman, M.D.(11)(n)
10.30 Agreement between Advanced Viral and Angelo Chinnici, M.D. dated
July 1, 1999. (14)
10.31 Consulting Agreement between Advanced Viral and GloboMax LLC dated
January 18, 1999. (14)
10.32 Registration Rights Agreement dated August 3, 1999 between Advanced
Viral Research and Focus Investors LLC. **
10.33 Employment Agreement dated October 1, 1999 between Advanced Viral
and Alan V. Gallantar *
21.1 Subsidiaries of Registrant: Advance Viral Research Limited, a
Bahamian corporation, and Peptigen Biopharmaceuticals, Inc., a
Delaware corporation.
23.1 Consent of Rachlin Cohen & Holtz, LLP, Independent Certified Public
Accountants *
23.2 Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler,
P.A. (See Exhibit 5.1).
27.1 Financial Data Schedule for Advanced Viral as of and for the
Six Months ended June 30, 1999. *
* Filed herewith.
** Previously filed.
1. Documents incorporated by reference herein to certain exhibits our
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 our
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 our
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Reports on Form 8-K and Exhibits
thereto as follows:
II-10
<PAGE>
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
</TABLE>
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if,
II-11
<PAGE>
in the aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Advanced Viral has duly caused this Amendment No. 3 to the Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Yonkers, State of New York, on October 20, 1999.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
---------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Shalom Z. Hirschman, M.D President and Chief October 20, 1999
- ------------------------------------ Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and October 20, 1999
- ------------------------------------ director
Bernard Friedland
/s/ Alan Gallantar Chief Financial Officer October 20, 1999
- ------------------------------------
William Bregman
/s/ William Bregman Secretary-Treasurer, October 20, 1999
- ------------------------------------ director
William Bregman
/s/ Louis J. Silver director October 20, 1999
- ------------------------------------
Louis J. Silver
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
<S> <C> <C>
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel &
Mandler, P.A.
10.33 Employment Agreement dated October 1, 1999 between Advanced Viral
and Alan V. Gallantar
21.1 Subsidiaries of Advanced Viral Research Corp.
23.1 Consent of Rachlin Cohen & Holtz, LLP, Independent Certified Public
Accountants
27.1 Financial Data Schedule for Advanced Viral as of and for the Six Months
Ended June 30, 1999
</TABLE>
BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
ATTORNEYS AND COUNSELORS
NATIONSBANK TOWER AT INTERNATIONAL PLACE
100 SOUTHEAST SECOND STREET, SUITE 3500
MIAMI, FLORIDA 33131-2130
CHARLES J. RENNERT PHONE (305) 577-4177
FAX (305) 373-6036
October 20, 1999
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
Gentlemen:
You have requested our opinion, as counsel to Advanced Viral Research
Corp., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-1 (Registration No. 333-70523, as amended (the
"Registration Statement"), filed by the Company with the U.S. Securities and
Exchange Commission (the "Commission").
The Registration Statement relates to an offering of up to 42,432,493
shares (the "Shares") of the common stock of the Company, par value $0.00001 per
share, by certain shareholders, which include:
(i) 4,917,276 shares of common stock held by certain shareholders;
(iii) 4,701,922 shares of the Company's common stock issuable upon
the exercise of certain warrants (the "Warrants"); and
(iii) 32,813,295 shares of the Company's common stock issuable upon
the exercise of certain stock options (the "Options").
We have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records,
certificates and instruments relating to the Company as we have deemed relevant
and necessary to the formation of the opinion hereinafter set forth. In such
examination, we have assumed the genuineness and authenticity of all documents
examined by us and all signatures thereon, the legal capacity of all persons
executing such documents, the conformity to originals of all copies of documents
submitted to us and the truth and correctness of any representations and
warranties contained therein.
<PAGE>
We have also consulted with officers and directors of the Company and
have obtained such representations with respect to the matters of fact as we
have deemed necessary or advisable for purposes of rendering the opinion
hereinafter expressed. We have not independently verified the factual statements
made to us in connection therewith, nor the veracity of such representations.
Based upon and subject to the foregoing, we are of the opinion that,
after the Commission has declared the Registration Statement to be effective
(such Registration Statement as is finally declared effective and the form of
Prospectus contained therein being hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively) and when the applicable
provisions of the "Blue Sky" or other state securities laws shall have been
complied with, the shares covered by the Registration Statement, upon receipt of
payment therefor and the satisfaction of all other conditions as referenced in
the warrants, the options and all agreements relating thereto, will constitute
legally issued securities of the Company, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference of this law firm in the Prospectus
under the heading "LEGAL MATTERS." In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Respectfully submitted,
/s/ BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
----------------------------------------------
BERMAN WOLFE & RENNERT VOGEL & MANDLER, P.A.
EMPLOYMENT AGREEMENT
--------------------
This Agreement made as of the 1st day of October, 1999, by and between
ADVANCED VIRAL RESEARCH CORP., a Delaware corporation, with offices located at
200 Corporate Boulevard South, Suite 145, Yonkers, New York 10701 (the
"Corporation") and ALAN GALLANTAR, with an address at 97 Trieste Street, Iselin,
New Jersey 08830 (the "Employee"):
W I T N E S S E T H :
WHEREAS, the parties desire to enter into this agreement to set forth
the terms of the Employee's employment by the Corporation.
NOW, THEREFORE, in consideration of the mutual premises and covenants
set forth herein and for other good and valuable consideration, the receipt,
adequacy and legal sufficiency of which are hereby acknowledged, the Corporation
and the Employee mutually agree as follows:
1.Employment and Duties.
(a) Employment. The Company agrees to employ the Employee, and
the Employee agrees to accept employment with the Company, on the terms and
conditions hereinafter set forth.
(b) Scope of Duties. The Employee's title shall be Chief
Financial Officer of the Company. The Employee shall render services solely for
the benefit, and on behalf of the Company and its subsidiaries as directed by
the Board of Directors of the Company. The Board of Directors of the Company
shall have the power to determine the general and specific duties to be
performed by the Employee and the means and the manner by which those duties
shall be performed.
1
<PAGE>
(c) Professional Standards. Recognizing and acknowledging that
it is essential for the protection and enhancement of the name and business of
the Corporation and the good will pertaining thereto, the Employee shall perform
his duties under this Agreement professionally and in accordance with the
standards established by the Corporation from time to time; and the Employee
shall not act, and shall refrain from acting, in any manner that could harm or
tarnish the name, business or income of the Corporation or the good will
pertaining thereto.
2.Devotion of Time to Employment: The Employee shall devote his full
business time and attention to the business and affairs of the Corporation as
shall be necessary to carry out his duties hereinabove, and as may be amended
from time to time consistent with the Corporation's business development.
3.Compensation and Benefits:
(a) Base Salary. For all services rendered by the Employee
during the term of this Agreement, the Corporation shall pay to the Employee a
base salary, payable in accordance with the Corporation's customary payment
policies and periods, at the following annual rates: (i) for the period
commencing on the date of this Agreement and ending on the day immediately
preceding the first anniversary of the date of this Agreement, $175,000; (ii)
for the period commencing on the first anniversary of the date of this Agreement
and ending on the day immediately preceding the second anniversary of the date
of this Agreement, $200,000; and (iii) for the period commencing on the second
anniversary of the date of this Agreement and ending on the day immediately
preceding the third anniversary of the date of this Agreement, $225,000.
(b) Bonuses. For each year during the term of this Agreement
the Corporation shall pay to the Employee not later than 90 days after the end
of such period a cash bonus of not less than 10% nor more than 50% of the
Employee's base salary for such year the lesser percentage being
2
<PAGE>
earned upon the completion of each year's term of service in compliance with
this Agreement, and the remaining 40% being dependent on the Board's good faith
determination, after discussion with the Employee as to whether or not the
Corporation and the Employee met their respective goals for such year, as set
forth in Schedule A-1 and A-2 for each year of the term hereof.
(c) Fringe Benefits. During the term of this Agreement, the
Corporation shall provide to the Employee and the Employee's family the same
benefits that the Corporation is then providing generally to all other senior
executives of the Corporation and their families. Nothing herein shall require
the Corporation to adopt, maintain or continue any fringe benefit.
(d) Stock Options. On the date hereof, the Corporation has
granted to the Employee stock options to purchase an aggregate of 4,547,880
shares of the Corporation's Common Stock, par value $.00001 per share ("Common
Stock"), which number of shares is equal to 1.5% of the issued and outstanding
shares of Common Stock on the date hereof. All of the options granted pursuant
to the preceding sentence shall have a term of ten (10) years from the date of
grant. The price for all Common Stock which may be purchased upon exercise of
the foregoing options shall be $.24255 per share, such amount being equal to
110% of the average of the low bid and high asked prices of the Common Stock for
the last ten days prior to the date of this Agreement during which the
Corporation's Common Stock was traded. Subject to Section 5(c), options to
purchase an aggregate of 1, 515,960 shares shall vest on each of the first,
second and third anniversaries of the date of this Agreement provided that the
Employee shall then be employed by the Corporation and shall not be in material
default of any of the provisions of this Agreement. The Employee shall also be
eligible for additional awards of stock options by the Corporation, provided
that the granting of such options shall be within the sole discretion of the
Board of Directors of the Corporation (or any committee thereof with
responsibility for the granting of stock options).
3
<PAGE>
(e) Vacation. The Employee shall be entitled to vacation at
the rates of 15 working days during the first year and 20 working days during
each succeeding year of the term of this Agreement. Vacation time may be taken
all at once or from time to time; provided, however, that (i) the Employee shall
schedule vacation time so as to mitigate the adverse effect to the Corporation
of the Employee's absence and (ii) the Employee shall give the Corporation at
least thirty (30) days notice of consecutive vacation days in excess of five (5)
to be taken by the Employee at any time.
(f) Automobile Allowance. During the term of this Agreement
the Employee shall receive a non-accountable automobile allowance of $500 per
month. The Employee shall be solely responsible for all costs of acquiring and
maintaining an automobile for his business use including purchase or leasing
costs, fuel, insurance, repairs, license and registration fees.
(g) Professional Fees and Other Reimbursable Expenses. The
Corporation shall reimburse the Employee for certified public accountant license
fees and for membership in professional organizations set forth in Schedule B
hereto up to a maximum of $5,000 per year in the aggregate. In addition, the
Corporation shall reimburse the Employee for all other expenses incurred by him
in performing his duties under this Agreement provided that such expenses are
approved in advance by the Chief Executive Officer of the Corporation.
(h) Relocation Expenses. If the Employee relocates his primary
residence to Westchester County, New York or to New York City prior to the
second anniversary of the date of this Agreement, the Corporation shall pay on
behalf of the Employee, upon receipt of reasonable documentation therefor, the
reasonable expenses incurred by the Employee in connection with such relocation,
up to a maximum of $15,000, such expenses to be limited to those incurred from a
moving company and legal and brokerage fees related to the sale of his current
residence. If any of
4
<PAGE>
the foregoing expenses are taxable as income to the Employee, he shall be
entitled to receive an additional sum equal to 40% of the amount so taxable.
4.Intellectual Property. The parties agree that if any intellectual
property rights, including, without limitation, trademarks, copyrights, or
patents, shall be developed by the Employee from the knowledge the Employee
acquires while performing his duties to the Corporation under this Agreement,
the Employee agrees to assign such rights to the Corporation.
5.Termination of Agreement.
(a) Subject to Section 5(b) and 5(c), the term of this
Agreement shall commence on the date hereof and continue until the third
anniversary of the date hereof. Until the expiration of 90 days after the date
of this Agreement, the Corporation may terminate this Agreement if in the good
faith determination of the Board of Directors of the Corporation, in its sole
discretion, the continued employment of the Employee under this Agreement would
not be beneficial to the Corporation. In such event, the effects of such
termination shall be the same as set forth in Section 5(b), except that the
Employee shall be paid $87,500 as severance pay.
(b) The Corporation may terminate this Agreement at any time
"for cause" if: the Employee becomes unfit to properly render services to the
Corporation hereunder because of alcohol or drug related abuses, as defined
under and is consistent with applicable laws; conviction of a crime or moral
turpitude that constitutes a felony under federal or state law; or material
breach of this Agreement which is not cured within twenty (20) days after
written notice is given by the Corporation to the Employee. Such termination,
except for material breach (in which case the termination shall be effective
immediately upon the expiration of the cure period) shall be effective thirty
(30) days after the delivery of written notice thereof to the Employee of such
termination of his employment for cause (the "Cause Termination Notice"), or at
such later time as may be
5
<PAGE>
designated in said notice. The Employee shall vacate the offices of the
Corporation on or before such effective date unless such termination for cause
may be subject to cure by the Employee. All compensation due hereunder shall
cease as of said effective date of the termination, except accrued compensation
that shall remain unpaid at such date. For such purpose, the Employee shall not
be deemed to have any accrued right to receive any bonus for the year in which
his employment is terminated. Upon a termination of the Employee's employment
under this Section 5(b), the Employee may exercise his options to the extent
vested as of the effective date of termination, until ninety (90) days after the
effective date of termination of his employment, after which such options shall
terminate.
(c) Except in the case of a termination for cause (which is
governed by Section 5(b)), the Corporation may terminate this Agreement upon not
less than thirty (30) days prior written notice for any reason or no reason. In
such event, all compensation shall cease as of the effective date of the
termination, except accrued compensation which shall remain unpaid at such date
(which accrued compensation shall not be deemed to include any bonus payable in
respect of the year in which the Employee's employment was terminated), except
that the Corporation shall also pay to the Employee in cash in three equal
monthly installments starting 30 days after the effective date of termination an
amount equal to an aggregate of 75% of the Employee's annual base salary at the
rate then in effect. Upon a termination of the Employee's employment under this
Section 5(c), all stock options granted to the Employee on the date hereof shall
become 100% vested (the options which were vested prior to the acceleration made
as a result of this sentence are referred to as the "Pre- Vested Options" and
the options which first become vested pursuant to this sentence are referred to
as the "Accelerated Options"). Upon termination of the Employee's employment
under this Section 5(c), the Employee may exercise (i) all of his Pre-Vested
Options for the remainder of the original
6
<PAGE>
term of such Pre-Vested Options and (ii) all of his Accelerated Options until
ninety (90) days after the effective date of termination of his employment,
after which such Accelerated Options shall terminate.
(d) Except in the case of termination by the Employee after a
Change of Control (as hereinafter defined), the effect of which termination
shall be governed by Section 5(e), the Employee may elect to terminate this
Agreement at any time for any reason provided he delivers written notice of such
intention to terminate not less than sixty (60) days prior to the date of such
termination. In such event, all compensation and other benefits (except accrued
compensation which shall remain unpaid at such date (which accrued compensation
shall not be deemed to include any bonus payable in respect of the year in which
the Employee terminates his employment)), shall cease as of the effective date
specified in such notice, except that the Employee shall have the right to
exercise his options to the extent they are vested on the effective date of
termination until ninety (90) days after such date, after which such options
shall terminate.
(e) If there occurs a Change of Control of the Corporation,
the Employee may, at his option, upon thirty (30) days written notice given to
the Corporation within one year after a Change of Control, terminate this
Agreement, and:
(i) the Employee shall be entitled to receive payment
of his base salary for the remaining term of the
Agreement[, to be paid as a lump sum];
(ii) all stock options granted to the Employee on the
date hereof shall immediately become 100% vested; and
(iii) the Employee may exercise all of his stock
options until ninety (90) days after the effective
date of termination of his employment, after which
such options shall terminate.
7
<PAGE>
(f) Notwithstanding any other provision of this Agreement, if
the aggregate present value of the "parachute payments" to the Employee,
determined under Section 280G(b) of the Internal Revenue Code of 1986, as
amended (the "Code"), is at least three times the "base amount" determined under
such Section 280G, then the compensation otherwise payable under this Agreement
and any other amount payable hereunder or any other severance plan, program,
policy or obligation of the Corporation or any other affiliate thereof shall be
reduced so that the aggregate present value of the parachute payments to the
Employee, determined under such Section 280G, does not exceed 2.99 times the
base amount. In no event, however, shall any benefit provided hereunder be
reduced to the extent such benefit is specifically excluded by Section 280G(b)
of the Code as a "parachute payment" or as an "excess parachute payment." Any
decisions regarding the requirement or implementation of such reductions shall
be made by such tax counsel as may be selected by the Company and acceptable to
the Employee.
(g) For purposes of this Agreement, the term "Change of
Control" means the occurrence of any of the following: (i) the consummation of
any transaction the result of which is that any person or group (as such term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended),
other than the Employee, Shalom Hirschman, Bernard Friedland or William Bregman
or any affiliate thereof or any group comprised of any of the foregoing, owns,
directly or indirectly, 51% of the Common Equity (as hereinafter defined) of the
Corporation, (ii) the Corporation consolidates with, or merges with or into,
another person (other than a direct or indirect wholly-owned subsidiary) or any
person consolidates with, or merges with or into, the Corporation, in any such
event pursuant to a transaction in which the outstanding Voting Stock (as
hereinafter defined) of the Corporation, as the case may be, is converted into
or changed for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the
8
<PAGE>
Corporation, as the case may be, is converted into or exchanged for Voting Stock
of the surviving or transferee corporation and the beneficial owners of the
Voting Stock of the Corporation immediately prior to such transaction own,
directly or indirectly, not less than a majority of the Voting Stock of the
surviving or transferee corporation immediately after such transaction, (iii)
the Corporation, either individually or in conjunction with one or more
subsidiaries sells, assigns, conveys, transfers, leases or otherwise disposes
of, or the subsidiaries sell, assign, convey, transfer, lease or otherwise
dispose of, all or substantially all of the properties and assets of the
Corporation and its subsidiaries, taken as a whole (either in one transaction or
a series of related transactions), including capital stock of the subsidiaries,
to any person (other than the Corporation or a wholly owned subsidiary of the
Corporation), or (iv) during any two (2) year period commencing subsequent to
the date of this Agreement, individuals who at the beginning of such period
constituted the Board of Directors of the Corporation (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Corporation was approved by a vote of
two-thirds of the directors then still in office) who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved cease for any reason to constitute a majority of the
Board of Directors then in office; provided, however, that a person shall not be
deemed to have ceased being a director for such purpose if such person shall
have resigned or died. For purposes hereof, (x) the term "Common Equity" of the
Corporation means all capital stock of the Corporation that is generally
entitled to vote in the election of directors and (ii) the term "Voting Stock"
of the Corporation means securities of any class of capital stock of the
Corporation entitling the holders thereof to vote in the election of members of
the Board of Directors of the Corporation.
9
<PAGE>
6.Limitations on Authority: Without the express written consent from
the Board of Directors of the Corporation, and other than in the ordinary course
of business, the Employee shall not have apparent or implied authority to:
(a) Pledge the credit of the Corporation.
(b) Bind the Corporation under any note, mortgage or other
monetary obligation under a monetary instrument.
(c) Release or discharge any debt due the Corporation unless
the Corporation has received the full amount thereof.
(d) Sell, mortgage, transfer or otherwise dispose of a
substantial amount of the assets of the Corporation.
7.Covenant Not to Compete and Confidentiality.
(a) In order to induce the Corporation to enter into an
employment relationship, the Employee covenants and agrees for a period of five
(5) years after termination of the Employee's employment, the Employee will not
directly or indirectly, as sole proprietor, independent contractor, employee,
consultant, agent, partner or joint venturer, or as an officer, director,
stockholder, agent, servant or employee of any firm, person, entity, partnership
or corporation, or otherwise, engage or participate in or attempt to engage or
participate in any manner in the same, a similar or a directly or indirectly
competitive business, to that of Corporation. Notwithstanding the foregoing, the
Employee shall be entitled to be employed by a major pharmaceutical company in a
non-marketing or sales capacity even if such employer is marketing a product
that is competitive with those of the corporation provided that such competitive
product does not constitute 10% or more of such employer's sales.
10
<PAGE>
(b) For a period of one (1) year from and after the
termination of the Employee's employment, the Employee agrees that he shall
refrain from soliciting and shall not, directly or indirectly, as sole
proprietor, independent contractor, employee, consultant, agent, partner, or
joint venturer, or as an officer, director, stockholder, agent or employee of
any firm, person, entity, partnership or corporation, or otherwise solicit the
employees of the Corporation to leave the service of Corporation.
(c) The parties agree that the Corporation's products,
technology, inventions, technical data, process, patent applications,
"know-how", tests, developments, designs, improvements, drawings, formulas,
methods, research plans, clinical plans, clinical data, marketing plans and
business plans shall be a trade secret and proprietary and/or confidential
information. The parties agree that all information concerning the Corporation's
product, RETICULOSE AND/OR PRODUCT R, and any and all additional products
developed during the period of the employee's employment are highly confidential
and are the sole and exclusive property of the Corporation. The parties
acknowledge that the Employee shall have access to confidential information
concerning the Corporation and specifically concerning RETICULOSE AND/OR PRODUCT
R, and any and all additional products developed during the period of the
Employee's employment, including their methodology of development and
manufacture, among other confidential data and information. The Employee
expressly agrees to refrain from disclosing to any person or entity, other than
at the direction and approval of the Board of Directors of the Corporation, any
confidential information regarding RETICULOSE AND/OR PRODUCT R, and any and all
additional products developed during the period of the Employer's employment,
either directly or indirectly, or to seek to exploit RETICULOSE AND/OR PRODUCT
R, and any and all additional products developed during the
11
<PAGE>
period of the Employee's employment, other than through and with the approval of
the Board of Directors of the Corporation, for a period of ten years.
(d) (i) It is agreed and understood by and among the parties
to this Agreement that the restrictive covenants and agreements set forth in
subsections 7(a), 7(b) and 7(c) are each individually essential elements of this
Agreement and that, but for agreement of the Employee to comply with such
covenants and agreements, the Corporation would not have agreed to employ the
Employee. Further, the Employee expressly acknowledges that the restrictions
contained in subsections 7(c), 7(b) and 7(c) are reasonable and necessary to
accomplish the mutual objectives of the parties associated with the employment
relationship and to protect the Corporation's legitimate interests and
protecting its business and business relationships. The Employee further
acknowledges that enforcement of the restrictions contained herein will not
deprive him, or any of his agents, servants or employees, or any of them, of the
ability to earn a reasonable living and that any violation of the restrictions
contained in this Agreement will cause irreparable injury to Corporation. Such
covenants and agreements of the Employee shall be construed as agreements
independent of any other provision of this Agreement and of each other. The
existence of any claim or cause of action of the Employee against the
Corporation, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Corporation of such restrictive
covenants and agreements.
(ii) It is agreed by the parties hereto that if any portion of
the restrictive covenants and agreements set forth in subsubsections 7(a), 7(b)
and 7(c) are held to be invalid, unreasonable, arbitrary or against public
policy, then each such agreement shall be considered divisible both as to time,
geographical area and any other relevant feature, with each month of a specified
period being deemed a separate period of time and each geographical market area
being deemed a separate
12
<PAGE>
geographical area, it being the intention of the parties that a lesser period of
time, geographical area or other relevant feature shall be enforced as long as
the same is not unreasonable, arbitrary or against public policy. The parties
hereto further agree that, in the event any court of competent jurisdiction
determines that a specified time period, a specified geographical area or any
other relevant feature is unreasonable, arbitrary or against public policy, a
lesser time period, geographical area or other relevant feature which is
determined to be reasonable, non-arbitrary and not against public policy may be
enforced against the Employee, and the Employee agrees to be bound thereby.
(iii) The parties hereto agree that damages at law,
including but not limited to monetary damages, will be insufficient remedy to
the Corporation in the event that the restrictive covenants of subsubsections
7(a), 7(b) and 7(c) are violated and that, in addition to any remedies or rights
that may be available to the Corporation, all of which other remedies or rights
shall be deemed to be cumulative, retained by Corporation and not waived by the
enforcement of any remedy available hereunder, including but not limited to the
right to sue of monetary damages; Corporation also shall be entitled, upon
application to a court of competent jurisdiction, to seek injunctive relief,
including but not limited to a temporary restraining order or temporary,
preliminary or permanent injunction, to enforce the provisions of this Section 7
as well as an equitable accounting of all profits or benefits arising out of any
such violation, all of which shall constitute rights and remedies to which the
Corporation may be entitled.
(e) The Employee recognizes that the restrictions set forth in
this Section 7 are reasonable and properly required for the adequate protection
of the business of the Corporation
8.Survival of Representations and Warranties. The warranties,
representations, covenants and agreements set forth herein shall be continuous
and shall survive the termination of this Agreement or any part hereof.
13
<PAGE>
9.Entire Agreement: This Agreement contains the entire understanding
between the parties hereto with respect to the transactions contemplated hereby,
and this Agreement supersedes in all respects all written or oral understandings
and agreements heretofore existing between the parties hereto.
10.Amendment and Waiver: This Agreement may not be modified or amended
except by an instrument on writing duly executed by the parties hereto. No
waiver of compliance with any provision or condition hereof and no consent
provided for herein shall be effective unless evidenced by an instrument in
writing duly executed by the party hereto sought to be charged with such waiver
or consent.
11.Notices: Notices and requests required or permitted hereunder shall
be deemed to be delivered hereunder if mailed with postage prepaid or delivered,
in writing to the addresses set forth above or to such other address as the
respective parties shall designate in writing.
12.Counterparts: This Agreement may be executed in one or more
counterparts, and all such counterparts shall constitute one and the same
instrument.
13.Captions: Captions used herein are for convenience only and are not
a part of this Agreement and shall not be used in construing it.
14.Execution of Documents: At any time and from time to time, the
parties hereto shall execute such documents as are necessary to effect this
Agreement.
15.Arbitration: Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, or regarding the failure or refusal to
perform the whole or any part of this Agreement shall be settled by arbitration
in New York City. Any such arbitration shall be held in accordance with the
rules of the American Arbitration Association, and the judgment upon the award
rendered may be entered in any court having jurisdiction hereof. Any decision
made by an arbitrator or by the
14
<PAGE>
arbitrators under this provision shall be enforceable as a final and binding
decision as if it were a final decision or decree of a court of competent
jurisdiction.
16.General Provisions:
(a) Assignability. This Agreement shall not be assignable by
any of the parties to this Agreement without the prior written consent of all
other parties to this Agreement.
(b) Governing Law. This Agreement has been negotiated and
prepared and shall be performed in the State of New York, and the validity,
construction and enforcement of, and the remedies under, this Agreement shall be
governed in accordance with the laws of the State of New York.
(c) Severability of Provisions. The invalidity or
unenforceability of any particular provision hereof shall not affect the
remaining provisions of this Agreement, and this Agreement shall be construed in
all respect as if such invalid or unenforceable provision were omitted.
(d) Successors and Assigns. The rights and obligations of the
parties hereunder shall inure to the benefit of, and be binding and enforceable
upon the respective heirs, successors, assigns and transferees of either party.
(e) Reliance. All representations and warranties contained
herein, or any certificate or other instrument delivered in connection herewith,
shall be deemed to have been relied upon by the parties hereto, notwithstanding
any independent investigation made by or on behalf of such parties.
15
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto caused this Agreement
to be executed the day and year first above written.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Hirschman
------------------------
Shalom Hirschman,
President and Chief Executive Officer
EMPLOYEE
/s/ Allan Gallantar
-------------------
Alan Gallantar
16
<PAGE>
EXHIBIT A-1
-----------
Corporate Performance Goals
---------------------------
The corporate objectives, the attainment of which 50% of the
discretionary bonus payable to the Employee will depend, include the following:
1. Approval of one or more IND's by the United States Food and Drug
Administration;
2. Increased values for shareholders reflected by long term stock price
appreciation;
3. Attainment of listing on NASDAQ SmallCap Market and, subsequently, on
the NASDAQ National Market;
4. The execution of material license agreements with attendant royalty
streams payable to the Corporation;
5. Successful completion of corporate finance transactions resulting in
the infusion of equity, quasi equity and/or long term debt into the
Corporation (not including so called "death spiral" transactions);
6. Joint venture transactions with major pharmaceutical companies;
17
<PAGE>
EXHIBIT A-2
-----------
Individual Performance Goals1
-----------------------------
The individual objectives, the attainment of which 50% of the
discretionary bonus payable to the Employee will depend, include the following:
1. Establish and maintain policies for effective investor communications;
2. Establish and maintain financial controls, reporting systems and
accounting policies and provide timely and accurate operating
information to management and regulatory agencies;
3. Move the accounting, legal and financial reporting functions to New
York headquarters;
4. Prepare budgets for the Company;
5. Establish and maintain an approval process for growth and development
plans;
6. Analyze results of operations versus budget and prior year results of
operations;
7. Make recommendations to the CEO and Board of Directors with respect to
operating efficiencies;
8. Develop and supervise staff;
9. Develop and maintain a corporate culture and mission statement;
10. Develop and maintain investor communications procedures;
11. Develop and maintain employee benefit plans, including a 401(k) plan;
12. Discuss, develop and maintain a business plan strategy for the Company;
13. Develop and maintain corporate governance policies to expand the
breadth of the Board of Directors and Advisory Boards;
14. Develop and maintain risk management policies for the Company;
15. Develop intangible property policies for the Company;
16. Maintain an ongoing relationship between the Company and NASDAQ and
market makers;
17. Develop a strategy to move the Company from OTC Bulletin Board to
NASDAQ SmallCap listing.
- -------------------------
1 With the exception of Number 3, each of the items will be addressed
each year, except that it is intended that, once established, most of the
policies will not require significant modifications on a year by year basis.
18
<PAGE>
EXHIBIT B
---------
National and regional organizations and licenses relating to the
Employee's status as a certified public accountant.
19
SUBSIDIARIES OF REGISTRANT
1. Advance Viral Research Limited, a Bahamian Corporation
2. Peptigen Biopharmaceuticals, Inc., a Delaware Corporation.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of Advanced Viral Research Corp. of our
report dated February 11, 1999 (which report contains an explanatory paragraph
that describes a condition that raises substantial doubt as to the ability of
Advanced Viral Research Corp. to continue as a going concern) relating to the
Consolidated Financial Statements of Advanced Viral Research Corp. As of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 appearing in such Prospectus. We also consent to the
references to us under the heading "EXPERTS" in the Prospectus.
/S/ RACHLIN COHEN & HOLTZ LLP
-----------------------------
RACHLIN COHEN & HOLTZ LLP
MIAMI, FLORIDA
OCTOBER 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 95,618
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 160,953
<PP&E> 1,090,339 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,747,862
<CURRENT-LIABILITIES> 425,790
<BONDS> 0
0
0
<COMMON> 3,013
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,747,862
<SALES> 4,590
<TOTAL-REVENUES> 26,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,972,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,043
<INCOME-PRETAX> (2,085,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,085,832)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<FN>
F-1 PP&E REPRESENT NET AMOUNTS.
</FN>
</TABLE>
