As filed with the Securities and Exchange Commission on December 15, 1999.
Registration No. 333-70523
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
5129
- --------------------------------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
59-2646820
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
200 Corporate Boulevard South, Yonkers, New York 10701 (914) 376-7383
- --------------------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President
200 Corporate Boulevard South, Yonkers, New York 10701 (914) 376-7383
- --------------------------------------------------------------------------------
(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. [_]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum
Title of each class of Amount to offering price per aggregate offering Amount of
securities to be registered be registered share(1) price(1) registration fee (2)
- --------------------------- ------------- -------- -------- --------------------
<S> <C> <C> <C> <C>
Common stock par
value $0.00001 per share 40,097,359 $0.2266 $9,086,062 $2,526
Total Fee $2,526
</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 December 6, 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 December 15, 1999.
40,097,359 Shares
ADVANCED VIRAL RESEARCH CORP.
Common Stock
The shareholders named on page 43 are selling up to 40,097,359
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
December 6, 1999 the low and high bid prices for the common stock on the
Bulletin Board were $0.2188 and $0.2344, 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 OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary...................................................................................... 1
Risk Factors............................................................................................ 3
About this Prospectus................................................................................... 6
Where to Find More Information.......................................................................... 6
Forward-looking Statements May Prove Inaccurate ....................................................... 7
Market Price of and Dividends on the Common Stock and Related Shareholder Matters....................... 7
Capitalization.......................................................................................... 8
Selected Consolidated Financial Data.................................................................... 9
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 11
Business................................................................................................ 24
Management.............................................................................................. 31
Selling Shareholders.................................................................................... 39
Certain Relationships and Related Transactions.......................................................... 40
Description of Common Stock............................................................................. 41
Use of Proceeds......................................................................................... 41
Plan of Distribution.................................................................................... 41
Legal Matters........................................................................................... 43
Experts................................................................................................. 43
Index to Financial Statements...........................................................................F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
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(Trademark) 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.
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.
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.
1
<PAGE>
Shalom Z. Hirschman, M.D., our President, has monitored the testing of
Reticulose and has recently performed 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.
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.
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.
Summary Statement of Operations Data
<TABLE>
<CAPTION>
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
<CAPTION>
December 31
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Total Assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
Long-term debt - - - $2,384,793 1,625,299
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
<PAGE>
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.
1. Because our shares are 'penny stocks,' you may be unable to resell them
in the secondary market.
A "penny stock" is an equity security with a market price of less than $5 per
share which is not listed on the Nasdaq or a national securities exchange. Due
to the extra risks involved in an investment in penny stocks, federal securities
laws and regulations require broker/dealers who recommend penny stocks to
persons other than their established customers and accredited investors to make
a special written suitability determination for the purchaser, provide them with
a disclosure schedule explaining the penny stock market and its risks, and
receive the purchaser's written agreement to the transaction prior to the sale.
These requirements limit the ability of broker/dealers to sell penny stocks.
Also, because of the extra requirements, many broker/dealers are unwilling to
sell penny stocks at all. As a result, you maybe unable to resell the stock you
buy in this offering and could lose your entire investment.
2. 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 303,292,035
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
4
<PAGE>
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 20,962,048 shares assuming an
average closing price of $0.2266 based on the average of the
closing bid and ask of our common stock on December 6, 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 61,153,793 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 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.
3. It is unlikely that our company will be able to continue as a going
concern without a significant improvement in our financial condition,
which has constrained our ability to finance necessary research,
development and other operating expenses as needed.
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. We estimate that we will require an additional $6,800,000 for
operations over the next 12 months, including $1,600,000 over the next 12 months
in order to conduct research and development related activities, including
$1,300,000 for the preparation of the IND; $225,000 for overseas research of
Reticulose; and $75,000 to prepare the manufacturing facility in the Bahamas for
FDA inspection and in accordance with good manufacturing practices and
standards. We currently are unable to calculate the amount we will require in
additional funding to complete the FDA approval process, including conducting
clinical trials and filing the NDA application. 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.
Unless we are able to generate sufficient revenue or raise additional
funds when 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. 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. Furthermore, there is no guarantee that approval of Reticulose 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. The extensive delays and costs of complying with the FDA regulations
makes it unlikely that we will have adequate funds to finance the necessary
clinical studies and related costs.
5
<PAGE>
4. If we do not obtain the FDA's approval to conduct clinical tests of
Reticulose in the United States, we will not be able to complete its
development and may not be able to sell it anywhere.
Reticulose is the only product we are developing, We will not be able
to sell it in the United States unless we submit, and the FDA approves, a new
drug application, known as an "NDA." We must conduct clinical trials of
Reticulose in humans before we submit an NDA. However, we cannot begin clinical
trials in the United States until the FDA approves our notice of claimed
investigational exemption for a new drug, or "IND." We have not yet submitted an
IND for Reticulose and we don't know if or when we will submit one. The FDA will
not approve our IND if we haven't satisfied regulatory protocols and other
preapproval requirements required for the introduction of a new or unapproved
drug.
If we submit an IND and the FDA approves it, we won't be able to begin
clinical testing unless we are able to obtain the additional financing we need
in order to conduct the trials. It is also possible that clinical trials, if
conducted, will not prove that Reticulose is safe or effective in treating
viruses of any kind, in which case we won't be able to submit an NDA and we
won't be able to sell Reticulose in the United States.
We haven't been able to sell Reticulose outside the United States
because we don't have a free sales certificate for Reticulose. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Reticulose. 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 the
product in that country. Because we are unable to obtain a certificate from the
Bahamas, we are not able to meet registration requirements in the countries
which require the certificate, and will be unable to sell Reticulose in those
countries.
6
<PAGE>
5. We have incurred losses since our inception, have no product revenue,
and expect to incur additional losses in the future.
Although we were formed in 1985, we are still in the development stage.
From inception through September 30, 1999, we had an accumulated deficit of
$17,649,843. We expect that our deficit will continue to increase. The only
product revenues we have ever had are insignificant amounts related to our
distribution of Reticulose for testing purposes. We do not currently have any
source of product revenue. At this time we have no basis to believe that we will
ever generate operating revenues from the sale of Reticulose.
7
<PAGE>
6. 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.
7. 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 303,292,035 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.
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 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
8
<PAGE>
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
This prospectus includes forward-looking statements . We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to important factors, disclosed in this prospectus, that could cause
actual results to differ materially from such expectations, including those
factors discussed in "Risk Factors."
We will not publicly update or revise any forward-looking statements,
whether because of new information, future events or otherwise. In light of
these risks,
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<PAGE>
uncertainties, and assumptions, the forward-looking events discussed in the
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.
Low Bid High Bid
(per share) (per share)
----------- -----------
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
Third Quarter 1999.............................0.1875 0.2344
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 operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends
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<PAGE>
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 September 30, 1999, and an adjusted
capitalization to reflect the issuance of an additional 61,153,793 shares of
common stock pursuant to:
o the issuance of 20,962,048 shares upon the full conversion of
the RBB debenture and the Focus debentures, assuming an
average closing price of $0.2266 based on the average of the
closing bid and ask of our common stock on December 6, 1999.
o the issuance of 7,378,450 shares upon the full exercise of
certain warrants; and
o the issuance of 32,813,295 shares upon the full exercise of
certain stock options.
The capitalization information set forth in the table below is
qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Pro Forma
Actual As Adjusted
------ -----------
<S> <C> <C>
Long-term Debt:
Convertible debenture issued in November 1998 $1,442,273 --
Convertible debentures issued in August 1999 $2,000,000 --
Stockholders' Equity (Deficiency):
Common stock, $0.00001 par value; 1,000,000,000 shares $3,032 $3,644
authorized; 303,292,035 shares outstanding Actual; 364,445,828 shares
outstanding Pro Forma As Adjusted Additional paid-in-capital $16,920,763 $30,337,571
Deficit accumulated during the development stage ($17,649,843) ($17,649,843)
Discount on Warrants ($455,047) ($455,047)
Total Stockholders' Equity (Deficiency): ($1,181,095) $12,232,681
</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 the nine months
ended September 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.
Selected Statement of Operations Data
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------- Nine Months Ended
1994 1995 1996 1997 1998 Sep. 30, 1999
------ ------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales $22,402 $27,328 $24,111 $2,278 $656 $6,517
Interest 7,450 16,155 46,796 111,845 102,043 27,951
Other income 55,000 25,000 32,000 7,800 293 --
----------- ----------- ----------- ----------- ----------- -----------
84,852 68,483 102,907 121,923 102,992 34,468
Costs and Expenses:
Research and development 30,040 34,931 255,660 817,603 1,659,456 1,192,190
General and administrative 478,984 420,757 983,256 1,681,436 1,420,427 1,544,592
Depreciation 16,665 14,679 18,731 26,288 110,120 419,208
Interest -- -- -- 1,738,325 1,470,699 1,247,345
----------- ----------- ----------- ----------- ----------- -----------
525,689 470,367 1,257,647 4,263,652 4,660,702 4,133,335
----------- ----------- ----------- ----------- ----------- -----------
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710) ($4,098,867)
=========== =========== =========== =========== =========== ===========
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 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073 300,598,827
=========== =========== =========== =========== =========== ===========
</TABLE>
- ------------------------
See notes to consolidated financial statements.
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<PAGE>
Selected Balance Sheet Data
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $211,203 $65,230 $61,396 $236,059 $924,420 $1,308,378
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 35,839
----------- ------------ ------------ ------------ --------- -------------
Total current assets 226,366 575,288 1,476,047 3,260,930 1,795,014 1,363,946
Property and Equipment 224,098 214,494 207,209 485,661 1,049,593 1,093,548
Other Assets 1,800 6,459 33,544 443,251 460,346 563,276
----------- ------------ ------------ ------------ --------- -------------
Total assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953 $3,020,770
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and other $40,244 $14,651 $54,474 $375,606 $279,024 $582,321
Capital lease payable-current portion --- --- --- --- 38,355 40,849
----------- ------------ ------------ ------------ --------- -------------
Total current liabilities 40,244 14,651 54,474 375,606 317,379 623,170
----------- ------------ ------------ ------------ --------- -------------
Long-Term Debt:
Convertible debenture, net --- --- -- 2,384,793 1,457,919 3,442,273
Capital lease payable-long term portion --- --- --- --- 167,380 136,422
----------- ------------ ------------ ------------ --------- -------------
Total Long-Term Debt --- --- --- 2,384,793 1,625,299 3,578,695
----------- ------------ ------------ ------------ --------- -------------
Deposit on securities purchase agreement --- --- --- --- 600,000 ---
----------- ------------ ------------ ------------ --------- -------------
Deposit on exercise of options --- --- --- --- --- ---
----------- ------------ ------------ ------------ --------- -------------
Stockholders' Equity:
Common stock, 1,000,000,000 shares 2,416 2,512 2,671 2,779 2,964 3,032
of par value $0.00001
authorized, 303,292,035 and 296,422,907
shares issued and outstanding
Additional paid-in capital 3,704,517 4,475,875 7,003,351 10,512,767 14,325,076 16,920,763
Subscription receivable --- --- (19,000) (19,000) --- (17,649,843)
Deficit accumulated during the development
stage (3,294,913) (3,696,797) (4,851,537) (8,993,266) (13,550,976) (455,047)
Deferred compensation cost --- --- (473,159) (73,837) (14,769) ---
----------- ------------ ------------ ------------ --------- -------------
Total stockholders' equity 412,020 781,590 1,662,326 1,429,443 762,295 (1,181,096)
----------- ------------ ------------ ------------ --------- -------------
Total liabilities and stockholders' equity $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953 $3,020,770
(deficit) =========== ============ ============ ============ =========== =============
Shares outstanding at period end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907 303,292,035
=========== ============ ============ ============ =========== =============
</TABLE>
- ---------------------
See notes to 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 September 30, 1999 we had
incurred a cumulative net loss of $17,649,843. 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
14
<PAGE>
. Furthermore, Reticulose may never 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 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 Nine Months Ended September 30, 1999 and 1998
For the three month periods ended September 30, 1999 and September
30, 1998, we incurred losses of $2,013,035 ($0.01 per share) and $869,070
($0.00 per share), respectively. For the nine month periods ended September
30, 1999 and September 30, 1998, we incurred losses of $4,098,867 ($0.01 per
share) and $3,118,824 ($0.01 per share), respectively.
General and Administrative Expense. Our increased losses during the
three and nine months ended September 30, 1999 are principally due to
increased general and administrative expense ($605,917 and $1,544,592 for the
three and nine months ended September 30, 1999 vs. $364,554 and $1,087,707 for
the three and nine months ended September 30, 1998, respectively). Included in
the general and administrative expenses are:
15
<PAGE>
o consulting expenses payable to GloboMax LLC, a firm assisting us with
the preparation and filing of the IND, of approximately $65,000 and
$175,000 for the three and nine months ended September 30, 1999 vs. no
expenses for the three and nine months ended September 30, 1998,
respectively ;
o increased professional expenses resulting principally from, among
others, legal expenses related to certain financings of $127,000
and $315,000 for the three and nine months ended September 30,
1999 vs. $50,000 and $186,000 for the three and nine months ended
September 30, 1998, respectively; and
o increased employee benefit costs of approximately $76,000 and
$173,000 for the three and nine months ended September 30, 1999
vs. $41,000 and $106,000 for the three and nine months ended
September 30, 1998, respectively.
Depreciation Expense. Our increased losses during the three and nine
months ended September 30, 1999 are also due to increased depreciation expense
($53,152 and $149,208 for the three and nine months ended September 30, 1999 vs.
$28,437 and $64,777 for the three and nine months ended September 30, 1998,
respectively).
Interest Expense. Our increased losses during the three and nine months
ended September 30, 1999 are also due to increased interest expense ($935,803
and $1,247,345 for the three and nine months ended September 30, 1999 vs. $0 and
$811,714 for the three and nine months ended September 30, 1998, respectively).
Included in the interest expense are:
o beneficial conversion feature on certain convertible debentures of
$688,000 and $688,000 for the three and nine months ended
September 30, 1999 vs. $0 and $211,000 for the three and nine
months ended September 30, 1998, respectively;
o interest expense associated with certain convertible debentures of
approximately $50,000 and $102,000 for the three and nine months
ended September 30, 1999 vs. $0 and $96,000 for the three and nine
months ended September 30, 1998, respectively;
o amortization of discount on certain warrants of approximately
$45,000 and $113,000 for the three and nine months ended September
30, 1999 vs. $7,299 and $285,000 for the three and nine months
ended September 30, 1998, respectively;
o amortization of loan costs of approximately $76,000 and $128,000
for the three and nine months ended September 30, 1999 vs. $0 and
$221,000 for the three and nine months ended September 30, 1998,
respectively; and
16
<PAGE>
o contractually imposed finance penalties associated with not having
an effective registration statement covering certain securities of
approximately $48,000 and $168,000 for the three and nine months
ended September 30, 1999 vs. no expenses for the three and nine
months ended September 30, 1998, respectively.
Research and Development Expense. Our research and development expenses
have been consistent during the three and nine months ended September 30, 1999,
however, there has been a shift from the use of external to internal personnel
and testing.
Sales. We had sales of $1,928 and $6,517 for the three and nine months
ended September 30, 1999, respectively, vs. $656 and $656 for the three and nine
months ended September 30, 1998, respectively. All sales during these periods
were to distributors purchasing Reticulose for testing purposes. Interest income
was $6,461 and $27,951 for the three and nine months ended September 30, 1999,
respectively, vs. $22,310 and $79,533 for the three and nine months ended
September 30, 1998, respectively. There can be no assurance that Reticulose
will ever be sold for commercial distribution anywhere in the world.
Our net loss, exclusive of costs directly related to costs of
financing and costs related to GloboMax, was approximately $985,000 and
$2,574,000 for the three and nine months ended September 30, 1999 vs.$869,000
and $2,305,000 for the three and nine months ended September 30, 1998,
respectively. This information is not presented as an alternative to operating
results or cash flow from operations as determined by generally accepted
accounting principles (GAAP), but rather to show that the net loss is consistent
with prior corresponding periods when the variable costs of financing and the
Globomax consulting expenses are excluded. It should not be considered in
isolation from or construed as having greater importance than GAAP operating
income or cash flows from operations as a measure of our performance.
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:
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
17
<PAGE>
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.
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.
Depreciation Expense. Depreciation expense increased from $18,731 in
1996, $26,288 in 1997 to $110,000 in 1998 as a result of the acquisition of
furniture and equipment for the Yonkers office and laboratory .
Interest Expense. Interest expense for the years ended 1996, 1997
and 1998 was approximately $0, $1,738,000 and $1,471,000, respectively. Included
in interest expense for these periods was:
o the beneficial conversion feature} on certain convertible
debentures of approximately $0, $1,553,000 and $836,000 for the
years ended 1996, 1997 and 1998, respectively;
o interest expense associated with certain convertible debentures
of approximately $0, $29,000 and $95,000 for the years ended
1996, 1997 and 1998, respectively;
o amortization of discount on certain warrants of approximately $0,
$44,000 and $291,000 for the years ended 1996, 1997 and 1998,
respectively; and
18
<PAGE>
o amortization of loan costs of approximately $0, $112,000 and
$230,000 for the years ended 1996, 1997 and 1998, respectively.
Sales. 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. 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
September 30, 1999 vs. December 31, 1998
Assets. As of September 30, 1999 and December 31, 1998, we had
current assets of $1,363,946 and $1,795,014, respectively. We had total assets
of $3,020,770 and $3,304,953 at September 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.
Liabilities. As of September 30, 1999 and December 31, 1998, we had
current liabilities of $623,170 and $317,359, respectively. The increase in
current liabilities was due to a $303,000 increase in payables primarily
resulting from our increased costs of financing of $180,000, plus increased
operating expenses. As of September 30, 1999 and December 31, 1998, we had total
long term liabilities of $3,578,695 and $1,625,299 at September 30, 1999 and
December 31, 1998, respectively. The increase in total long term liabilities was
primarily attributable to the issuance to Focus Investors, LLC of convertible
debentures.
Cash Flow. During the nine months ended September 30, 1999, we used
cash of $2,917,982 for operating activities, vs. $2,491,726 during the nine
months ended September 30, 1998. During the nine months ended September
30, 1999, we:
o incurred non-cash expenses of approximatelyo $1,093,000,
primarily relating to the beneficial conversion feature on certain
debentures ($688,000), depreciation ($150,000), amortization of
loan costs ($128,000) and discount on warrants ($113,000);
o expended approximately $1,100,000 for payroll and related costs;
19
<PAGE>
o expended approximately} $625,000 in professional and consulting
fees, approximately $200,000 of which are consulting fees
incurred in connection with the IND for Reticulose , and
approximately $200,000 of which relate to legal fees incurred in
connection with certain financing arrangements;
o expended approximately $285,000 for research expenses incurred
by third parties in connection with the testing of Reticulose in
Argentina and Barbados;
o expended approximately $143,000 in laboratory supplies; and
o expended approximately $500,000 of additional operating expenses.
During the nine months ended September 30, 1999, cash flows provided
by investing and financing 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 debentures, warrants and shares of common
stock in 1999
(approximately $2,703,000). In addition, we expended approximately $193,000 for
additions to machinery and equipment at our Yonkers, New York office and the
manufacturing plant in Freeport, Bahamas;
As of September 30, 1999, we had expended the following amounts for
research and development in connection with the following ongoing studies being
conducted abroad:
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.
20
<PAGE>
Years Ended December 31, 1998 and 1997
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. During 1998, we:
o incurred non-cash expenses of approximately $230,000 and
$291,000, respectively, relating to amortization of loan costs
and discount on warrants relating to convertible debentures issued
in 1997 and 1998;
o incurred non-cash expenses of approximately} $836,000 relating
to amortization of deferred interest associated with the
beneficial conversion feature of the 1997 and 1998 convertible
debentures;
o expended approximately $406,000 in professional and consulting
fees;
o expended approximately $210,000 in laboratory supplies;
o expended approximately $1,100,000 for payroll and related costs;
During 1998, cash flows provided by investing and financing
activities was primarily due to the sales of investments which were available
from the proceeds of the issuance of the convertible debentures in 1997 and
1998 ($1,300,000). In addition, we expended approximately $675,000 for leasehold
improvements and furniture and equipment at our Yonkers, New York office.
Projected Expenses
During the next 12 months, we expect to spend approximately
$1,600,000 on research and development related activities, exclusive of
payroll and operating expenses to be incurred at our Yonkers, New York
laboratory, including:
o approximately $1,300,000 in the preparation of the IND;
21
<PAGE>
o approximately $225,000 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 and standards.
Additionally, we expect to spend approximately $400,000 for building expansion
of our research and development facility in Yonkers, New York. We anticipate
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 RBB entered in November 1998
pursuant to which RBB purchased a 7% convertible debenture 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 convertible debenture
and upon exercise of the related warrants to allow the investors to resell such
common stock to the public. Because the registration statement was not declared
effective by the Commission on or before April 13, 1999, the RBB agreement
provides that we pay RBB a penalty equal to the sum of (x) $30,000 and (y)
$1,500 for each day lapsed after such date, until the registration statement is
declared effective by the Commission, provided, however, that total penalties
shall not exceed $100,000 in the aggregate. As of the date hereof, RBB has not
requested payment of the penalty, and we are negotiating with RBB to have the
penalty waived.
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
22
<PAGE>
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.
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.
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<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>
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
- -------------------------------------------------------------------------------------------------------------------
November 1998 $1,500,000 Debenture 9,193,881 shares $0.1632 per October 31, 2008
share (1)
--------------------------------------------------------------------------------
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 11,768,167 $0.17 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 average of high
and low price of the common stock on December 6, 1999, $0.2266, and an
applicable conversion price of $0.1632 for the RBB debenture and $0.17 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 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
24
<PAGE>
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 the date of this prospectus, 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 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.
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 the date of this prospectus, 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
25
<PAGE>
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 the date of this
prospectus, 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.
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 the date of this prospectus, 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
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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 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 the date of this prospectus, 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.
We are currently expending approximately $425,000 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 through
fiscal 1999 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 nor additional securities sold. 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. 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. As such, recent trading levels may not be
sustained nor may any additional options or warrants 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. 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, it is possible that
me may never 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
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Reticulose as a product. Other companies, having greater economic resources,
may be successful in developing a similar product using processes similar to
our product Reticulose. We may not obtain such a patent or, if obtained, it
may not be enforceable. We have retained patent counsel for the purpose of
pursuing additional patent protection for Reticulose. However, if any patents
are granted, such patents may not be sustained if questioned, and, if declared
valid, such patents, may not 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 such efforts and
procedures may prove unsuccessful and may not protect us from any competition
in the future.
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
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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. We do not know what the actual cost of such trials would be. If we need
additional financing to fund such human clinical trials, it may not be
available to us, which may force us to reduce our operations.
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
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to conduct the proposed clinical investigation. Where there has been widespread
use of the drug outside of the United States or otherwise, it is possible in
some limited circumstances to use well documented clinical experience as a
substitute for other pre-clinical work.
After the FDA approves the IND or allows it to become effective, the
investigation is permitted to proceed, during which the sponsor must keep the
FDA informed of new studies, including animal studies, make progress reports on
the study or studies covered by the IND, and also be responsible for alerting
FDA and clinical investigators immediately of unforeseen serious side effects or
injuries.
When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the 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
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
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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 currently do not have the
resources necessary to complete the FDA approval process. We may allocate
certain proceeds from the exercise of currently outstanding options and
warrants for the purpose of filing a new IND with the FDA, however, such
proceeds, if any, will not be sufficient to improve our financial condition to
any great degree. It is possible that the new IND for clinical tests of
Reticulose on humans, if submitted, will not be approved by the FDA for
human clinical trials on AIDS or other diseases, and that any tests previously
conducted or to be conducted will not satisfy FDA requirements. It is also
possible that the results of such human clinical trials, if performed, will
not prove that Reticulose is safe or effective in the treatment of AIDS or
other diseases, or that the FDA will not 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. The data generated may not 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.
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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. Clinical studies
conducted outside of any country may not 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 $3.6 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 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;
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;
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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.
Our studies detailing the results of the above research and testing
may not 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, and as a result may not improve our chances of
gaining 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 nine
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, 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.
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, and it is possible that none of our distributors will
ever secure registration of Reticulose. 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 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 will not generate any material sales of Reticulose. For the
years ended December 31, 1998, 1997 and 1996, we
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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,
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
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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.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact 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(Registered) (manufactured by
Glaxo Wellcome Inc.) which contains acyclovir and is administered orally,
topically, or intravenously, Famvir(Registered) (manufactured by SmithKline
Beecham Pharmaceuticals) which contains famcyclovir and is administered orally,
and Valtrex(Registered) (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.
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
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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."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
Name Age Position
- ---- --- --------
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
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 March1998 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.
36
<PAGE>
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.
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.
Summary Compensation Table
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary Bonus Compensation (1) SARs (3) Compensation (4)
- ------------------ ---- ------ ----- ---------------- -------- ----------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1998 $325,000 $0 $12,288 23,000,000 $4,316
President, Chief Executive ----------------------------------------------------------------------------------------
Officer and Chief Scientific 1997 $325,000 $43,000 $14,604 0 $3,956
Officer since October 1996 ----------------------------------------------------------------------------------------
and consultant from May 24, 1996 $68,750(2) $0 $ 4,825 15,000,000 $4,316
1995 until October 1996.
- -----------------------------------------------------------------------------------------------------------------------
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.
(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.
37
<PAGE>
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 Mr. Gallantar options to
acquire 4,547,880 shares of common stock, exercisable in one third 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.
<TABLE>
<CAPTION>
Aggregated Option Exercises in
Last Fiscal Year And Year-end Option Values
-------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-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>
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
38
<PAGE>
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")
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,
39
<PAGE>
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 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
40
<PAGE>
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 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>
This Space Intentionally Left Blank
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, 303,292,035 shares of
the common stock were outstanding as of the close of business as of the
date hereof.
(2) Includes shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days from the date hereof.
(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,
42
<PAGE>
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.
Selling Shareholder Table
<TABLE>
<CAPTION>
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> <C>
Elliott Bauer 4a Affiliate of AVIX 4,099,500 1.20% 4,099,500 0 0.00%
Cesar Blumtritt, MD 4b Affiliate of DCT 753,333 0.22% 753,333 0 0.00%
Leonard Cohen 4c Consultant and 1,700,000 0.50% 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, MD 4e President and CEO 16,100,000 4.72% 16,100,000 0 0.00%
Gary Hussian 4f Affiliate of DCT 292,500 292,500 0 0.00%
0.09%
Interfi Capital Group 4g Investor 1,538,015 1,538,015 0 0.00%
0.45%
Henry Kamioner 4h None 1,500,000 0.44% 1,500,000 0 0.00%
Charles Miller 4i Affiliate of Plata 8,100 0.00% 8,100 0 0.00%
Jeffrey & Cheryl Miller 4j Affiliate of Plata 183,300 0.05% 183,300 0 0.00%
Richard Rubin 4k Former legal counsel 1,000,000 0.29% 1,000,000 0 0.00%
Freddie Velez 4l Affiliate of DCT 440,667 0.13% 440,667 0 0.00%
Alan Gallantar 4m Chief Financial 4,547,880 1.33% 4,547,880 0 0.00%
Officer
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Harborview Group 5a Investor 3,831,372 1.12% 3,831,372 0 0.00%
Joe Feshbach 5b Investor 857,843 0.25% 857,843 0 0.00%
Russell Kuhn 5c Investor 586,880 0.17% 428,880 158,000 0.05%
Victor Sherman 5d Investor 528,880 0.16% 428,880 100,000 0.03%
Jennifer Brandenburg Smith 5e Investor 171,569 0.05% 171,569 0 0.00%
Jo Sherrin Smith 5f Investor 171,569 0.05% 171,569 0 0.00%
Robert Franklin Smith, Sr. 5g Investor 171,569 0.05% 171,569 0 0.00%
Shelly Marion Smith 5h Investor 271,569 0.08% 171,569 100,000 0.03%
Myron Weiner 5i Investor 438,880 0.13% 428,880 10,000 0.00%
John Zimmerman 5j Investor 641,151 0.19% 536,151 105,000 0.03%
Matt Zimmerman 5k Investor 105,782 0.03% 85,782 20,000 0.01%
Selling Shareholders Total Shares 40,590,359 11.91% 40,097,359 493,000 0.14%
Total Shares Outstanding 6 340,807,252
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;
44
<PAGE>
(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. Includes the following number of shares of common stock underlying certain
warrants: (a) 1,380,392 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.
6. Assumes the full exercise of stock options and warrants listed in footnotes
4 & 5 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.
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
45
<PAGE>
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 trade 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;
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.
46
<PAGE>
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 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 Nine Months Ended September 30, 1999
Balance Sheets, September 30, 1999 and December 31, 1998.......................................F-31
Statements of Operations for the Three and Nine Months Ended September
30, 1999 and 1998 and from Inception (February 20, 1984) to September 30, 1999.............F-32
Statements of Stockholders' Equity from Inception (February 20, 1984)
to September 30, 1999......................................................................F-33
Statements of Cash Flows for the Nine Months Ended September 30, 1999
and 1998 and from Inception (February 20, 1984) to September 30, 1999......................F-41
Notes to Consolidated Condensed Financial Statements...........................................F-42
</TABLE>
F-1
<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 and 1997 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, to
reclassify certain expenses initially recorded as general and administrative
expenses to research and development costs, and to reclassify amortization of
debt issuance costs as interest expense.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 11, 1999
F-2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Restated)
ASSETS
------
<S> <C> <C>
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-3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (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 110,120 26,288 18,731 315,348
Interest 1,470,699 1,738,325 -- 3,211,189
------------- ------------- ------------- -------------
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-4
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
------------ ------- -------- ---------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
------------ ------- -------- ---------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
------------ ------- -------- ---------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
------------ ------- -------- ---------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
------------ ------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, period ended December 31, 1987 - - - (258,663)
----------- ----- --------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ----- --------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ----- --------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 -
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 -
Issuance of common stock, exercise of "C" warrants .08 12,900 - 1,032 -
Net loss, year ended December 31, 1990 - - - (267,867)
----------- ----- --------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------ ------ ---------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
------------ ------ ---------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------ ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------ ---------- -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ - $(2,854,076) $ -
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453 - - -
Issuance of common stock, exercise of options .08 400,000 4 31,996 - - -
Issuance of common stock, exercise of options .10 190,000 2 18,998 - - -
Net loss, year ended December 31, 1994 - - - - (440,837) -
----------- ----- --------- -- ---------- --
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock, for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
----------- ----- --------- -- ---------- --
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
----------- ----- --------- -- ---------- --
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options .08 3,333,333 33 247,633 - - -
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 - - -
Issuance of common stock, conversion of debt .15 894,526 9 133,991 - - -
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 - - -
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 - - -
Issuance of common stock, conversion of debt .16 772,201 8 119,992 - - -
Issuance of common stock, for services rendered .41 50,000 - 20,500 - - -
Issuance of common stock, for services rendered .24 100,000 1 23,999 - - -
Beneficial conversion feature, February debenture - - 413,793 - - -
Beneficial conversion feature, October debenture - - 1,350,000 - - -
Warrant costs, February debenture - - 37,242 - - -
Warrant costs, October debenture - - 291,555 - - -
Amortization of deferred compensation cost - - - - - 399,322
Imputed interest on convertible debenture - - 4,768 - - -
Net loss, year ended December 31, 1997 - - - - (4,141,729) -
----------- ----- ---------- ------- --------- -------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----- ---------- ------- ---------- -------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $(19,000) $(8,993,266) $(73,837)
Issuance of common stock, exercise of options .12 295,000 3 35,397 - - -
Issuance of common stock, exercise of options .14 500,000 5 69,995 - - -
Issuance of common stock, exercise of options .16 450,000 5 71,995 - - -
Issuance of common stock, exercise of options .20 10,000 - 2,000 - - -
Issuance of common stock, exercise of options .26 300,000 3 77,997 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 - - -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Issuance of common stock, for services rendered .21 100,000 1 20,999 - - -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998, as Restated - - - - (4,557,710) -
----------- ----- ----------- ------ ------------- --------
Balance, December 31, 1998, as Restated 296,422,907 2,964 $14,325,076 $ - $(13,550,976) $(14,769)
=========== ===== =========== ====== ============= ========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (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 110,120 26,288 18,731 315,348
Amortization of debt issue costs 229,978 111,957 - 341,935
Amortization of deferred interest cost on beneficial
conversion feature 835,951 1,552,842 - 2,388,718
Amortization of discount on warrants 290,297 - - 290,297
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
=========== =========== ===========
</TABLE>
During 1998, the Company purchased equipment under a capital lease totaling
$222,317.
See notes to consolidated financial statements.
F-12
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the
purpose of manufacturing and marketing a pharmaceutical product
named RETICULOSE. While the Company has had limited sales of this
product, primarily for research purposes, the success of the
Company will be dependent upon obtaining certain regulatory
approval for its pharmaceutical product, RETICULOSE, to commence
commercial operations. The Company was in the development stage at
December 31, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research
(LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, with
original maturities of three months or less.
Investments
Investments consist of certificates of deposit with maturities
greater than three months, carried at cost, which is market value,
U.S. Government securities and discount notes and U.S. Treasury
Bills. The U.S. Government securities, notes and treasury bills are
classified as "held to maturity" and are carried at amortized cost,
which approximates market value.
Property and Equipment
Property and equipment are recorded at cost and depreciated using
the straight-line method, over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized
currently. Maintenance and repairs are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
Research and Development
Research and development costs are expensed as incurred by the
Company.
Deferred Compensation Cost
Deferred compensation costs are recognized based on the fair value
for non-employee stock options. Compensation cost is amortized over
the life of the option period, which is either shorter than or
essentially equivalent to the period for which the services are to
be provided. Compensation expense is classified as general and
administrative.
F-13
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The limited sales generated by the Company have consisted of sales
of RETICULOSE for testing and other purposes. Sales are recorded by
the Company when the product is shipped to customers.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to 1998 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ
from actual results.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplate the continuance of the Company as a going concern. The
Company has suffered losses from operations during its history. The
Company is dependent upon registration of RETICULOSE for sale before it
can begin commercial operations. The Company's cash position may be
inadequate to pay all the costs associated with the full range of
testing and clinical trials required by the FDA. Management does not
anticipate registration or other approval of RETICULOSE in the near
future in the United States. Unless and until RETICULOSE is approved
for sale in the United States or another industrially developed
country, the Company may be dependent upon the continued sale of its
securities for funds to meet its cash requirements. Management intends
to continue to sell the Company's securities in an attempt to mitigate
the effects of its cash position; however, no assurance can be given
that such equity financing, if and when required, will be available. In
the event that such equity financing is not available, in order to
continue operations, management anticipates that they will have to
defer their salaries. During 1998 and 1997, the Company obtained debt
financing and may seek additional debt financing if the need arises. No
assurance can be given that the Company will be able to sustain its
operations until FDA approval is granted or that any approval will ever
be granted. 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-14
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition is a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market RETICULOSE
worldwide, except within the Bahamas, for $50,000. The Company also
purchased inventory of RETICULOSE from LTD for $45,000 and was
obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
ampules purchased and $2 per ampule for purchases exceeding 100,000
ampules. On December 16, 1987, the Company acquired the controlling
beneficial interest in 99.6% of the common stock of LTD through an
appropriate trust agreement to satisfy the rules of the Bahamian
Government, from two of the principal stockholders of the Company. Both
stockholders concurrently canceled $86,565 of indebtedness due them
from LTD.
NOTE 4. INVESTMENTS
<TABLE>
<CAPTION>
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
<CAPTION>
Estimated Useful
Lives (Years) 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 324,083 299,550
Machinery and equipment 5 1,003,768 354,250
---------- -----------
1,362,401 688,350
Less accumulated depreciation 312,808 202,689
---------- ----------
$1,049,593 $ 485,661
========== ===========
</TABLE>
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $370,028 as of
December 31, 1998 and 1997 including $17,623 expended in 1987 to
purchase a land lease expiring in 2068. Included with machinery and
equipment is $222,318 of equipment purchased under a capital lease
during 1998. Depreciation expense for equipment under capital lease was
approximately $12,000 in 1998. These amounts are included above.
F-15
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. OTHER ASSETS
<TABLE>
<CAPTION>
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-16
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
The assured incremental yield on the February Debenture was measured
based on the date of issuance of the security and amortized to interest
expense over the conversion period which ended on May 29, 1997 which
was the first date full conversion could occur. The interest expense
relating to this measurement was $4,768.
During 1997, RBB exercised its right to convert the principal amount of
the February Debenture into 6,675,982 shares of the Company's common
stock at conversion prices ranging from $.1162 to $.2002 per share.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February warrants") to purchase
common stock, each such February warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected holding period of ten years (RBB exercised its right
to convert within one year). This amount has been reflected in the
accompanying consolidated financial statements as interest expense
related to the convertible debenture.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $413,793. This amount was fully amortized to
interest expense in 1997 with a corresponding credit to additional
paid-in capital.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7%
Convertible Debenture (the "October Debenture") due August 30, 2007, to
RBB. Accrued interest under the October Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the October
Debenture until the date of interest payment. The October Debenture may
be prepaid by the Company before maturity, in whole or in part, without
premium or penalty, if the Company gives the holder of the Debenture
notice not less than 30 days before the date fixed for prepayment in
that notice. The October Debenture is convertible, at the option of the
holder, into shares of common stock.
During 1997, RBB exercised its right to convert $120,000 of the
principal amount of the October Debenture into 772,201 shares of the
Company's common stock at a conversion price of $.1554 per share.
During 1998, RBB exercised its right to convert the remaining
$2,880,000 of the principal amount of the October Debenture into
16,805,333 shares of the Company's common stock at conversion prices
ranging from $.13 to $.23 per share.
F-17
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October warrants") to purchase
Common Stock, each such October warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free interest
rate of 6% and an expected holding period of ten years (RBB exercised
its right to convert within one year). This amount has been reflected
in the accompanying consolidated financial statements as a discount on
the convertible debenture, with a corresponding credit to additional
paid-in capital, and was fully amortized to interest expense over the
actual conversion period.
Based on the terms for conversion associated with the October
Debenture, there was intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount was treated as deferred
interest expense and recorded as a reduction of the convertible
debenture liability with a corresponding credit to additional paid-in
capital and was amortized to interest expense over the period from
October 8, 1997 (date of debenture) to February 24, 1998 (date the
debenture is fully convertible). The interest expense relative to this
item was $210,951 for 1998 and $1,139,049 for 1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture is convertible, at
the option of the holder, into shares of common stock.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of one year. This amount has been reflected in
the accompanying consolidated financial statements as interest expense
related to the convertible debenture.
F-18
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $625,000. 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-19
<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:
Year ending December 31:
1999 $ 54,348
2000 54,348
2001 54,348
2002 54,348
2003 31,703
--------
Total minimum lease payments 249,095
Less amount representing interest (43,380)
--------
Present value of net minimum lease payments 205,715
Current maturities (38,335)
--------
$167,380
========
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-20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Operating Leases
Future minimum lease payments are as follows:
Year ending December 31:
1999 $ 177,000
2000 274,000
2001 260,000
2002 280,000
2003 290,000
Thereafter 580,000
----------
Total $1,861,000
==========
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through April 30, 1999
at an exercise price of $.14 and $.16, respectively. As of December
31, 1998, there are outstanding Plata Options to acquire 683,300
shares at $.14 per share and Additional Plata Options to acquire
108,100 shares at an exercise price of $.16 per share. Through
December 31, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
F-21
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS
Argentine Agreement
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug RETICULOSE on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50. The Clinical
Trials did not include a placebo control group or references to any
other antiviral drug.
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, the Written Report was delivered by
Dr. Flichman to the Company. Upon delivery of the Written Report to
the Company, the Company delivered to the principals of DCT options
to acquire 2,000,000 shares of the Company's common stock for a
period of one year from the date of the delivery of the Written
Report, at a purchase price of $.20 per share. Pursuant to several
amendments, the DCT options are exercisable through April 30, 1999
at an exercise price of $.21 per share. As of December 31, 1998,
473,500 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of RETICULOSE for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $665,000, which is accounted for as a research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
F-22
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
RETICULOSE for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,800, respectively. Such expenses are
accounted for as research and development expenses. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts respectively
expended in connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and RETICULOSE with those taking
a three drug cocktail and a placebo. As of December 31, 1998, the
Company has advanced approximately $50,000 for such study, which
has been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
RETICULOSE for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$75,000, which has been accounted for as research and development
expenses.
F-23
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of December 31, 1998, the Company has
expended approximately $385,000 to cover the costs of the Barbados
Study. In December 1996, the Company received from the coordinators
of the Barbados Study, a written summary of results of the Barbados
Study (the "Written Summary").
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $5,000 for such study, which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which RETICULOSE affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one year term
through March 3, 1999 to investigate the anti-tumor activity of
RETICULOSE using kidney tumor model systems. In addition, NCI will
study the effects of RETICULOSE on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
RETICULOSE.
F-24
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases and now president of AVRC, whereby
Dr. Hirschman was to provide consulting services to the Company
through May 1997. The consulting services included the development
and location of pharmacological and biotechnology companies and
assisting the Company in seeking joint ventures with and financing
of companies in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of December 31, 1998, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 1999 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 1999 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 1999 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of December 31, 1998, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
F-25
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27 and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
does not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement, which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
F-26
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through April 30, 1999), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.15 per
share) (the "September 1992 Cohen Options"). As of December 31,
1998, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). The Company has been informed that
Messrs. Cohen, Bauer and Rizzuto are principals of a firm, which
has been granted certain distribution rights, which were terminated
on May 31, 1995. Through December 31, 1997, 2,855,000 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
of his shares and all shares underlying his options. Pursuant to
several amendments, the remaining Bauer options are exercisable
through April 30, 1999 at an option price of $.13. The Company
agreed to issue to Cohen an additional 300,000 shares in 1995 at a
time when the shares were valued at $.14 per share, in
consideration for expenditures incurred by Mr. Cohen in connection
with securing for the benefit of the Company and the affiliated
distributor, the continued services of a doctor.
F-27
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
Shares have been accounted for as an administrative expense in the
amount of the Company's valuation of such shares as of the issuance
date. During the year ended December 31, 1996, Mr. Cohen was issued
300,000 shares for services rendered. These shares were accounted
for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date.
Chinnici Agreement
In July 1998, the Company entered into a consulting agreement with
Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
Such agreement calls for Dr. Chinnici to provide assistance in
connection with research, development, production, marketing and
sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
the FDA in connection with an application for approval of
RETICULOSE and will provide detailed clinical reports regarding
patients observed by him. Dr. Chinnici will receive options to
purchase 300,000 shares at an exercise price of $.30 per share. The
options will be exercisable in equal installments on January 1,
1999 and 2000 and December 15, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. No sales have been made by the
Company under the distribution agreements other than for testing
purposes.
Additionally, pursuant to one of the distributions agreements, the
Company granted the distributor the right to acquire 3,000,000 shares
of the Company's common stock at a purchase price of $.25 (which has
been increased to $.26) upon the completion of certain tests and the
publication of a paper with respect to such tests. During May 1998,
300,000 shares of common stock were issued pursuant to exercise of
these options for an aggregate exercise price of $78,000.
F-28
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. STOCKHOLDERS' EQUITY
During 1997, the Company issued 10,931,516 shares of common stock for
an aggregate consideration of $1,412,166. These amounts were comprised
of the issuance of common stock pursuant to the exercise of stock
options of 3,333,333 shares for $247,666 and the issuance of common
stock in exchange for consulting services of 150,000 shares for
consideration of $44,500 and the issuance of common stock upon
conversion of debt of 7,448,183 shares for $1,120,000.
During 1998, the Company issued 18,460,333 shares of common stock for
an aggregate consideration of $3,158,400. The amounts were comprised of
the issuance of common stock pursuant to the exercise of stock options
of 1,555,000 shares for $257,400 and the issuance of common stock in
exchange for consulting services of 100,000 shares for consideration of
$21,000 and the issuance of common stock upon commission of debt of
16,805,333 shares for $2,880,000.
NOTE 11. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.
As of December 31, 1998 and 1997, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $9,700,000 and $6,300,000, which expire in varying
amounts to 2018.
The Company presently has one significant temporary difference between
financial reporting and income tax reporting relating to interest
expense on the beneficial conversion feature of the convertible debt.
The components of the deferred tax asset as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit of net operating loss carryforwards $3,300,000 $2,100,000
Less valuation allowance 3,300,000 2,100,000
--------- ---------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
As of December 31, 1998, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $3,300,000 has been established.
F-29
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 1998. Since the reported
fair values of financial instruments are based upon a variety of
factors, they may not represent actual values that could have been
realized as December 31, 1998 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, U.S. government obligations, accounts payable and the
convertible debentures. Fair values were assumed to approximate
carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values
or they are receivable or payable on demand.
The fair value of non-current investments, primarily U.S. government
obligations, 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 $572,917 ($.00 per share). The net effect of the restatement
represents a non-cash interest charge to operations.
F-30
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. RESTATEMENT (Continued)
Additionally, $950,000 of expenses related to facilities and laboratory
technician costs associated with the New York facility was reclassified
from general and administrative to research and development expense.
This reclassification had no effect upon net loss for 1998.
The accompanying financial statements for 1998 and 1997 have been
restated to reclassify $229,978 and $111,957 of amortization of debt
issue costs from depreciation and amortization to interest expense.
This reclassification had no effect upon net loss for 1998 and 1997.
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
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)
============ ========= ===========
Research and development $ 709,456 $ 950,000 $ 1,659,456
============ ========= ============
General and administrative $ 2,370,427 $(950,000) $ 1,420,427
============ ========= ============
Depreciation and Amortization $ 340,098 $(229,978) $ 110,120
============ ========= ============
Interest expense $ 667,804 $ 572,917 $ 1,470,699
============ ========= ============
Net loss $ (3,984,793) $(572,917) $ (4,557,710)
============ ========= ============
Net loss per share of common stock - basic
and diluted ($.01) ($.01) ($.02)
December 31, 1997
-----------------
Interest expense $1,626,368 $ 111,957 $1,738,325
========== ========= ==========
Depreciation and amortization $ 138,245 $(111,957) $ 26,288
========== ========= ==========
</TABLE>
F-31
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
September 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,308,378 $ 924,420
Investments - 821,047
Inventory 19,729 19,729
Other current assets 35,839 29,818
------------ ------------
Total current assets 1,363,946 1,795,014
Property and Equipment 1,093,548 1,049,593
Other Assets 563,276 460,346
------------ ------------
Total assets $ 3,020,770 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $ 582,321 $ 279,024
Current portion of capital lease obligation 40,849 38,335
------------ ------------
Total current liabilities 623,170 317,359
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 3,442,273 1,457,919
Capital lease obligation - long-term portion 136,422 167,380
------------ ------------
Total long-term liabilities 3,578,695 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement - 600,000
------------ ------------
Commitments and Contingencies - -
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 303,292,035 and 296,422,907
shares issued and outstanding 3,032 2,964
Additional paid-in capital 16,920,763 14,325,076
Deficit accumulated during the development stage (17,649,843) (13,550,976)
Discount on warrants (455,047) -
Deferred compensation cost - (14,769)
------------ ------------
Total stockholders' equity (deficit) (1,181,095) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 3,020,770 $ 3,304,953
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-32
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Three Months Ended Nine Months Ended (February 20,
September 30, September 30, 1984) to
------------- ------------- September 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,928 $ 656 $ 6,517 $ 656 $ 201,493
Interest 6,461 22,310 27,951 79,533 587,247
Other income - - - 100 120,093
------------ ----------- ----------- ----------- -----------
8,389 22,966 34,468 80,289 908,833
------------ ----------- ----------- ----------- -----------
Costs and Expenses:
Research and development 426,552 499,045 1,192,190 1,234,915 4,777,399
General and administrative 605,917 364,554 1,544,592 1,087,707 8,858,186
Depreciation 53,152 28,437 149,208 64,777 464,556
Interest 935,803 - 1,247,345 811,714 4,458,535
------------ ----------- ----------- ----------- -----------
2,021,424 892,036 4,133,335 3,199,113 18,558,676
------------ ----------- ----------- ----------- -----------
Net Loss $ (2,013,035) $ (869,070) $ (4,098,867) $ (3,118,824) $(17,649,843)
============ =========== ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $(0.01) $(0.00) $(0.01) $(0.01)
====== ====== ====== ======
Weighted Average Number of
Common Shares Outstanding 300,598,827 290,194,958 300,598,827 290,194,958
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-33
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
----------- ------ -------- --------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ------ -------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ------ -------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- ------ -------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ------ -------- --------
</TABLE>
See notes to consolidated condensed financial statements.
F-34
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, period ended December 31, 1987 - - - (258,663)
----------- ------ --------- ----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ------ --------- ----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ------ --------- ----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .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-35
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
----------- ------ ---------- ----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
----------- ------ ---------- ----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
----------- ------ ---------- ----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
F-36
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ - (2,854,076) $ -
Issuance of common stock, for consulting services $.05 4,750,000 47 237,453 - - -
Issuance of common stock, exercise of options .08 400,000 4 31,996 - - -
Issuance of common stock, exercise of options .10 190,000 2 18,998 - - -
Net loss, year ended December 31, 1994 - - - - (440,837) -
----------- ----- ---------- -- --------- --
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock, for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
----------- ----- ---------- -- --------- --
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
----------- ----- ---------- -- --------- --
</TABLE>
See notes to consolidated condensed financial statements.
F-37
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ----- --------- ------- ----------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options .08 3,333,333 33 247,633 - - -
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 - - -
Issuance of common stock, conversion of debt .15 894,526 9 133,991 - - -
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 - - -
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 - - -
Issuance of common stock, conversion of debt .16 772,201 8 119,992 - - -
Issuance of common stock, for services rendered .41 50,000 - 20,500 - - -
Issuance of common stock, for services rendered .24 100,000 1 23,999 - - -
Beneficial conversion feature, February debenture - - 413,793 - - -
Beneficial conversion feature, October debenture - - 1,350,000 - - -
Warrant costs, February debenture - - 37,242 - - -
Warrant costs, October debenture - - 291,555 - - -
Amortization of deferred compensation cost - - - - - 399,322
Imputed interest on convertible debenture - - 4,768 - - -
Net loss, year ended December 31, 1997 - - - - (4,141,729) -
----------- ------ ----------- -------- ---------- -------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------ ----------- -------- ---------- -------
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $(19,000) $(8,993,266) $(73,837)
Issuance of common stock, exercise of options .12 295,000 3 35,397 - - -
Issuance of common stock, exercise of options .14 500,000 5 69,995 - - -
Issuance of common stock, exercise of options .16 450,000 5 71,995 - - -
Issuance of common stock, exercise of options .20 10,000 - 2,000 - - -
Issuance of common stock, exercise of options .26 300,000 3 77,997 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 - - -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Issuance of common stock, for services rendered .21 100,000 1 20,999 - - -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998 - - - - (4,557,710) -
----------- ------ ----------- ------ ----------- -------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 - (13,550,976) (14,769)
----------- ------ ----------- ------ ----------- -------
</TABLE>
See notes to consolidated condensed financial statements.
F-40
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ------ ------ ------- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $14,325,076 $(13,550,976) $(14,769) $ -
Issuance of common stock, securities purchase .16 4,917,276 49 802,451 - - -
agreement
Issuance of common stock, securities purchase .27 1,851,852 18 499,982 - - -
agreement
Issuance of common stock, for services rendered .22 100,000 1 21,999 - - -
Beneficial conversion feature, August debenture - - 687,500 - - -
Warrant costs, securities purchase agreement - - 494,138 - - (494,138)
Warrant costs, securities purchase agreement - - 37,025 - - (37,025)
Warrant costs, August debenture - - 52,592 - - -
Amortization of warrant costs, securities purchase
agreement - - - - - 76,116
Amortization of deferred compensation cost - - - - 14,769 -
Net loss, nine months ended September 30, 1999 - - - (4,098,867) - -
------------ ------- ----------- ------------ -------- ---------
Balance, September 30, 1999 303,292,035 $ 3,032 $16,920,763 $(17,649,843) $ - $(455,047)
============ ======= =========== ============ ======== =========
</TABLE>
See notes to consolidated condensed financial statements.
F-41
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Inception
September 30, (February 20,
------------- 1984) to
September 30,
1999 1998 1999
---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,098,867) $(3,118,824) $(17,649,843)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 149,208 64,777 464,556
Amortization of debt issue costs 128,750 221,227 470,685
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 687,500 210,951 3,076,218
Amortization of discount on warrants 113,062 284,256 403,359
Amortization of deferred compensation cost 14,769 44,301 760,500
Issuance of common stock for services 22,000 21,000 1,459,500
Other - - (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (6,021) (3,597) (35,839)
Increase in inventory - - (19,729)
Increase in other assets (231,680) (106,658) (1,008,422)
Increase (decrease) in accounts payable and
accrued liabilities 303,297 (109,159) 558,521
----------- ----------- ------------
Total adjustments 1,180,885 627,098 6,127,742
----------- ----------- ------------
Net cash used by operating activities (2,917,982) (2,491,726) (11,522,101)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments - (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,890,902 6,292,979
Expenditures for property and equipment (193,163) (313,594) (1,336,763)
Proceeds from sale of property and equipment - - 1,200
----------- ----------- ------------
Net cash provided (used) by investing activities 627,884 2,483,308 (1,335,563)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 - 7,500,000
Proceeds from sale of securities, net of issuance costs 702,500 257,400 6,681,088
Payments under capital lease (28,444) - (45,046)
----------- ----------- ------------
Net cash provided by financing activities 2,674,056 257,400 14,136,042
----------- ----------- ------------
Net Increase in Cash and Cash Equivalents 383,958 248,982 1,278,378
Cash and Cash Equivalents, Beginning 924,420 236,059 -
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 1,308,378 $ 485,041 $ 1,278,378
=========== =========== ============
</TABLE>
See notes to consolidated condensed financial statements.
F-42
<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 September 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 September 30, 1999
and results of operations for the three months and the nine months
ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. Certain amounts in the
1998 financial statements have been reclassified to conform to 1999
presentation. 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 September 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-43
<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 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
September 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 September 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-44
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 September 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-45
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 September 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-46
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 September 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
As of September 30, 1999, the Company advanced $97,750 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 September 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 September 30, 1999, the Company has advanced
approximately $20,000 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-47
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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 September 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 September 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-48
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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.
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-49
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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 September 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 September 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
$175,000 in services to Globomax through September 30, 1999.
F-50
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Galantar Agreement
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial 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 agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
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.
Other
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipated
that the total expenses associated with the build-out will be
approximately $400,000, of which none has been incurred as of September
30, 1999.
F-51
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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.
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
F-52
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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.
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.
F-53
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In August 1999, in order to finance further research and
development, 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 (the "August Debenture") due August 3, 2009 to Focus
Investors LLC ("Focus"). Accrued interest under the August
Debenture is payable semi-annually, computed at the rate of 7% on
the unpaid principal balance from the date of issuance until the
date of the interest payment. No payment of the principal of the
August Debenture may be made prior to the maturity date without the
consent of the holder. The August Debenture is convertible, at the
option of the holder into shares of common stock.
In connection with the issuance of the August Debenture, the
Company issued to Focus one warrant (the "August Warrant") to
purchase Common Stock, such August Warrant entitling the holder to
purchase 1,000,000 shares of the Common Stock at any time and from
time to time through August 3, 2004. The exercise price of the
August Warrant is $.2461 per warrant share. The fair value of the
August Warrant was estimated to be $52,593 ($.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
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
is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $687,500. This amount has been
recorded as interest expense in the three months ended September
30, 1999.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Unpaid principal balance of August debenture 2,000,000 -
Less unamortized discount 57,727 42,081
---------- ----------
Convertible debenture, net $3,442,273 $1,457,919
========== ==========
</TABLE>
F-54
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
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.
Under the terms of certain of the aforementioned securities
purchase agreements, the Company is required to file with the SEC a
registration statement(s) to register shares of the common stock
issuable upon conversion or exercise of the securities sold
pursuant to such agreements to allow the investors to resell such
common stock to the public. Because a registration statement was
not declared effective by the SEC on or before a certain date, we
may be obligated to pay additional financing costs based on the
date the registration statement covering such securities is
declared effective. Included in interest expense for the nine
month period ended September 30, 1999 is $168,000 which may be
payable by the Company as additional financing costs related to the
effective date of a registration statement covering the resale of
these securities. Additional amounts, up to a maximum of $200,000
may be accrued based on the effective date of the registration
statement.
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 is being amortized to interest expense.
NOTE 4. RESTATEMENT
The accompanying financial statements for the three and nine months
ended September 30, 1999 have been restated to reclassify $76,250 and
$128,750, respectively, of amortization of debt issue costs from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
For the nine months ended September 30, 1998, the financial statements
have been restated to reclassify $221,227 of amortization of debt issue
costs and $7,299 of amortization of discount on warrants from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the nine months
ended September 30, 1998.
The financial statements for the three and nine months ended September
30, 1999 have been restated to reclassify $78,000 and $198,000,
respectively, from general and administrative to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
F-55
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. RESTATEMENT (Continued)
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
As
Previously As
Reported Restatement Restated
-------- ----------- --------
Three Months Ended September 30, 1999
-------------------------------------
<S> <C> <C> <C>
General and administrative $ 683,917 $ (78,000) $ 605,917
=========== ========= ==========
Depreciation and amortization $ 129,402 $ (76,250) $ 53,152
=========== ========= ==========
Interest expense $ 781,553 $ 154,250 $ 935,803
=========== ========= ==========
Nine Months Ended September 30, 1999
------------------------------------
General and administrative $ 1,742,592 $(198,000) $1,544,592
= ========= ========= ==========
Depreciation and amortization $ 277,958 $(128,750) $ 149,208
=========== ========= ==========
Interest expense $ 920,595 $ 326,750 $1,247,345
=========== ========= ==========
Nine Months Ended September 30, 1998
------------------------------------
Depreciation and amortization $ 293,303 $(228,526) $ 64,777
=========== ========= ==========
Interest expense $ 583,188 $ 228,526 $ 811,714
=========== = ======= ==========
</TABLE>
F-56
<PAGE>
=====================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
40,097,359 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, 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
II-1
<PAGE>
and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made , with respect to a
person who is a director or officer at the time of such determination,
(1) by a majority vote of the directors 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
II-2
<PAGE>
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.
II-3
<PAGE>
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
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)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
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
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
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
100,000 Malcolm Santer 9-14-99 Services (Consulting) (8)
4,547,880 shares Alan Gallantar 10-1-99 .24255 per share (9)
</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) The 100,000 shares issued for consulting services on 9-14-99 have been
valued at $0.22 per share.
(9) Granted pursuant to the Gallantar employment agreement.
[This Space Intentionally Left Blank]
II-6
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description
- ------ -----------
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. **
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. **
II-7
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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)
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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 *
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
23.2 Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A.
(See Exhibit 5.1).
27.1 Financial Data Schedule of Advanced Viral as of and for the Nine
Months ended September 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:
(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.
II-10
<PAGE>
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.
(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, 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
II-11
<PAGE>
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. 5 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 December 15,
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. 5 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 December 15, 1999
- ---------------------------- Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and December 15, 1999
- ---------------------------- director
Bernard Friedland
/s/ Alan Gallantar Chief Financial Officer December 15, 1999
- ----------------------------
Alan Gallantar
/s/ William Bregman Secretary-Treasurer, December 15, 1999
- ---------------------------- director
William Bregman
/s/ Louis J. Silver director December 15, 1999
- ----------------------------
Louis J. Silver
</TABLE>
II-13
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert
Vogel & Mandler, P.A.
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
Nine Months Ended September 30, 1999
EXHIBIT 5.1
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
December 9, 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 United States
Securities and Exchange Commission (the "Commission").
The Registration Statement relates to an offering of up to 40,097,359
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) 2,366,788 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.
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
<PAGE>
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 non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference of this law firm in the Prospectus
under the heading "LEGAL MATTERS." In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Respectfully submitted,
/s/ BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
-----------------------------------------------
BERMAN WOLFE & RENNERT VOGEL & MANDLER, P.A.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this registration statement on Form S-1 of Advanced Viral Research Corp. of our
report dated February 11, 1999 (which report contains an explanatory paragraph
that describes a condition that raises substantial doubt as to the ability of
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
December 13, 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000786623
<NAME> Advanced Viral Research Corp.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,308,378
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,363,946
<PP&E> 1,093,548
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,020,770
<CURRENT-LIABILITIES> 623,170
<BONDS> 0
0
0
<COMMON> 3,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,020,770
<SALES> 6,517
<TOTAL-REVENUES> 34,468
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,133,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 920,595
<INCOME-PRETAX> 4,098,867
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,098,867
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
