As filed with the Securities and Exchange Commission on September 2, 1999.
Registration No. 333-70523
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
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(Exact name of Registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
5129
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(Primary Standard Industrial Classification Code Number)
59-2646820
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(I.R.S. Employer Identification No.)
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
- --------------------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Fl 33009 (954) 458-7636
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
---------------
Copies to:
CHARLES J. RENNERT
Berman Wolfe Rennert Vogel & Mandler, P.A.
NationsBank Tower, Suite 3500
100 Southeast Second Street
Miami, Florida 33131-2130
(305) 577-4177 Phone (305) 373-6036 Fax
---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this registration
statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum
Title of each class of Amount to offering price per aggregate offering Amount of
securities to be registered be registered share(1) price(1) registration fee(2)
- --------------------------- ------------- -------- -------- --------------------
<S> <C> <C> <C> <C>
Common stock par 89,912,993 $0.20 $17,982,598.60 $5,000
value $0.00001 per share
Total Fee $5,000
======
</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 August 24, 1999, as reported on the OTC Electronic Bulletin Board.
(2) $3,017 of the fee was 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 August 31, 1999.
89,912,993 Shares
ADVANCED VIRAL RESEARCH CORP.
Common Stock
The shareholders named on page 41 are selling up to 89,912,993 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 August
25, 1999 the low and high bid prices for the common stock on the Bulletin Board
were $0.20 and $0.21, respectively.
Investing in our common stock involves substantial risks. See "RISK
FACTORS" beginning on page 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or 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.............................................................................................8
Where to Find More Information....................................................................................8
Information Incorporated by Reference.............................................................................8
Forward-looking Statements May Prove Inaccurate...................................................................8
Market Price of and Dividends on the Common Stock and Related Shareholder Matters................................10
Capitalization...................................................................................................11
Selected Consolidated Financial Data.............................................................................12
Management's Discussion and Analysis of Financial Condition and Results of Operations............................14
Business.........................................................................................................25
Management.......................................................................................................34
Principal Shareholders...........................................................................................39
Selling Shareholders.............................................................................................40
Certain Relationships and Related Transactions...................................................................43
Description of Common Stock......................................................................................43
Use of Proceeds..................................................................................................43
Plan of Distribution.............................................................................................43
Legal Matters....................................................................................................45
Experts..........................................................................................................45
Financial Statements............................................................................................F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights only some of the important information
contained elsewhere in this prospectus about the offering and Advanced Viral
Research Corp. ("Advanced Viral"). You should read the entire document carefully
for a complete understanding of our business and the securities offered in this
prospectus, including the "Risk Factors" section, the financial statements and
notes to the financial statements, and the documents incorporated by reference
into this prospectus, before making any decision to invest in the common stock
This prospectus is part of a registration statement on Form S-1 that we
have filed with the Securities and Exchange Commission. The SEC allows us to
"incorporate by reference" information that we file with them. This means that
we can disclose important information to you by referring you to other documents
that we have filed with the SEC. The information that is incorporated by
reference is considered part of this prospectus, and information that we file
later will automatically update and may supersede this information. For further
information about Advanced Viral and the securities being offered, you should
refer to the registration statement and the documents that are incorporated by
reference.
GENERAL INFORMATION ABOUT ADVANCED VIRAL
Advanced Viral was formed to engage in the production and marketing,
promotion and sale of the pharmaceutical product Reticulose(Trademark), an
anti-viral peptide-nucleic acid preparation, for the treatment of certain viral
diseases such as:
o Human Immunodeficiency Virus (HIV), including Acquired Immune
Deficiency Syndrome (AIDS);
o Hepatitis B, which causes both the acute and chronic forms of
HBV, a liver disease that is a major cause of illness and
death throughout the world, and can lead to cirrhosis and
hepatocellular carcinoma (liver cancer);
o Hepatitis C, a potentially deadly disease that may lead to
cirrhosis and liver cancer;
o Human Papilloma Virus (HPV), which causes genital warts;
o other interferon-related viruses, which produce a substance
known as interferon in cell cultures or host tissues in
response to infection which is capable of inducing a state of
resistance to superinfection with a related or unrelated
virus; and
o Rheumatoid Arthritis, an autoimmune disorder that causes the
body's immune system to attack the lining of the joints and
can lead to joint deformity or destruction, organ damage,
disability and premature death.
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We are a development stage company and 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 outside the United
States. In connection with these engagements, we have granted distribution
rights for Reticulose in certain foreign countries. Shalom Hirschman, M.D., our
President, has monitored the testing of Reticulose and has recently performed
certain analyses of Reticulose with our laboratory personnel, which analyses 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.
<TABLE>
<CAPTION>
Summary Statement of Operations Data
Years Ended December 31
-----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $84,852 $68,483 $102,907 $121,923 102,992
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710)
Net loss per common share ($0.00) ($0.00) ($0.00) ($0.02) ($0.02)
Weighted average # of shares 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
<CAPTION>
Summary Balance Sheet Data
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>
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<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, as well as all other information set forth elsewhere in this
prospectus, particularly the information contained in the consolidated financial
statements in this prospectus.
1. Because our shares are 'penny stocks,' you may be unable to resell them
in the secondary market.
Our common stock is subject to the Securities Enforcement and Penny
Stock Reform Act of 1990, which requires additional disclosure relating to the
market for penny stocks in connection with trades in any stock defined as a
penny stock. Commission regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
In addition, because our securities do not meet the exceptions to the
penny stock regulations cited above, trading in our securities is covered by
Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for securities
that are not listed on The Nasdaq Stock Market or any national securities
exchange. Under such rule, broker/dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities also
are exempt from this rule if the market price is at least $5.00 per share.
Because our securities are subject to the regulations applicable to
penny stocks, the market liquidity for our securities may be adversely affected.
The regulations on penny stocks limit the ability of broker/dealers to sell our
securities and thus the ability of purchasers to sell our securities in the
secondary market. In addition, certain states may have rules and regulations
that impose additional sales practice requirements on broker-dealers who sell
the common stock.
2. If we do not receive FDA and other regulatory approvals we will not be
permitted to sell our product.
Reticulose has not been registered or approved for commercial
distribution by the Food and Drug Administration of the United States Department
of Health and Human Services, or any other applicable foreign government body.
Reticulose cannot be sold until the FDA and corresponding foreign regulatory
authorities approve Reticulose for medical use. This means that:
o We have conducted and will continue to conduct expensive and
time consuming clinical trials of Reticulose;
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<PAGE>
o We have incurred and will continue to incur the expense and
delay inherent in seeking FDA approval of Reticulose; and
o We will face similar regulatory issues in foreign countries.
3. If Reticulose is not certified for free sale in the Bahamas or other
country in which it is manufactured, or if we do not receive FDA
approval, Reticulose will not be approved for commercial distribution
and sale in any country.
A free sales certificate is a document typically issued by a country in
which a pharmaceutical product is manufactured which certifies that such country
permits the "free sale" of such product in such country. Most countries require
that a pharmaceutical product be at least registered and certified for free sale
in the country in which it is manufactured before allowing the registration of
such product for use in that country. However, the Bahamas, where our
manufacturing facility is located, has no procedures currently in place to issue
a "free sales certificate" for any therapeutic drug, including Reticulose. If we
do not obtain a free sales certificate or other equivalent document from the
Bahamas or another country, 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, which means that
Reticulose will not be approved for commercial distribution by any country.
4. Because Reticulose has not been approved and is not currently
marketable, we cannot be sure if we will ever generate revenues from
sales of Reticulose, and thus you could lose your entire investment in
our company.
We have a very limited operating history, insignificant operating
revenues and must be considered promotional and still in our early developmental
stage. From inception through June 30, 1999, we had an accumulated deficit of
$15,516,808. We are dependent upon approval by the FDA and foreign regulatory
authorities of Reticulose for sale before we can begin any significant
commercial operations. We are uncertain that we will ever receive FDA approval
to sell Reticulose. Since 1962, when Reticulose, among many other drugs, was
reclassified as a "new drug" by the FDA, the FDA has not permitted Reticulose to
be marketed in the United States. This has been the direct result of our
inability to satisfy the regulatory protocols and the substantial preapproval
requirements imposed by the FDA upon the introduction of any new or unapproved
drug product pursuant to our prior Notice of Claimed Investigational Exemption
for a New Drug ("IND"). FDA approval first requires clinical testing of
Reticulose in human trials, and such clinical testing cannot be conducted in the
United States until we satisfy the FDA's requirements in a new IND for
Reticulose.
Although we currently anticipate the submission of a new IND to the FDA
with the aid of Globomax, we are uncertain as to when such IND will be
submitted, and when submitted that the FDA will approve such IND. If such
approval is granted, additional financing to fund the first phase of human
clinical trials will be necessary in the absence of grants or other subsidies,
and
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we cannot be certain that additional financing will be available to us. We are
uncertain as to whether the results of such human clinical trials will prove
that Reticulose is safe or effective in the treatment of any diseases.
Further, we are uncertain as to whether Reticulose will ever be
approved for commercial distribution by any country. There is nothing at this
time upon which to base any assumption that we will either generate operating
revenues or will ever be able to operate on a profitable basis. Our shareholders
and holders of options and warrants may lose all or a substantial portion of
their investment. See "Business -- Competition," "-- Testing Agreements" and
"--Government Regulation."
5. Because Reticulose has gained limited medical acceptance, has not been
approved for sale by regulatory authorities, sales of Reticulose have
been limited to sales for testing purposes only.
Reticulose is neither widely known nor accepted by the medical
community nor approved for use in the United States for any purpose by the FDA.
Two articles published in 1962 in recognized medical journals have questioned
the anti-viral effect of Reticulose on Mumps, Encephalitis and Herpes Simplex
utilizing tissue culture; on Herpes Simplex in students; and on Lansing Polio
and mouse adapted and egg adapted Influenza: A. C. Kempe, "Failure to
Demonstrate Antiviral Activity of Reticulose," American Journal of Diseases of
Children, Vol. 103, May 1962, and Behbehani, "The Effect of Reticulose on Viral
Infections of Experimental Animals," Southern Medical Journal, Vol. 55, February
1962. We cannot be certain that Reticulose will be effective in treating viruses
of any variety on a wide scale or any other basis. See "Management's Discussion
and Analysis and Results of Operations," "Business -- Government Regulation" and
"Testing Agreements."
The only revenues we have received from sales of Reticulose are
insignificant revenues related to distribution of the drug for testing purposes.
Without FDA and other regulatory approvals, timely or otherwise, we will be
unable to generate sales through our distribution agreements through the
marketing of Reticulose in their territories. We currently have exclusive
distribution agreements in place with various distributors to market and sell
Reticulose, subject to each distributor obtaining regulatory approval, in the
following countries: Mexico, China, Japan, Hong Kong, Macao, and Taiwan (AVIX
International Pharmaceutical Corp., a New York corporation); Channel Islands,
Isle of Man, British West Indies, Jamaica, Haiti, Bermuda, Belize and Saudi
Arabia (Commonwealth Pharmaceuticals, a corporation organized under the laws of
Cayman Islands, British West); and Argentina, Bolivia, Paraguay, Uruguay,
Brazil, and Chile (DCT S.R.L., an Argentine corporation). We are dependent upon
obtaining regulatory approval of Reticulose for sale and use in the United
States, in other developed countries, or alternatively in one or more of our
distributors' territories in order to have the potential for significant
distribution and sales of Reticulose.
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<PAGE>
6. The complexity and expense of complying with government regulations
decreases the likelihood that we will be able finance necessary
research, development and other operating expenses.
The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements upon the introduction of therapeutic drug products
including lengthy and detailed laboratory and clinical testing procedures,
sampling activities and other costly and time consuming procedures. Registration
or approval of a pharmaceutical product in at least one other country is a
prerequisite to obtaining registration for sale in many Third World countries.
Such governmental regulation decreases the likelihood that FDA approval for the
sale of Reticulose in the United States or elsewhere will ever be obtained or
that we will have adequate funds to finance the necessary clinical studies and
related costs. In addition, the effect of the FDA and foreign government
regulation will be to delay marketing of Reticulose for a considerable period of
time, to impose costly procedures upon our activities and to impede and/or
prevent our ability to compete with larger companies in our industry. The extent
of potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted.
7. We might not be able to raise additional capital needed to pay our
operating expenses as needed.
We will need to raise additional capital in the near future. We cannot
be certain that we will be able to raise additional funds on favorable terms or
at all, or that any funds raised will be sufficient to permit us to meet the
considerable costs of the full range of continued research and development and
testing, as well as the clinical trials that may be required by the FDA in order
to obtain approval for the IND to test Reticulose in the United States. Unless
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. We
expect to continue to incur substantial research, product development, and
regulatory expenses.
8. The exercise or conversion of our outstanding convertible securities
could have a significant adverse impact on the market price of our
common stock.
As of the date of this prospectus, in addition to the 303,192,035
shares of our common stock currently outstanding, the following securities are
outstanding:
o Stock options to purchase an aggregate of 28,265,415 shares of
common stock at exercise prices ranging from $0.11 to $0.36
o Warrants to purchase an aggregate of 7,378,450 shares of
common stock at prices ranging from $0.20 to $0.864
o Convertible debenture currently estimated to be convertible
into an aggregate of approximately 20,833,333 based upon an
average closing price of $0.10 (the "RBB Debenture").
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o Convertible debentures currently estimated to be convertible
into an aggregate of approximately 26,666,667 shares based
upon an average closing price of $0.10 (the "Focus
Debentures").
If all the options, warrants, and convertible debentures were fully
exercised and converted, as the case may be, there would be outstanding an
additional 89,912,993 shares of common stock, all of which would be available
for public resale. The sale or availability for sale of this number of shares of
common stock in the public market could adversely affect the market price of the
common stock. Additionally, the availability to us of additional equity
financing, and the terms of any such financing, may be adversely affected by the
sale or availability for sale of this number of shares.
9. Our business could be adversely affected 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 Shalom Z. Hirschman, M.D., President and Chief Executive
Officer, could have a material adverse effect 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. In the event our level of operations significantly
increase, the business may depend upon our abilities to attract and hire
additional management and staff employees. We cannot be certain that we will be
able to secure such additional management and staff, if necessary. See
"Management -- Executive Officers and Directors" for further information
concerning the extent, nature and scope of management's business experience.
10. The voting control held by present management could significantly
impact our business.
As of the date of this prospectus, our current officers and directors
beneficially owned 91,653,133 shares of our common stock, or approximately 29%
of the 303,192,035 shares of common stock deemed outstanding on such date for
the purposes of the percentage calculation, including certain shares underlying
options held by Shalom Z. Hirschman. As there are no cumulative voting rights,
current management, by virtue of their stock ownership, can be expected to
influence substantially the election of our Board of Directors and thereby
continue to impact substantially our business, affairs and policies. See
"Principal Shareholders" and "Description of Securities."
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<PAGE>
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
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, N.W., 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
INFORMATION INCORPORATED BY REFERENCE
The Commission allows us to "incorporate by reference" the information
we file with it, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this propectus, and information that we file with
the Commission later will automatically update and supersede this information.
For further information about our company and the securities being offered, you
should refer to the registration statement, the documents that are incorporated
by reference and any future filings made by us with the Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until the offering of
securities under this prospectus is terminated.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Statements contained in this prospectus that are not historical facts
may constitute forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
discussed. Words such as "expects," "may," "will," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," and similar
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expressions identify forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we are
uncertain that such expectations will prove to be correct or whether our company
will be able to attain the projected or estimated financial information set
forth in this prospectus or the accuracy or completeness of the assumptions from
which such projected or estimated information is derived. Important factors that
could cause actual results to differ materially from such expectations are
disclosed in this prospectus, including those factors discussed in "Risk
Factors."
We advise you that all cautionary remarks are meant to qualify all
forward-looking statements attributable to our company or persons acting on our
behalf. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur.
MARKET PRICE OF AND DIVIDENDS ON THE COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The principal United States market in which our common stock is traded
is the over-the-counter market. The following table shows the range of reported
low bid and high bid quotations for our common stock for each full quarterly
period during the two recent fiscal years ended December 31, 1997 and 1998, and
for the first and second quarters of 1999, as reported on the National
Association of Securities Dealers, Inc.'s OTC Bulletin Board. The high and low
bid prices for the periods indicated reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
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
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SHAREHOLDERS
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,830 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 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.
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CAPITALIZATION
The following table sets forth the actual capitalization derived from
our financial statements as of December 31, 1998, and an adjusted capitalization
to reflect the issuance of an additional 89,912,993 shares of common stock
pursuant to:
o the full conversion of the RBB Debenture assuming an average
closing price of $0.10;
o the issuance of 4,917,276 shares of our common stock pursuant
to a private placement in January 1999;
o the issuance of 1,851,852 shares of our common stock pursuant
to a private placement in July 1999.
o the full conversion of the Focus Debentures assuming an
average closing price of $0.10;
o the full exercise of certain warrants; and
o the full exercise of certain stock options.
The capitalization information set forth in the table below is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this prospectus and should be read in conjunction
with such Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
December 31, 1998 Pro Forma As Adjusted
----------------- ---------------------
<S> <C> <C>
Long-term Debt:
Convertible debenture issued in November 1998......................... $1,457,919 $1,457,919
Convertible debentures issued in August 1999 ......................... - $2,000,000
Stockholders' Equity:
Common stock, $0.00001 par value; 1,000,000,000 shares authorized;
296,422,907 shares outstanding as of December 31, 1998............ $2,964 $3,118
Additional paid-in-capital............................................ $14,325,076 $29,707,582
Deficit accumulated in the Development Stage..........................($13,550,976) ($13,550,976)
Deferred Compensation Costs........................................... ($14,769) ($14,769)
Total Stockholders' Equity .............................................. $762,295 $16,144,955
</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 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
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $22,402 $27,328 $24,111 $2,278 $656
Interest 7,450 16,155 46,796 111,845 102,043
Other income 55,000 25,000 32,000 7,800 293
----------- ----------- ----------- ----------- -----------
84,852 68,483 102,907 121,923 102,992
Costs and Expenses:
Research and development 30,040 34,931 255,660 817,603 1,659,456
General and administrative 478,984 420,757 983,256 1,681,436 1,420,427
Depreciation and amortization 16,665 14,679 18,731 138,245 340,098
Interest -- -- -- 1,626,368 1,240,721
----------- ----------- ----------- ----------- -----------
525,689 470,367 1,257,647 4,263,652 4,660,702
----------- ----------- ----------- ----------- -----------
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710)
=========== =========== =========== =========== ===========
Net loss per share of common stock - basic
and diluted $0.00 $0.00 $0.00 $0.02 $0.02
=========== =========== =========== =========== ===========
Weighted Average Number of Common
Shares Outstanding 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
=========== =========== =========== =========== ===========
</TABLE>
- --------------------------------
See notes to consolidated financial statements.
12
<PAGE>
Selected Balance Sheet Data
---------------------------
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $211,203 $65,230 $61,396 $236,059 $924,420
Investments 5,000 479,000 1,378,841 2,984,902 821,047
Inventory --- 18,091 19,729 19,729 19,729
Other current assets 10,163 12,967 16,081 20,240 29,818
----------- ----------- ----------- ----------- -----------
Total current assets 226,366 575,288 1,476,047 3,260,930 1,795,014
Property and Equipment 224,098 214,494 207,209 485,661 1,049,593
Other Assets 1,800 6,459 33,544 443,251 460,346
----------- ----------- ----------- ----------- -----------
Total assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and other $40,244 $14,651 $54,474 $375,606 $279,024
Capital lease payable-current portion --- --- --- --- 38,355
----------- ----------- ----------- ----------- -----------
Total current liabilities 40,244 14,651 54,474 375,606 317,379
=========== =========== =========== =========== ===========
Long-Term Debt:
Convertible debenture, net --- --- -- 2,384,793 1,457,919
Capital lease payable-long term portion --- --- --- --- 167,380
----------- ----------- ----------- ----------- -----------
Total Long-Term Debt --- --- --- 2,384,793 1,625,299
----------- ----------- ----------- ----------- -----------
Deposit on securities purchase agreement --- --- --- --- 600,000
----------- ----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock; 1,000,000,000 shares, par 2,416 2,512 2,671 2,779 2,964
value $0.00001 authorized
Additional paid-in capital 3,704,517 4,475,875 7,003,351 10,512,767 14,325,076
Subscription receivable --- --- (19,000) (19,000) ---
Deficit accumulated during the development (3,294,913) (3,696,797) (4,851,537) (8,993,266) (13,550,976)
stage
Deferred compensation cost --- --- (473,159) (73,837) (14,769)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 412,020 781,590 1,662,326 1,429,443 762,295
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
=========== =========== =========== =========== ===========
Shares outstanding at year end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907
=========== =========== =========== =========== ===========
</TABLE>
- ---------------------
See notes to consolidated financial statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read along with our Consolidated Financial Statements and
Notes thereto included elsewhere in this prospectus.
OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has
been engaged primarily in research and development activities. We have not yet
generated significant operating revenues, and as of June 30, 1999 we had
incurred a cumulative net loss of $15,516,808. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Reticulose. All of our research and
development efforts have been devoted to the development of Reticulose.
In order to commence clinical trials for regulatory approval of
Reticulose in the United States, we must submit an Investigational New Drug
application (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 dieases. 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 incidence of adverse
events in the use of Reticulose for the treatment of AIDS and other dieases.
However, we are uncertain that the FDA will approve the IND upon its submission.
It is impossible to determine whether the data from any ongoing studies will be
useful in connection with the IND. FDA approval to begin human clinical trials
of Reticulose will require significant cash expenditures, the amount of which is
not currently determinable. Further, we are uncertain as to whether Reticulose
will ever be approved for commercial distribution by any country.
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. Because our
14
<PAGE>
research and development expenses and clinical trial expenses will be charged
against earnings for financial reporting purposes, we expect that losses from
operations will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 and June 30, 1998
For the three month periods ended June 30, 1999 and June 30, 1998, we
incurred losses of $1,056,036 ($0.01 per share) and $1,151,916 ($0.01 per
share), respectively. For the six month periods ended June 30, 1999 and June 30,
1998, we incurred losses of $1,965,832 ($0.01 per share) and $2,249,754 ($0.01
per share), respectively. Our decreased losses during 1999 are principally due
to a combination of decreased amortization of loan costs related to our
convertible debentures (discussed below) included in depreciation and
amortization ($148,556 for the six months ended June 30, 1999 vs. $541,823 for
the six months ended June 30, 1998), and increased research and development
expense ($767,380 for the six months ended June 30, 1999 vs. $380,764 for the
six months ended June 30, 1998) resulting from the employment of additional
research professionals and rent and operating costs associated with the Yonkers,
New York laboratory. Administrative expenses and the lack of sales revenues also
contributed to our losses.
We had sales of $2,191 and $0 during the three month periods ended June
30, 1999 and June 30, 1998, respectively, and $4,590 and $0 during the six month
periods ended June 30, 1999 and June 30, 1998, respectively. All sales during
these periods were to distributors purchasing Reticulose for testing purposes.
Interest income was $5,680 and $27,926 for the three month periods ended June
30, 1999 and June 30, 1998, respectively, and $21,489 and $57,223 for the six
month periods ended June 30, 1999 and June 30, 1998, respectively.
There can be no assurance that Reticulose will ever be sold for
commercial distribution anywhere in the world.
Years Ended December 31, 1998, 1997 and 1996
During the fiscal years ended December 31, 1998 and 1997, we incurred
losses of $3,984,793 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 the salary of Shalom Z. Hirschman, M.D. as President and Chief
Executive Officer, interest charges as a result of the beneficial conversion
feature associated with convertible debentures issued in 1997, increased
research and development expense, opening and maintenance costs of our Yonkers,
NY office and laboratory, and the implementation of Statement of Financial
Accounting Standards Board (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which accounted for options granted and recorded as compensation
expense. Administrative expenses and the lack of sales revenues also contributed
to our losses.
15
<PAGE>
There were $656 and $2,278 in sales revenues in 1998 and 1997,
respectively, compared to $24,111 in sales revenues for 1996. All sales revenues
resulted from distributors purchasing Reticulose for testing purposes. Interest
income was $102,043 and $111,845 in 1998 and 1997, respectively, compared to
$46,796 in 1996. In 1998 and 1997, we collected $0 from the sale of territorial
rights compared to $32,000 in 1996.
LIQUIDITY
June 30, 1999 vs. December 31, 1998
As of June 30, 1999 and December 31, 1998, we had current assets of
$160,953 and $1,795,014, respectively. We had total assets of $1,747,862 and
$3,304,953 at June 30, 1999 and December 31, 1998, respectively. The decrease in
current and total assets was primarily attributable to the use of investment
capital to fund increased operating expenditures.
During the six months ended June 30, 1999, we used cash of $1,726,785
for operating activities, as compared to $1,634,420 for the six months ended
June 30, 1998. During the six months ended June 30, 1999, we:
o incurred non-cash expenses of approximately of $123,000
relating to amortization of loan costs ($52,500) and discount
on warrants ($73,460);
o expended approximately $717,000 for payroll and related costs;
o obtained approximately $232,500 in proceeds from the sale of
securities;
o expended approximately $390,000 in professional and consulting
fees;
o expended approximately $137,000 for additions to machinery and
equipment at our Yonkers, New York office; and
o expended approximately $85,000 in laboratory supplies.
During the six months ended June 30, 1999, cash flows provided by
investing activities were primarily due to the sales of investments which were
available from the proceeds of the issuance of the convertible debenture in 1998
and shares of common stock in 1999. See "Capital Resources" for a discussion of
cash flows provided by financing activities.
As of June 30, 1999, we expended the following amounts for research and
development in connection with the following ongoing studies being conducted
abroad:
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
16
<PAGE>
three-drug cocktail and a placebo, pursuant to an agreement
entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a
controlled study in 30 patients to determine the effectiveness
of Reticulose for the treatment of rheumatoid arthritis in
humans, pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of
Reticulose in inhibiting the mutation of the AIDS virus on
patients in Argentina, pursuant to an agreement entered in July
1998.
Years Ended December 31, 1998, 1997 and 1996
As of December 31, 1998, we had current assets of $1,795,014, compared
to $3,260,930 at December 31, 1997. We had total assets of $3,304,953 and
$4,189,842 at December 31, 1998 and 1997, respectively. The decrease in current
and total assets was primarily attributable to the use of investment capital to
fund increased operating expenditures.
During 1998, we used cash of $3,364,528 for operating activities, as
compared to $2,179,780 in 1997 and $665,682 in 1996. During 1998, we:
o incurred non-cash expenses of approximately $230,000 and
$285,000, respectively, relating to amortization of loan costs
and discount on warrants relating to convertible debentures
issued in 1997;
o incurred non-cash expenses of approximately $667,000 relating
to amortization of deferred interest;
o expended approximately $316,000 in legal and consulting fees;
o expended approximately $210,000 in laboratory supplies;
o expended approximately $1.1 million for payroll and related
costs;
o expended approximately $675,000 for leasehold improvements and
furniture and equipment at our Yonkers, New York office; and
o obtained approximately $1.3 million in proceeds from the sale
of the convertible debenture issued in 1998.
During 1998, cash flows provided by investing activities was primarily
due to the sales of investments which were available from the proceeds of the
issuance of the convertible debentures in 1997.
17
<PAGE>
During 1999, we expect to spend approximately $1,000,000 on research
and development related activities, including:
o approximately $300,000 in the preparation of the IND;
o approximately $325,000 in connection with laboratory research,
equipment, supplies and electronics;
o approximately $300,000 in overseas research of Reticulose; and
o approximately $75,000 in preparing the manufacturing facility
in the Bahamas for FDA inspection and in accordance with good
manufacturing practices standards.
Management anticipates that we will be required to sell additional
securities to obtain the funds necessary to further our research and development
activities.
Under the terms of an agreement with 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
18
<PAGE>
public. The registration statement must be filed on or prior to December 28,
1999. In the event the registration statement is not declared effective by the
Commission prior to such date, we must pay the purchasers a penalty of $10,000,
on a pro rata basis, for each full calendar month lapsed after such date, and a
pro rated amount of said $10,000 based on a month of 30 or 31 days (as
applicable to the month in which the registration statement is declared
effective), provided, however, that total penalties shall not exceed $20,000 in
the aggregate.
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, in the event 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 shall be
insufficient for issuance upon the conversion of the debentures and the exercise
of the warrants, or upon the occurrence of a Blackout Event (as described in the
agreement (each of these events referred to as a "Registration Default"), we
will be required to pay the purchaser a penalty for each 30 day period during
which a Registration Default shall be in effect (each such period, a "Default
Period") equal to $40,000 (the "Periodic Amount"); provided that, with respect
to any Default Period during which the relevant Registration Defaults shall have
been cured, the Periodic Amount shall be pro rated for the number of days during
such period during which the Registration Defaults were pending. To the extent
the Periodic Amounts for all Default Periods exceed $100,000 in the aggregate,
such excess amount shall be paid in shares of common stock, as set forth in the
agreement. The agreement further provides that until such 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.
19
<PAGE>
CAPITAL RESOURCES
We have been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. The following table
summarizes sales of our securities since February 1997.
<TABLE>
<CAPTION>
Gross Security Convertible/ Conversion Price/ Maturity Date/
Date Issued Proceeds Issued Exercisable Into Exercise Price Expiration Date
----------- -------- ------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
August 1997 $3,000,000 Debenture 17,577,354 shares $0.13-0.23 per share Fully converted
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
November 1998 $1,500,000 Debenture 20,833,333 shares $0.075 per share (1) October 31, 2008
Warrants 375,000 shares $0.20 per share
375,000 shares $0.24 per share
January 1999 $802,500 Shares 4,917,276 n/a n/a
Warrants 1,183,394 shares $0.2040 per share December 31,
2003
1,183,394 shares $0.2448 per share
July 1999 $500,000 Shares 1,851,852 n/a n/a
Warrants 463,264 shares $0.324 per share June 30, 2004
463,264 shares $0.378 per share
August 1999 $2,000,000 Debentures 26,666,667 $0.075 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 an average closing
price of $0.10, and an applicable conversion price of $0.072 for the
RBB debenture and $0.075 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
20
<PAGE>
principal balance from the date of issuance until the date of interest payment.
The 1997 debentures were convertible, at the option of the holder, into shares
of common stock pursuant to specified formulas. On April 22, 1997, June 6, 1997,
July 3, 1997 and August 20, 1997, pursuant to notice by the holder, RBB, to us
under the February 1997 debenture, $330,000, $134,000, $270,000 and $266,000,
respectively, of the principal amount of the February 1997 debenture was
converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares of the common
stock, respectively. As of August 20, 1997 the February 1997 debenture was fully
converted. On December 9, 1997, January 7, 1998, January 14, 1998, February 19,
1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant
to notice by the holder, RBB, to us, $120,000, $133,000, $341,250, $750,000,
$335,750, $425,000, $275,000 and $620,000, respectively, of the October 1997
debenture was converted into 772,201, 1,017,011, 2,512,887, 5,114,218,
1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of common stock,
respectively. As of May 5, 1998, the October 1997 debenture was fully converted.
In connection with the issuance of the 1997 debentures, we issued to
RBB six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from August
30, 1997 through August 30, 2007, 600,000 shares of the common stock. The
exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and
$0.27 per warrant share, respectively. Each such warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under such warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of August 30, 1999, none
of the warrants have been exercised.
Securities Issued in 1998.
In November 1998 we sold $1,500,000 principal amount of our ten-year 7%
convertible debenture due October 31, 2008 to RBB, as agent for the accounts of
certain persons, in an offshore transaction pursuant to Regulation S under the
Securities Act. Accrued interest under the convertible debenture is payable
semiannually, computed at the rate of 7% per annum on the unpaid principal
balance from the date of issuance until the date of interest payment. The
convertible debenture is convertible, at the option of the holder, into shares
of common stock pursuant to a specified formula. The actual number of shares of
common stock issued or issuable upon conversion of the convertible debenture is
subject to adjustment and could be materially less or more than the above
estimated amount, depending upon factors that cannot be predicted by us at this
time, including the future market price of the common stock and the potential
conversion of accrued interest into shares of common stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense.
21
<PAGE>
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock , each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of August 30, 1999, none of such warrants
had been exercised.
The fair value of the warrants issued in connection with the
convertible debenture was estimated to be $48,000 ($0.064 per warrant) based
upon a financial analysis of the terms of such warrants using the Black-Sholes
Pricing Model with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one year. This
amount has been reflected in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
In December 1998 pursuant to a securities purchase agreement, we sold
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) two warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harborview Group consisting of two warrants to purchase an aggregate 400,000
shares of common stock, in a private offering transaction pursuant to Section
4(2) of the Securities Act, for an aggregate purchase price of $802,500, of
which $600,000 was received on December 31, 1998, and $202,500 was received in
January 1999. Two of the warrants entitle the holders to purchase 983,394 and
983,394 shares of common stock at exercise prices of $0.2040 and $0.2448 per
share, respectively. The other two warrants entitle the holders to purchase
200,000 and 200,000 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. All four warrants are exercisable at any time
and from time to time until December 31, 2003. Each warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under that warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of August 30, 1999, none
of such warrants had been exercised.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares in connection with the securities purchase agreement,
was estimated to be $494,000 ($0.0208 per warrant) based upon a financial
analysis of the terms of such warrants using the Black-Sholes Pricing Model with
the following assumptions: expected volatility of 20%, and a risk free interest
rate of 6% through the December 31, 2003 expiration date.
22
<PAGE>
Securities Issued in 1999.
In June 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 August 30, 1999, none of the warrants
had been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%, and a risk free interest rate
of 5.75% through the June 30, 2004 expiration date.
Pursuant to a securities purchase agreement dated August 3,1999 in a
private offering transaction under Section 4(2) of the Securities Act, we sold
to Focus Investors LLC an aggregate of 20 Units for an aggregate gross purchase
price of $2 million, each Unit consisting of (i) $100,000 principal amount of
our ten-year 7% convertible debentures due August 3, 2009, and (ii) Series W
warrants to purchase 50,000 shares of our common stock exercisable until August
3, 2004. Accrued interest under the convertible debenture is payable
semiannually, computed at the rate of 7% per annum on the unpaid principal
balance from the date of issuance until the date of interest payment. The
convertible debenture is convertible, at the option of the holder, into shares
of common stock pursuant to a specified formula. The actual number of shares of
common stock issued or issuable upon conversion of the convertible debenture is
subject to adjustment and could be materially less or more than the above
estimated amount, depending upon factors that cannot be predicted by us at this
time, including the future market price of the common stock and the potential
conversion of accrued interest into shares of common stock.
The exercise price of the Series W warrants is $0.2461 per warrant
share. The warrants provide that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; The Series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of August 30, 1999, none of such
warrants had been exercised.
If the FDA or other approvals are obtained, of which we cannot be
certain, we must budget funds from the exercise of options and warrants,
potential grants and/or additional equity. We are uncertain as to the
availability of such funds.
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<PAGE>
We are currently expending approximately $300,000 per month, which
expenses include salaries, rent, professional fees, license fees and taxes,
research and development, and travel, principally between our two offices and
our Bahamian facility, and anticipate that we can continue operations for at
least nine months with our current liquid assets, including the proceeds from
the recent sale of the convertible debenture and other securities if no stock
options or warrants are exercised. If all of the stock options and warrants are
exercised, we will receive net proceeds of approximately $8.4 million. Those
proceeds will contribute to general and administrative and working capital and
will permit us to substantially increase our budget for research and development
and clinical trials and testing and to operate at significantly increased levels
of operation, assuming Reticulose receives approvals and prospects for sales
increase to justify such increased levels of operation, of which we cannot be
certain. The recent prevailing market price for shares of common stock has from
time to time been above the exercise prices of certain of the outstanding
options and warrants. However, we cannot be certain that the recent trading
levels will be sustained or that any additional options or warrants will be
exercised. If less than 25% or none of the outstanding options and warrants are
exercised, and we obtain no other additional financing, in order for us to
achieve the level of operations contemplated by management, management
anticipates that we will have to limit intentions to expand operations beyond
current levels. We are currently seeking debt financing, licensing agreements,
joint ventures and other sources of financing. We are uncertain that such
additional sources of financing will be found. We are uncertain that any of our
distributors will ever obtain regulatory approvals to test or market Reticulose
in any territory. If financing is not available, in order to continue
operations, management anticipates that they will have to defer their salaries.
Management does not believe that, at present, debt or equity financing will be
readily obtainable on favorable terms unless and until FDA approval for Phase I
clinical testing is granted or comparable approval is obtained from another
developed or developing country. Because of the uncertainties involved in the
process of gaining approval for commercial drug use on humans, we cannot be
certain that we will be able to sell Reticulose.
We have three patents for the use of Reticulose as a treatment. In
addition, we have filed 34 patent applications with the United States Patent
Office, including one for Reticulose as a product. We cannot be certain that
other companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to ours. We cannot be
certain that we will obtain such a patent or, if obtained, that it will be
enforceable. We have retained patent counsel for the purpose of pursuing
additional patent protection for Reticulose. However, we are uncertain that any
patents will be granted, or if granted, that such patents will be sustained if
questioned, and, if declared valid, that the patents, in fact, will operate to
protect us from the replication of Reticulose by competitors. We have relied
upon laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect our rights to Reticulose and the processes
for its manufacture, but we are uncertain as to whether such efforts and
procedures will continue to be successful and protect us from any competition in
the future.
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<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 computer issue is the result of computer programs using a
two-digit format, as opposed to a four-digit format to indicate the year. Such
computer programs will be unable to recognize date information correctly when
the year changes to 2000. The Year 2000 issue poses risks for our information
technology systems.
Our information technology systems are based upon software licenses and
software maintenance agreements with third party software companies. Based upon
our internal assessments and communications with our software vendors, all of
the software we use is Year 2000 compliant software. We have used internal
personnel to test our software systems for Year 2000 compliance and such tests
yielded positive results. We will continue to monitor our Year 2000 readiness.
Also, we do not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to us by other manufacturers.
Based on the foregoing, we believe that we will be Year 2000 compliant
on a timely basis and that future costs relating to the Year 2000 issue will not
have a material impact on our consolidated financial position, results of
operations or cash flows.
BUSINESS
OVERVIEW
Advanced Viral was formed in July 1985 to engage in the production and
marketing, promotion and sale of a pharmaceutical drug with the trade name
"Reticulose." Under the Federal Food, Drug, and Cosmetic Act, as amended in
1962, the FDA classified Reticulose as a "new drug" requiring FDA approval prior
to any sale in the United States. Reticulose has not been approved for sale or
use by the FDA or any foreign government body, and thus we have not as yet
commenced any commercial operations. We are dependent on registration and/or
approval by applicable regulatory authorities of Reticulose in order to commence
commercial operations.
Our operations over the last five years have been limited principally
to engaging in research, in vitro testing and analysis of Reticulose in the
United States, and engaging others to perform testing and analysis of Reticulose
on human patients overseas. The FDA has not approved human clinical trials for
Reticulose in the United States. We may be required, in the absence of grants or
other subsidies, to bear the expenses of the first phase of human clinical
trials to the extent the FDA permits human clinical trials to occur, of which we
cannot be certain. We do not know what the actual cost of such trials would be.
If we need additional financing to fund such human clinical trials, we cannot be
certain that additional financing will be available to us.
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<PAGE>
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 Investigational New Drug (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 (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
26
<PAGE>
gain confirmatory evidence of efficacy and safety from a wide base of
investigators and patients. The initial IND may cover only Phase I.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well documented clinical experience as a substitute for other pre-clinical work.
After the FDA approves the IND or allows it to become effective, the
investigation is permitted to proceed, during which the sponsor must keep the
FDA informed of new studies, including animal studies, make progress reports on
the study or studies covered by the IND, and also be responsible for alerting
FDA and clinical investigators immediately of unforeseen serious side effects or
injuries.
When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the human pharmacokinetic data and
human bioavailability data (or information supporting a waiver of the submission
of in vivo bioavailability data). Also included in the NDA is a section
describing the composition,
27
<PAGE>
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.
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 other interferon related viruses. The FDA has issued four
letters of deficiency with regard to the IND. In a letter dated November 29,
1984, the FDA indicated, among other deficiencies noted, that the publications
submitted with the IND and relating to the effectiveness of Reticulose on virus
related diseases will not be accepted in support of the safety of Reticulose
unless 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
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<PAGE>
the objective of obtaining full approval for Reticulose in the United States.
Pursuant to the agreement with GloboMax LLC, we are obligated to pay for
services on an hourly basis, at prescribed rates. We cannot be certain as to the
costs or the timing of the filing of the new IND or whether we have the
resources to complete the FDA approval process. We may allocate certain funds
from the exercise of currently outstanding options and warrants for the purpose
of filing a new IND with the FDA, however, we cannot be certain that any of the
currently outstanding options or warrants will be exercised. We cannot be
certain that any new IND for clinical tests of Reticulose on humans will be
approved by the FDA for human clinical trials on AIDS or other diseases, that
any tests previously conducted or to be conducted will satisfy FDA requirements,
that the results of such human clinical trials will prove that Reticulose is
safe or effective in the treatment of AIDS or other diseases, or that the FDA
would approve the sale of Reticulose in the United States if we submitted a
proper NDA. It is not known at this time how extensive the Phase II and Phase
III clinical trials will be, if they are conducted. We are uncertain as to
whether the data generated will show that the drug Reticulose is safe and
effective, and even if the data shows that Reticulose is safe and effective,
obtaining approval of the NDA could take years and require financing of amounts
not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Reticulose for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. We cannot be certain
that clinical studies conducted outside of any country will be accepted by such
country, and the approval of any pharmaceutical or diagnostic product in one
country does not assure that such product will be approved in another country.
Accordingly, until registration is granted, if ever, in the United States or
another developed or developing country, we do not expect that we will be able
to generate material sales revenues. We received a grant of authority from the
Bahamian Port Authority on October 15, 1992 confirming the right of our
subsidiary, Advance Viral Research, Ltd., a Bahamian corporation, to carry on
the manufacture and export sale of ethical pharmaceutical products. See
"-Marketing And Sales."
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TESTING AGREEMENTS
For the period from inception (February 20, 1984) through December 31,
1998 we expended approximately $2.7 million on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. In connection with these
engagements, we have also granted distribution rights for Reticulose in certain
foreign countries. In 1995, we retained Shalom Hirschman, M.D. as our President.
As President, Dr. Hirschman established our research facility in Yonkers, New
York, monitored the testing of Reticulose and recently performed certain
analyses of Reticulose with our laboratory personnel, which analyses we believe
may be used in connection with the FDA approval process. We currently are
funding research and testing to:
o determine the safety of the topical use of Reticulose on
animals and cultured human cells;
o assess the effectiveness of the topical application of
Reticulose on HPV;
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;
o study the effects of Reticulose in inhibiting the mutation of
the AIDS virus in humans; and
o determine the molecular mechanism by which Reticulose may
specifically enhance transcription of the gamma interferon
gene, study the basic mechanisms of immune responses, and
investigate anti-tumor activity of Reticulose.
We are not certain that our studies detailing the results of the above
research and testing will positively impact the FDA's decision to approve a new
IND for Reticulose or approve of the marketing, sales or distribution of
Reticulose within the United States. As a result, we are not certain that such
studies will enhance our ability to obtain approval for the marketing, sales or
distribution of Reticulose anywhere in the world.
MARKETING AND SALES
Except for limited sales (approximately $4,500 during the first six
months of 1999) of Reticulose for testing and other purposes, Reticulose is not
sold commercially anywhere in the world. As of the date of this prospectus, the
our efforts or the efforts of any of our representatives have produced no
material benefits to us regarding our ability to have Reticulose sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with five separate entities granting exclusive rights to distribute
Reticulose in the countries of
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China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel Islands, Isle of Man,
British West Indies, Jamaica, Haiti, Bermuda, Belize, Saudi Arabia, Argentina,
Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant to these agreements, the
distributors are obligated to cause Reticulose to be approved for commercial
sale in such countries and upon such approval, to purchase from us certain
minimum quantities of Reticulose to maintain the exclusive distribution rights.
Our marketing plans for Reticulose are still dependent upon registration of
Reticulose for sale in the various jurisdictions where our distributors are
seeking approvals.
We are uncertain as to whether we or any distributor will ever secure
registration of Reticulose, and to date we have received no information that
would lead us to believe that we will be positioned to sell Reticulose
commercially anywhere in the world in the immediate future. To date, the only
application for registration of Reticulose which has been filed is an
application requesting that Reticulose be permitted to be sold in Argentina,
which was filed in March 1998. The completion of this application to secure
approval to sell Reticulose in Argentina is dependent upon the results of a test
requested by the government of Argentina which will demonstrate the effect of
Reticulose on certain animals. We initially targeted our sales and marketing
efforts to those countries where Reticulose was previously marketed by its prior
owners for a number of years as an anti-viral agent in the treatment of Asian
Influenza, Viral Pneumonia, Viral Infectious Hepatitis, Mumps, Encephalitis,
Herpes Simplex and Herpes Zoster. Those countries included Singapore, Hong Kong,
Malaysia, Taiwan, the Philippines and Malta. Registration of Reticulose will be
required in such countries as well as in the other countries comprising the
distributors' territories before any significant sales may begin. The
registration of Reticulose for sale in these countries has been frustrated due
to our inability to obtain the registration and approval to sell Reticulose in
the Bahamas, the country of origin, and a general lack of published data on the
effectiveness of Reticulose. Until Reticulose is registered and approved for
sale in the United States, in another developed country or in the other
countries included in the distributors' territories, we cannot be certain that
we will generate any sales of Reticulose. For the years ended December 31, 1998,
1997 and 1996, we reported no commercial sales except limited sales for testing
purposes ($656, $2,278, and $24,111, respectively). Reticulose is not legally
available for commercial sale anywhere in the world, except for testing
purposes. See "-Testing Agreements."
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.
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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 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(Registered), a self-administered topical cream,
for the treatment of HPV. Reticulose, if approved for commercial sale by the
FDA, would also compete with surgical, chemical, and other methods of treating
HPV. We cannot assess the impact products developed by our competitors or
advances in other methods of the treatment of HPV will have on the commercial
viability of Reticulose.
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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.
Shalom Z. Hirschman, M.D., our President and Chief Executive Officer and a
director, Bernard Friedland, our Chairman of the Board and a director, and
William Bregman, our Secretary, Treasurer and a director, 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."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 63 President, Chief Executive Officer,
Chief Scientific Officer, Director
Bernard Friedland 73 Chairman of the Board of Directors
William Bregman 77 Vice President, Secretary, Treasurer,
Director
Louis J. Silver 70 Director
</TABLE>
Shalom Z. Hirschman, M.D., President, Chief Executive Officer and a
director since October 1996, was Director of the Division of Infectious Diseases
and Professor of Medicine at Mount Sinai School of Medicine, New York, New York,
from May 1969 until October 1996.
Bernard Friedland, Chairman of the Board since May 1987, director since
July 1985 and President and Chief Executive Officer from September 1985 until
October 1996, was employed by Key, Inc. for 29 years, until March 1, 1986, in
the Research and Development and Quality Assurance Departments in
Pharmaceuticals, Pharmacology, and Canceantimetabolites.
William Bregman, director since July 1985 and Secretary-Treasurer since
September 1985, was Vice President from September 1985 until May 1987 and Vice
President and Secretary of our subsidiary, Advance Viral Research, Ltd., from
August 1984 until July 1989.
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 stockholders and until their successors have been elected and have
qualified.
34
<PAGE>
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 All Other
Name and Other Annual Options/ Compensation
Principal Position Year Salary Bonus Compensation (1) SARs (3) (4)
- ------------------ ---- ------ ----- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1998 $325,000 $0 $12,288 23,000,000 $4,316
President, Chief Executive
Officer and Chief Scientific
Officer since October 1996 and 1997 $325,000 $43,000 $14,604 0 $3,956
consultant from May 24, 1995
until October 1996. 1996 $68,750(2) $0 $ 4,825 15,000,000 $4,316
- -----------------------------------------------------------------------------------------------------------------------------
Bernard Friedland, President 1998 - - - - -
and Chief Executive Officer
through October 13, 1996 1997 - - - - -
1996 $35,000 - $6,500 - -
</TABLE>
- --------------------------------
(1) Other Annual Compensation for Dr. Hirschman and Mr. Friedland include
medical insurance premiums paid by us on his behalf, and aggregate
incremental cost to us of Dr. Hirschman's automobile lease, gas, oil,
repairs and maintenance.
(2) Under the Hirschman employment agreement described under "-EMPLOYMENT
CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS,"
Dr. Hirschman's annual salary as President and Chief Executive Officer
(among other titles) is $325,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) The dollar value of insurance premiums paid by, or on behalf of, us with
respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, we granted Dr. Hirschman options to acquire
23,000,000 shares of common stock, the exerciseability of which is subject to
conditions precedent. No other stock
35
<PAGE>
options were granted to the named executive officers during 1998. Other than Dr.
Hirschman'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.
Aggregated Option Exercises in
Last Fiscal Year And Year-end Option Values
-------------------------------------------
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
Shares Underlying Unexercised Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End
Name Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
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.
36
<PAGE>
(3) As of December 31, 1998, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share, 4,000,000; shares of common
stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
share; and 4,000,000 shares of common stock at $0.36 per share, all of
which are currently exercisable. In addition, Dr. Hirschman held options to
purchase 23,000,000 shares of common stock at $0.27 per share which become
exercisable through February 2008 upon the earlier to occur of : (i) the
day an IND number is obtained from and approved by the FDA so that human
research may be conducted using Reticulose; (ii) the occurrence of a change
in control; or (iii) the execution of an agreement relating to co-marketing
pursuant to which one or more third parties commit to make payments to
Advanced Viral of at least $15 million.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between Advanced Viral and Shalom Z. Hirschman, M.D., 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. In
the event 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. In the event 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) a major medical insurance policy, disability policy and
dental policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and (b) a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall (a) take such action as may be
necessary to permit Dr. Hirschman to be entitled to participate in stock option,
stock bonus or similar plans (including plans for SARs) as are established by
us, (b) lease or purchase for Dr. Hirschman, at his discretion, an automobile
selected and to be used by him, having a list price not in excess of $40,000,
and pay for all gas, oil, repairs and maintenance, as well as the lease or
purchase payments, as applicable, in connection with the automobile, (c)
reimburse Dr. Hirschman for all of his proven expenses incurred in and about the
course of his employment that are deductible under the current tax law,
including, among other expenses, his license fees, membership dues in
37
<PAGE>
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 (d) 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 (i) the day an IND number is obtained from and approved by
the FDA so that human research may be conducted using Reticulose; (ii) the
occurrence of a change in control; or (iii) the execution of an agreement
relating to co-marketing pursuant to which one or more third parties commit to
make payments to us of at least $15 million.
38
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus
certain information regarding the beneficial ownership of the common stock by
(i) each person who is known by us to own beneficially more than 5% of the our
outstanding voting securities; (ii) each of our directors and named executive
officers; and (iii) 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.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
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
RBB Bank Aktiengeshellshaft 23,918,467 (6) 7.23%
Burgring 16
8010 Graz, Austria
Focus Investors LLC 27,666,667 (7) 8.36%
One World Trade Center, Suite 4563
New York, NY 10048
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 after August 30, 1999,
are deemed outstanding. According to American Stock Transfer & Trust
Company, the transfer agent for the
39
<PAGE>
common stock, 303,192,035 shares of the common stock were outstanding as of
the close of business on August 30, 1999.
(2) Represents shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days after August 30, 1999.
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that
agreement, shall vote all shares of the common stock owned or voted by them
in favor of Dr. Hirschman as a director of Advanced Viral. That agreement,
however, does not restrict or otherwise limit their right to sell their
shares to third parties without restriction. The Hirschman employment
agreement also provides that Dr. Hirschman, during that term, shall take no
action which shall preclude Messrs. Friedland and Bregman from being
nominees as directors of Advanced Viral and that Dr. Hirschman shall vote
all shares of the common stock owned or voted by him in favor of Messrs.
Friedland and Bregman as directors of Advanced Viral. See "- Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
(4) Includes (i) 1,000,000 shares of the common stock owned by Mr. Friedland
and Beth Friedland, his daughter, as joint tenants, (ii) 20,000,000 shares
owned by Mr. Friedland and Shirley Friedland, his spouse, as joint tenants,
and (iii) 600,000 shares owned the B&SD Friedland Foundation, a
not-for-profit foundation controlled by Mr. Friedland. Does not include
15,000 shares owned by Shirley Friedland as to which Mr. Friedland
disclaims beneficial ownership.
(5) Includes (i) 22,823,125 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; (ii) 70,000 shares owned by Carol
Bregman, his daughter; (iii) 73,000 shares owned by Janet Berlin, his
daughter, (iv) 70,000 shares owned by Forest Berlin, his grandson, and (v)
70,000 shares owned by Jessica Berlin, his granddaughter.
(6) Represents 20,833.333 shares of common stock issued or issuable upon the
full conversion of the RBB convertible debenture based upon an average
closing price of $0.10 (which number may fluctuate depending on the future
market price of our common stock) and 3,085,134 shares underlying certain
warrants.
(7) Represents 26,666,667 shares of common stock issued or issuable upon the
full conversion of the Focus convertible debenture based upon an average
closing price of $0.10 (which number may fluctuate depending on the future
market price of our common stock) and 1,000,000 shares underlying certain
warrants.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus by
each of the selling shareholders assuming the full conversion of the convertible
debenture (based on application of the formula for computing the applicable
conversion price as provided in the convertible debenture), warrants and certain
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. Based an assumed applicable conversion price of $0.10, full
conversion of the RBB Debenture would yield 20,833,333 shares of common stock,
and full conversion of the Focus Debentures would yield 26,666,667 shares of
common stock.
40
<PAGE>
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>
Shares Owned
Position with or Before Offering Shares Being Shares Owned
Relationship to (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 1.06% 4,099,500 0 0.00%
Cesar Blumtritt, MD 4b Affiliate of DCT, 753,333 0.19% 753,333 0 0.00%
SRL
Leonard Cohen 4c Consultant and 1,700,000 0.44% 1,700,000 0 0.00%
Affiliate of AVIX
David Duffy 4d Affiliate of Plata 650,000 0.17% 650,000 0 0.00%
Shalom Z. Hirschman, MD 4e President and CEO 16,100,000 4.17% 16,100,000 0 0.00%
Gary Hussian 4f Affiliate of DCT, 292,500 0.08% 292,500 0 0.00%
SRL
Interfi Capital Group 4g Investor 1,538,015 0.40% 1,538,015 0 0.00%
Henry Kamioner 4h None 1,500,000 0.39% 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 0.26% 1,000,000 0 0.00%
Freddie Velez 4l Affiliate of DCT, SRL 440,667 0.11% 440,667 0 0.00%
RBB Bank A.G. 5 Investor 23,918,467 6.19% 23,918,467 0 0.00%
Harborview Group 6a Investor 3,831,372 0.99% 3,831,372 0 0.00%
Joe Feshbach 6b Investor 857,843 0.22% 857,843 0 0.00%
Russell Kuhn 6c Investor 586,880 0.15% 428,880 158,000 0.04%
Victor Sherman 6d Investor 528,880 0.14% 428,880 100,000 0.03%
Jennifer Brandenburg 6e Investor 171,569 0.04% 171,569 0 0.00%
Smith
Jo Sherrin Smith 6f Investor 171,569 0.04% 171,569 0 0.00%
Robert Franklin Smith, Sr. 6g Investor 171,569 0.04% 171,569 0 0.00%
Shelly Marion Smith 6h Investor 271,569 0.07% 171,569 100,000 0.03%
Myron Weiner 6i Investor 438,880 0.11% 428,880 10,000 0.00%
John Zimmerman 6j Investor 641,151 0.17% 536,151 105,000 0.03%
Matt Zimmerman 6k Investor 105,782 0.03% 85,782 20,000 0.01%
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Kwong Wai Au 7a Investor 648,148 0.17% 648,148 0 0.00%
Michael Berman 7b Investor 1,389,490 0.36% 1,389,490 0 0.00%
Pak-Lin Law 7c Investor 740,742 0.19% 740,742 0 0.00%
Focus Investors LLC 8 Investor 27,666,667 7.16% 27,666,667 0 0.00%
Selling Shareholders 9 90,405,993 23.40% 89,912,993 493,000 0.13%
Total Shares
Total Shares 386,335,900
===========
</TABLE>
- --------------------------------
* Less than 1%
1. As required by regulations of the Commission, the number of shares shown as
beneficially owned include shares which can be purchased within 60 days
after August 30, 1999. The actual number of shares of common stock
beneficially owned is subject to adjustment and could be materially more or
less than the estimated amount indicated depending upon factors which
cannot be predicted by 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 and the full
conversion of the convertible debentures based on an estimated average
closing price of $0.10.
3. Assumes that all of the shares are sold by the selling shareholders and no
additional shares of common stock are acquired.
4. Numbers of shares stated include an aggregate of 27,765,415 shares
underlying options registered for the selling shareholders under this
prospectus, as follows:
(a) options to purchase 4,099,500 shares at $0.13 per share;
(b) options to purchase 753,333 shares at $0.21 per share;
(c) options to purchase 1,700,000 shares at $0.15 per share;
(d) options to purchase 600,000 shares at $0.14 per share and 50,000 shares
at $0.21 per share;
(e) options to purchase 4,100,000 shares at $0.18 per share, 4,000,000
shares at $0.19 per share, 4,000,000 shares at $0.27 per share, and
4,000,000 shares at $0.36 per share;
(f) options to purchase 292,500 shares at $0.21 per share;
(g) options to purchase 500,000 shares at $.20 per share, 926,542 shares at
$0.33 per share and 111,473 shares at $0.41 per share;
(h) options to purchase 500,000 shares at $0.19 per share, 500,000 shares
at $0.27 per share, and 500,000 shares at $0.36 per share;
(i) options to purchase 83,300 shares at $0.14 per share and 100,000 shares
at $0.16 per share;;
(j) options to purchase 8,100 shares at $0.16 per share;
(k) options to purchase 500,000 shares at $0.27 per share, and 500,000
shares at $0.33 per share;
(l) options to purchase 440,667 shares at $0.21 per share
5. Represents 20,833,333 shares of common stock issued or issuable upon the
full conversion of the RBB convertible debenture based upon an average
closing price of $0.10 (which number may fluctuate depending on the future
market price of our common stock) and 3,085,134 shares underlying certain
warrants.
6. Includes the following number of shares of common stock underlying certain
warrants: (a) 980,392 shares; (b) 245,098 shares; (c) 122,508 shares; (d)
122,508 shares; (e) 49,020 shares; (f) 49,020 shares; (g) 49,020 shares;
(h) 49,020 shares; (i) 122,508 shares; (j) 153,186 shares; and (k) 24,508
shares.
42
<PAGE>
7. Includes the following number of shares of common stock underlying certain
warrants: (a) 277,778 shares; (b) 463,564 shares; and (c) 185,185 shares.
8. Represents 26,666,667 shares of common stock issued or issuable upon the
full conversion of the Focus convertible debenture based upon an average
closing price of $0.10 (which number may fluctuate depending on the future
market price of our common stock) and 1,000,000 shares underlying certain
warrants.
9. Includes 7,378,450 shares of common stock issuable upon exercise of the
warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between 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 Stock Exchange), in
43
<PAGE>
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: (a) 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; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this prospectus; (c)
an exchange distribution in accordance with the rules of such exchange; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers, and (e) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
selling shareholders may arrange for other brokers or dealers to participate in
the resales.
In connection with distributions of the shares or otherwise, the
selling shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with selling shareholders. The selling shareholders may also sell shares
short and deliver the shares to close out such short positions. The selling
shareholders may also enter into option, 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 stockholder may pledge
its shares pursuant to the margin provisions of its customer agreements with
its broker-dealer. Upon delivery of the shares or a default by a selling
shareholder, the broker-dealer or financial institution may offer and sell the
pledged shares from time to time.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
selling shareholders, or any other broker-dealer, is acting as principal or
agent for the selling shareholders, the compensation to be received by
underwriters who may be selected by the selling shareholders, or any
broker-dealer, acting as principal or agent for the selling shareholders and the
compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to this
prospectus. 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.
44
<PAGE>
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,
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.
45
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.........................................................F-2
Consolidated Financial Statements Years Ended 1998, 1997 and 1996
Balance Sheets, December 31, 1998 and 1997............................................................F-3
Statements of Operations for the Years Ended December 31, 1998, 1997
and 1996 and from Inception (February 20, 1984) to December 31, 1998.............................F-4
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 1998.................................................................................F-5
Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996 and from Inception (February 20, 1984) to December 31, 1998.............................F-12
Notes to Consolidated Financial Statements...........................................................F-13
Consolidated Financial Statements Three and Six Months Ended June 30, 1999
Balance Sheets, June 30, 1999 and December 31, 1998..................................................F-31
Statements of Operations for the Three and Six Months Ended June 30, 1999
and 1998 and from Inception (February 20, 1984) to June 30, 1999.................................F-32
Statements of Stockholders' Equity from Inception (February 20, 1984)
to June 30, 1999.................................................................................F-33
Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998 and from Inception (February 20, 1984) to June 30, 1999.................................F-41
Notes to Consolidated Condensed Financial Statements.................................................F-42
</TABLE>
F-1
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1998 and for the period from inception (February 20, 1984) to December 31, 1998.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1998 and 1997
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 and for the period from
inception (February 20, 1984) to December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is dependent upon the continued sale of its securities or
obtaining debt financing for funds to meet its cash requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 11, 1999
F-2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
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
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 656 $ 2,278 $ 24,111 $ 194,975
Interest 102,043 111,845 46,796 559,297
Other income 293 7,800 32,000 120,093
------------ ------------ ------------ ------------
102,992 121,923 102,907 874,365
------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 1,659,456 817,603 255,660 3,583,467
General and administrative 1,420,427 1,681,436 983,256 7,315,337
Depreciation and amortization 340,098 138,245 18,731 657,283
Interest 1,240,721 1,626,368 -- 2,869,254
------------ ------------ ------------ ------------
4,660,702 4,263,652 1,257,647 14,425,341
------------ ------------ ------------ ------------
Net Loss $ (4,557,710) $ (4,141,729) $ (1,154,740) $(13,550,976)
============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.02) $ (0.02) $ (.00)
============ ============ ============
Weighted Average Number of
Common Shares Outstanding 294,809,073 274,534,277 257,645,815
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-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
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453
Issuance of common stock, exercise of options .08 400,000 4 31,996
Issuance of common stock, exercise of options .10 190,000 2 18,998
Net loss, year ended December 31, 1994 -- -- --
Balance, December 31, 1994 241,616,991 2,416 3,704,517
Issuance of common stock, exercise of options .05 3,333,333 33 166,633
Issuance of common stock, exercise of options .08 2,092,850 21 167,407
Issuance of common stock, exercise of options .10 2,688,600 27 268,833
Issuance of common stock, for consulting services .11 1,150,000 12 126,488
Issuance of common stock, for consulting services .14 300,000 3 41,997
Net loss, year ended December 31, 1995 -- -- --
Balance, December 31, 1995 251,181,774 2,512 4,475,875
----------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1993 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Net loss, year ended December 31, 1994 -- (440,837) --
Balance, December 31, 1994 -- (3,294,913) --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, for consulting services -- -- --
Net loss, year ended December 31, 1995 -- (401,884) --
Balance, December 31, 1995 -- (3,696,797) --
----- ---------- ------
</TABLE>
See notes to consolidated 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
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $ 4,475,875
Issuance of common stock, exercise of options .05 3,333,334 33 166,634
Issuance of common stock, exercise of options .08 1,158,850 12 92,696
Issuance of common stock, exercise of options .10 7,163,600 72 716,288
Issuance of common stock, exercise of options .11 170,000 2 18,698
Issuance of common stock, exercise of options .12 1,300,000 13 155,987
Issuance of common stock, exercise of options .18 1,400,000 14 251,986
Issuance of common stock, exercise of options .19 500,000 5 94,995
Issuance of common stock, exercise of options .20 473,500 5 94,695
Issuance of common stock, for services rendered .50 350,000 3 174,997
Options granted -- -- 760,500
Subscription receivable -- -- --
Net loss, year ended December 31, 1996 -- -- --
----------- ------ -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
----------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1995 $ -- $(3,696,797) $ --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for services rendered -- -- --
Options granted -- -- (473,159)
Subscription receivable (19,000) -- --
Net loss, year ended December 31, 1996 -- (1,154,740) --
--------- ----------- ---------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
--------- ----------- ---------
</TABLE>
See notes to consolidated 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
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
Issuance of common stock, exercise of options .08 3,333,333 33 247,633
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984
Issuance of common stock, conversion of debt .15 894,526 9 133,991
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982
Issuance of common stock, conversion of debt .16 772,201 8 119,992
Issuance of common stock, for services rendered .41 50,000 -- 20,500
Issuance of common stock, for services rendered .24 100,000 1 23,999
Beneficial conversion feature, February debenture -- -- 413,793
Beneficial conversion feature, October debenture -- -- 1,350,000
Warrant costs, February debenture -- -- 37,242
Warrant costs, October debenture -- -- 291,555
Amortization of deferred compensation cost -- -- --
Imputed interest on convertible debenture -- -- 4,768
Net loss, year ended December 31, 1997 -- -- --
----------- ------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
----------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1996 $ (19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, February debenture -- -- --
Beneficial conversion feature, October debenture -- -- --
Warrant costs, February debenture -- -- --
Warrant costs, October debenture -- -- --
Amortization of deferred compensation cost -- -- 399,322
Imputed interest on convertible debenture -- -- --
Net loss, year ended December 31, 1997 -- (4,141,729) --
--------- ----------- ---------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
--------- ----------- ---------
</TABLE>
See notes to consolidated 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
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
Issuance of common stock, exercise of options .12 295,000 3 35,397
Issuance of common stock, exercise of options .14 500,000 5 69,995
Issuance of common stock, exercise of options .16 450,000 5 71,995
Issuance of common stock, exercise of options .20 10,000 -- 2,000
Issuance of common stock, exercise of options .26 300,000 3 77,997
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981
Issuance of common stock, for services rendered .21 100,000 1 20,999
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost -- -- --
Write off of subscription receivable -- -- (19,000)
Net loss, year ended December 31, 1998 -- -- --
------------ -------- ------------
Balance, December 31, 1998 296,422,907 2,964 $ 14,325,076
============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1997 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost -- -- 59,068
Write off of subscription receivable 19,000 -- --
Net loss, year ended December 31, 1998 -- (4,557,710) --
--------- ------------ ---------
Balance, December 31, 1998 $ -- $(13,550,976) $ (14,769)
========= ============ =========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (4,557,710) $ (4,141,729) $ (1,154,740) $(13,550,976)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 340,098 138,245 18,731 657,283
Amortization of deferred interest cost on beneficial
conversion feature and discount on warrants 1,126,248 1,552,842 -- 2,679,015
Amortization of deferred compensation cost 59,068 399,322 287,341 745,731
Loss on sale of property and equipment -- 1,425 -- 1,425
Issuance of common stock for services 21,000 44,500 175,000 1,437,500
Imputed interest on convertible debenture -- 4,768 -- 4,768
Changes in operating assets and liabilities:
Increase in other current assets (9,578) (4,159) (3,114) (29,818)
Increase in inventory -- -- (1,638) (19,729)
Increase in other assets (247,072) (496,126) (27,085) (776,742)
Increase (decrease) in accounts payable and
accrued liabilities (96,582) 328,932 39,823 285,224
Decrease in customer deposits -- (7,800) -- (7,800)
------------ ------------ ------------ ------------
Total adjustments 1,193,182 1,961,949 489,058 4,976,857
------------ ------------ ------------ ------------
Net cash used by operating activities (3,364,528) (2,179,780) (665,682) (8,574,119)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments (915,047) (3,651,676) (1,247,256) (6,292,979)
Proceeds from sale of investments 3,078,902 2,045,615 347,415 5,471,932
Acquisition of property and equipment (451,734) (307,362) (11,446) (1,143,600)
Proceeds from sale of property and equipment -- 1,200 -- 1,200
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 1,712,121 (1,912,223) (911,287) (1,963,447)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,500,000 4,000,000 -- 5,500,000
Proceeds from deposit on securities purchase agreement 600,000 -- -- 600,000
Proceeds from sale of securities, net of issuance costs 257,400 266,666 1,573,135 5,378,588
Payments under capital lease (16,602) -- -- (16,602)
------------ ------------ ------------ ------------
Net cash provided by financing activities 2,340,798 4,266,666 1,573,135 11,461,986
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 688,391 174,663 (3,834) 924,420
Cash and Cash Equivalents, Beginning 236,059 61,396 65,230 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 924,450 $ 236,059 $ 61,396 $ 924,420
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 6,042 $ -- $ --
============ ============ ============
Options granted accounted for as deferred compensation cost $ -- $ -- $ 760,500
============ ============ ============
During 1998, the Company purchased equipment under a capital lease totaling $222,317.
</TABLE>
See notes to consolidated financial statements.
F-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 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
1998 1997
---- ----
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
<TABLE>
<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, have been estimated using quoted market prices. At
December 31, 1998, the differences between the estimated fair value and
the carrying value of non-current and current debt instruments were
considered immaterial in relation to the Company's financial position.
NOTE 13. DEFERRED COMPENSATION COST
As more fully described in Note 9 to these consolidated financial
statements, the Company granted stock options in exchange for testing
and consulting services. In accordance with SFAS 123, Accounting for
Stock-Based Compensation (effective for options granted after December
15, 1995), the Company recognized compensation cost based on the fair
value at the grant dates. The compensation cost is amortized over the
life of the option period. The fair value of the stock options used to
compute deferred compensation cost is the estimated present value at
grant date using the Black-Sholes option pricing model with the
following assumptions: Expected volatility of 20%; a risk-free interest
rate of 6% and an expected holding period ranging from 1-3 years. The
deferred compensation cost is reported as a component of stockholders'
equity. At December 31, 1998 and 1997, there were approximately
5,500,000 and 7,000,000 option shares outstanding with a weighted
average exercise price of $0.195 per share.
F-30
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
June 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 95,618 $ 924,420
Investments - 821,047
Inventory 19,729 19,729
Other current assets 45,606 29,818
----------- -----------
Total current assets 160,953 1,795,014
Property and Equipment 1,090,339 1,049,593
Other Assets 496,570 460,346
----------- -----------
Total assets $ 1,747,862 $ 3,304,953
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 385,797 $ 279,024
Current portion of capital lease obligation 39,993 38,335
----------- -----------
Total current liabilities 425,790 317,359
----------- -----------
Long-Term Liabilities:
Convertible debenture, net 1,481,965 1,457,919
Capital lease obligation - long-term portion 146,961 167,380
----------- -----------
Total long-term liabilities 1,628,926 1,625,299
----------- -----------
Deposit on Securities Purchase Agreement - 600,000
----------- -----------
Deposit on Exercise of Options 30,000 -
----------- -----------
Commitments and Contingencies - -
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 301,340,183 and 296,422,907
shares issued and outstanding 3,013 2,964
Additional paid-in capital 15,621,665 14,325,076
Deficit accumulated during the development stage (15,516,808) (13,550,976)
Discount on warrants (444,724) -
Deferred compensation cost - (14,769)
----------- -----------
Total stockholders' equity (deficit) (336,854) 762,295
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,747,862 $ 3,304,953
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-31
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Three Months Ended Six Months Ended (February 20,
June 30, June 30, 1984) to
-------- -------- June 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 2,191 $ - $ 4,590 $ - $ 199,565
Interest 5,680 27,926 21,489 57,223 580,786
Other income - - - 100 120,093
------------ ------------ ------------ ------------ ------------
7,871 27,926 26,079 57,323 900,444
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 409,464 210,618 767,380 380,764 4,350,847
General and administrative 498,529 572,845 936,932 1,078,259 8,252,269
Depreciation and amortization 85,199 365,396 148,556 541,823 805,839
Interest 70,715 30,983 139,043 306,231 3,008,297
------------ ------------ ------------ ------------ -----------
1,063,907 1,179,842 1,991,911 2,307,077 16,417,252
------------ ------------ ------------ ------------ ------------
Net Loss $ (1,056,036) $ (1,151,916) $ (1,965,832) $ (2,249,754) $(15,516,808)
============ ============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 298,881,545 282,767,657 298,881,545 282,767,657
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-32
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 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-33
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 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-34
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 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-35
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453 -
Issuance of common stock, exercise of options .08 400,000 4 31,996 -
Issuance of common stock, exercise of options .10 190,000 2 18,998 -
Net loss, year ended December 31, 1994 - - - -
----------- ------- ----------- ------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 -
Issuance of common stock, for consulting services .14 300,000 3 41,997 -
Net loss, year ended December 31, 1995 - - - -
----------- ------ ---------- ------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -
----------- ------ ---------- ------
<CAPTION>
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
<S> <C> <C>
Balance, December 31, 1993 $(2,854,076) $ -
Issuance of common stock, for consulting services - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Net loss, year ended December 31, 1994 (440,837) -
----------- ------
Balance, December 31, 1994 (3,294,913) -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, for consulting services - -
Issuance of common stock, for consulting services - -
Net loss, year ended December 31, 1995 (401,884) -
------------ ------
Balance, December 31, 1995 (3,696,797) -
------------ ------
</TABLE>
See notes to consolidated condensed financial statements.
F-36
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875
Issuance of common stock, exercise of options .05 3,333,334 33 166,634
Issuance of common stock, exercise of options .08 1,158,850 12 92,696
Issuance of common stock, exercise of options .10 7,163,600 72 716,288
Issuance of common stock, exercise of options .11 170,000 2 18,698
Issuance of common stock, exercise of options .12 1,300,000 13 155,987
Issuance of common stock, exercise of options .18 1,400,000 14 251,986
Issuance of common stock, exercise of options .19 500,000 5 94,995
Issuance of common stock, exercise of options .20 473,500 5 94,695
Issuance of common stock, for services rendered .50 350,000 3 174,997
Options granted - - 760,500
Subscription receivable - - -
Net loss, year ended December 31, 1996 - - -
----------- ------ ----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
----------- ------ ----------
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1995 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, for services rendered - - -
Options granted - - (473,159)
Subscription receivable (19,000) - -
Net loss, year ended December 31, 1996 - (1,154,740) -
-------- ----------- ---------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
-------- ----------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-37
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351
Issuance of common stock, exercise of options .08 3,333,333 33 247,633
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984
Issuance of common stock, conversion of debt .15 894,526 9 133,991
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982
Issuance of common stock, conversion of debt .16 772,201 8 119,992
Issuance of common stock, for services rendered .41 50,000 - 20,500
Issuance of common stock, for services rendered .24 100,000 1 23,999
Beneficial conversion feature, February debenture - - 413,793
Beneficial conversion feature, October debenture - - 1,350,000
Warrant costs, February debenture - - 37,242
Warrant costs, October debenture - - 291,555
Amortization of deferred compensation cost - - -
Imputed interest on convertible debenture - - 4,768
Net loss, year ended December 31, 1997 - - -
----------- ------ -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
----------- ------ -----------
<CAPTION>
Deficit
Accumulated
during the Deferred
bscription Development Compensation
eceivable Stage Cost
--------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1996 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, for services rendered - - -
Issuance of common stock, for services rendered - - -
Beneficial conversion feature, February debenture - - -
Beneficial conversion feature, October debenture - - -
Warrant costs, February debenture - - -
Warrant costs, October debenture - - -
Amortization of deferred compensation cost - - 399,322
Imputed interest on convertible debenture - - -
Net loss, year ended December 31, 1997 - (4,141,729) -
-------- ----------- ---------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
-------- ----------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767
Issuance of common stock, exercise of options .12 295,000 3 35,397
Issuance of common stock, exercise of options .14 500,000 5 69,995
Issuance of common stock, exercise of options .16 450,000 5 71,995
Issuance of common stock, exercise of options .20 10,000 - 2,000
Issuance of common stock, exercise of options .26 300,000 3 77,997
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981
Issuance of common stock, for services rendered .21 100,000 1 20,999
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - -
Write off of subscription receivable - - (19,000)
Net loss, year ended December 31, 1998 - - -
----------- ------ -----------
Balance, December 31, 1998 296,422,907 2,964 14,325,076
----------- ------ -----------
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1997 $(19,000) $ (8,993,266) $(73,837)
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, for services rendered - - -
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost - - 59,068
Write off of subscription receivable 19,000 - -
Net loss, year ended December 31, 1998 - (4,557,710) -
-------- ------------ --------
Balance, December 31, 1998 - (13,550,976) (14,769)
-------- ------------ --------
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $2,964 $14,325,076
Issuance of common stock, securities purchase .16 4,917,276 49 802,451
agreement
Warrants Costs, securities purchase agreement - - 494,138
Amortization of warrant costs, securities purchase
agreement - - -
Amortization of deferred compensation cost - - -
Net loss, six months ended June 30, 1999 - - -
----------- ------ -----------
Balance, June 30, 1999 301,340,183 $3,013 $15,621,665
=========== ====== ===========
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C>
Balance, December 31, 1998 $(13,550,976) $(14,769) $ -
Issuance of common stock, securities purchase - - -
agreement
Warrants Costs, securities purchase agreement - - (494,138)
Amortization of warrant costs, securities purchase
agreement - - 49,414
Amortization of deferred compensation cost - 14,769 -
Net loss, six months ended June 30, 1999 (1,965,832) - -
------------ -------- ---------
Balance, June 30, 1999 $(15,516,808) $ - $(444,724)
============ ======== =========
</TABLE>
See notes to consolidated condensed financial statements.
F-40
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
Six Months Ended (February 20,
June 30, 1984) to
-------- June 30,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,965,832) $(2,249,754) $(15,516,808)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization of loan costs 148,556 541,823 805,839
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture - 210,951 2,679,015
Amortization of discount on warrants 73,460 - 73,460
Amortization of deferred compensation cost 14,769 29,534 760,500
Issuance of common stock for services - - 1,437,500
Other - - (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (15,787) (3,382) (45,606)
Increase in inventory - - (19,729)
Increase in other assets (88,724) (63,393) (865,465)
Increase (decrease) in accounts payable and
accrued liabilities 106,773 (100,199) 391,997
----------- ----------- ------------
Total adjustments 239,047 615,334 5,215,904
----------- ----------- ------------
Net cash used by operating activities (1,726,785) (1,634,420) (10,300,904)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments - (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,700,902 6,292,979
Expenditures for property and equipment (136,803) (303,577) (1,280,403)
Proceeds from sale of property and equipment - - 1,200
----------- ----------- ------------
Net cash provided (used) by investing activities 684,244 2,303,325 (1,279,203)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt - - 5,500,000
Proceeds from deposit on exercise of options 30,000 - 30,000
Proceeds from sale of securities, net of issuance costs 202,500 225,400 6,181,088
Payments under capital lease (18,761) - (35,363)
----------- ----------- ------------
Net cash provided by financing activities 213,739 225,400 11,675,725
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (828,802) 894,305 95,618
Cash and Cash Equivalents, Beginning 924,420 236,059 -
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 95,618 $ 1,130,364 $ 95,618
=========== =========== ============
</TABLE>
See notes to consolidated condensed financial statements.
F-41
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at June 30, 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of June 30, 1999 and
results of operations for the three months and the six months ended
June 30, 1999 and 1998 and cash flows for the six months ended June
30, 1999 and 1998. All such adjustments are of a normal recurring
nature. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full
year. The statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at June 30, 1999 have been prepared in conformity with
generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company is dependent upon registration of Reticulose for sale
before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA.
Unless and until Reticulose is approved for sale in the United
States or another industrially developed country, the Company may
be dependent upon the continued sale of its securities and debt
financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt
to mitigate the effects of its cash position; however, no assurance
can be given that equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
1999 and 1998, the Company obtained equity and debt financing and
may seek additional financing as the need arises. No assurance can
be given that the Company will be able to sustain its operations
until FDA approval is granted or that any approval will ever be
granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to
submit an application for approval with the FDA in the near future.
The consolidated condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of Reticulose. The Company has not as yet
received any notice of claim from such parties.
F-42
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of Reticulose. Although the Company is
unaware of any such claims or threatened claims since Reticulose
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of Reticulose. As of the date
hereof, the Company does not have product liability insurance for
Reticulose. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
have a material adverse effect on the Company.
Lack of Patent Protection
The Company does not presently have a patent for Reticulose but the
Company has three patents for the use of Reticulose as a treatment.
The Company currently has 34 patent applications pending with the
U.S. Patent Office. The Company can give no assurance that other
companies, having greater economic resources, will not be
successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Reticulose incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through December 31,
1999 at an exercise price of $.15 and $.17, respectively. As of
June 30, 1999, there are outstanding Plata Options to acquire
683,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through June 30, 1999, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
F-43
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 June 30, 1999, 473,500
shares of common stock were issued pursuant to the exercise of
these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Reticulose in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Reticulose for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company advanced
approximately $665,000, which is accounted for as research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
F-44
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 June 30, 1999, the
Company has advanced approximately $50,000 for such study, which
has been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Reticulose for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$85,000, which has been accounted for as research and development
expense.
F-45
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 June 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
In April 1999, the Company advanced $47,750 for expenses in
connection with the drug approval process in Argentina.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Reticulose in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of June 30, 1999, the Company has
expended approximately $390,000 to cover the costs of the Barbados
Study.
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of Reticulose in inhibiting the mutation of
the AIDS virus. As of June 30, 1999, the Company has advanced
approximately $10,000 for such study, which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which Reticulose affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one-year term
through March 3, 1999 to investigate the anti-tumor activity of
Reticulose using kidney tumor model systems. In addition, NCI was
to study the effects of Reticulose on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
Reticulose.
F-46
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of June 30, 1999, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 2009 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 2009 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 2009 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of June 30, 1999, 500,000 shares of common stock were
issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company
on matters unrelated to his consultation with Dr. Hirschman.
F-47
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27, and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
do not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement, which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992
F-48
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
Cohen Agreement and the remaining 500,000 shares of which were
issuable upon Mr. Cohen completing 50 hours of consulting service
to the Company. The Company issued the first 500,000 shares to Mr.
Cohen in October 1992 and the remaining 500,000 shares to Mr. Cohen
in February 1993. Further pursuant to the September 1992 Cohen
Agreement, the Company granted to Mr. Cohen the option to acquire,
at any time and from time to time through September 10, 1993 (which
date has been extended through December 31, 1999), the option to
acquire 3,000,000 shares of common stock of the Company at an
exercise price of $.09 per share (which exercise price has been
increased to $.16 per share) (the "September 1992 Cohen Options").
As of June 30, 1999, 1,300,000 of the September 1992 Cohen Options
have been exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). Through June 30, 1999, 2,855,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through December 31, 1999 at an option
price of $.14.
Globomax Agreement
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to AVRC's Ind submission and to perform
all work that is necessary to obtain FDA's approval. The contract
expires on December 31, 1999 but may be extended by mutual written
agreement of both parties. The Company has incurred approximately
$110,000 in services to Globomax through June 30, 1999.
F-49
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Reticulose in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Reticulose to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Reticulose
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
NOTE 3. SECURITIES PURCHASE AGREEMENTS
Convertible Debentures
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000,
respectively, principal amount of its ten-year 7% Convertible
Debentures (the "February Debenture" and the "October Debenture",
collectively, the "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date
of interest payment. The Debentures were convertible, at the option
of the holder, into shares of Common Stock pursuant to specified
formulas. On April 22, 1997, June 6, 1997, July 3, 1997 and August
20, 1997, pursuant to notice by the holder, RBB, to the Company
under the February Debenture, $330,000, $134,000, $270,000 and
$266,000, respectively, of the principal amount of the February
Debenture was converted into 1,648,352, 894,526, 2,323,580 and
1,809,524 shares of the Common Stock, respectively. As of August
20, 1997, the February Debenture was fully converted. On December
9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5,
1998, the October Debenture was fully converted.
F-50
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants are $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants was
estimated to be $37,000 ($.021 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes
Pricing Model. This amount has been reflected in the accompanying
financial statements as interest expense related to the convertible
February Debenture. Based on the terms for conversion associated
with the February Debenture, there was an intrinsic value
associated with the beneficial conversion feature of $413,793. This
amount has been fully amortized to interest expense with a
corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the
Company issued to RBB three warrants (the "October Warrants") to
purchase Common Stock, each such October Warrant entitling the
holder to purchase, from the date of grant through August 30, 2007,
600,000 shares of the Common Stock. The exercise price of the three
October Warrants are $0.20, $0.23 and $0.27 per warrant share,
respectively. The fair value of the three October Warrants was
established to be $106,571 ($.178 per warrant), $97,912 ($.163 per
warrant) and $87,472 ($.146 per warrant), respectively, based upon
a financial analysis of the terms of the warrants using the
Black-Sholes Pricing Model. This amount has been reflected in the
accompanying financial statements as a discount on the convertible
debenture, with a corresponding credit to additional paid-in
capital, and is being amortized over the expected term of the notes
which at December 31, 1997 was 120 months. In May 1998, the
remaining unamortized discount of $276,957 was amortized upon full
conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $1,350,000. This amount has been
treated as deferred interest expense and recorded as a reduction of
the convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest
expense over the period from October 8, 1997 (date of debenture) to
February 24, 1998 (date the debenture is fully convertible). The
interest expense relative to this item was $210,951 for 1998 and
$1,139,049 for 1997.
In November 1998, in order to finance further research and
development, the Company sold 1,500,000 principal amount of its ten
year 7% Convertible Debenture (the "November Debenture") due
October 31, 2008, to RBB. Accrued interest under the November
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from the date of the issuance
of the November Debenture until the date of interest payment. The
November Debenture may be prepaid by the Company before maturity,
in whole or in part, without premium or penalty, if the Company
gives the holder of the Debenture notice not less than 30 days
before the date fixed for prepayment in that notice. The November
Debenture is convertible, at the option of the holder, into shares
of common stock.
F-51
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In connection with the issuance of the November Debenture, the
Company issued to RBB two warrants (the "November Warrants") to
purchase Common Stock, each such November Warrant entitling the
holder to purchase 375,000 shares of the Common Stock at any time
and from time to time through October 31, 2008. The exercise price
of the two November Warrants are $.20 and $.24 per warrant share,
respectively. The fair value of the November warrants was estimated
to be $48,000 ($.064 per warrant) based upon a financial analysis
of the terms of the warrants using the Black-Sholes Pricing Model
with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one
year. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $625,000. This amount has been
recorded as interest expense in 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Less unamortized discount and deferred interest 18,035 42,081
---------- ----------
Convertible debenture, net $1,481,965 $1,457,919
========== ==========
</TABLE>
On August 3, 1999, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture and warrants to purchase 50,000 shares of the Company's
common stock. The 7% convertible debenture is due August 3, 2009
and the warrants are exercisable through August 3, 2004.
Other
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an
aggregate purchase price of $802,500. Such agreement also provided
for the issuance of four warrants to purchase a total of 2,366,788
shares of common stock at prices ranging from $.204 to $.2448 per
share at any time until December 31, 2003. The fair value of these
warrants was estimated to be $494,138 ($.209 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to
interest expense in the accompanying consolidated financial
statements.
F-52
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provides for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($.04 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five
years. This amount will be amortized to interest expense.
F-53
<PAGE>
================================================================================
ADVANCED VIRAL RESEARCH CORP.
----------
PROSPECTUS
----------
89,912,993 Shares
of
Common Stock
September 2, 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.................................... $25,000
Accounting fees and expenses............................... $10,000
-------
Total............................................. $45,000
=======
* $3,017 of the registration fee has been previously paid.
Item 14. Indemnification of Directors and Officers
Article Ninth of our Certificate of Incorporation contains the
following provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person, who has
ceased to be director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director,
II-1
<PAGE>
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a)
II-2
<PAGE>
and (b) of this section. Such determination shall be made , with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a
quorum, or (2) by a committee of such directors designated by majority
vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (4) by the stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
Item 15. Recent Sales of Unregistered Securities
The following table sets forth our sales of unregistered securities for
past three years. All transactions listed below involved the issuance of common
stock and options to acquire shares of common stock prior to commencement of the
offering described in the foregoing prospectus. No underwriters were employed
with respect to the sale of any of the securities listed below. All shares were
issued in reliance upon Section 4(2) and/or 3(b) of the Securities Act.
<TABLE>
<CAPTION>
Securities Issued Purchaser Date Acquired Consideration
- ----------------- --------- ------------- -------------
<S> <C> <C> <C>
5,000,000 options exercisable at Shalom Z. Hirschman, M.D. 4-1-96 Services (Consulting) (1)
each of $0.18, $0.19, $0.27 and
$0.36 per share
500,000 options exercisable at Deborah Silver 4-1-96 Services (Consulting) (1)
$0.18 per share
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C> <C>
1,000,000 options exercisable at Freddie Velez 4-1-96 Services (Consulting) (1)
$0.20 per share
500,000 options at $0.20 per share Gary Hussian 4-1-96 Services (Consulting) (1)
500,000 options at $0.20 per share Cesar Blumtritt, M.D. 4-1-96 Services (Consulting) (1)
50,000 shares Malcolm Santer 9-4-96 Services (Consulting) (2)
50,000 shares Malcolm Santer 2-26-97 Services (Consulting) (2)
750,000 shares David Sass 3-21-97 .08 per share
375,000 shares Norman Schwartz 3-21-97 .08 per share
375,000 shares Mel Mendelson 3-21-97 .08 per share
1,833,333 shares Matthew Cohen 3-21-97 .08 per share
1,648,352 shares RBB Bank 4-22-97 .20 per share (3)
894,526 shares RBB Bank 6-6-97 .15 per share (3)
2,323,580 shares RBB Bank 7-3-97 .12 per share (3)
1,809,524 shares RBB Bank 8-20-97 .15 per share (3)
100,000 shares Malcolm Santer 9-8-97 Services (Consulting) (4)
722,701 shares RBB Bank 12-9-97 .16 per share (5)
1,017,011 shares RBB Bank 1-7-98 .13 per share (5)
2,512,887 shares RBB Bank 1-14-98 .14 per share (5)
23,000,000 options at $0.27 per Shalom Z. Hirschman, M.D. 2-18-98 (6)
share
5,114,218 shares RBB Bank 2-23-98 .15 per share (5)
190,000 shares Plata 3-5-98 .12 per share
1,498,884 shares RBB Bank 3-19-98 .22 per share (5)
105,000 shares Plata 3-27-98 .12 per share
1,870,869 shares RBB Bank 3-31-98 .23 per share (5)
10,000 shares Freddie Velez 4-3-98 .20 per share
200,000 shares Charles Miller 4-3-98 .14 per share
1,491,485 shares RBB Bank 5-4-98 .18 per share (5)
3,299,979 shares RBB Bank 5-5-98 .19 per share (5)
50,000 shares Charles Miller 5-13-98 .16 per share
200,000 shares Duffy 5-13-98 .14 per share
100,000 shares Charles Miller 5-13-98 .14 per share
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C> <C>
100,000 shares Charles Miller 5-18-98 .16 per share
200,000 shares Commonwealth 5-18-98 .26 per share
100,000 shares Commonwealth 5-22-98 .26 per share
100,000 shares Charles Miller 6-22-98 .16 per share
85,000 shares Charles Miller 7-15-98 .16 per share
15,000 shares Charles Miller 7-17-98 .16 per share
25,000 shares Charles Miller 7-22-98 .16 per share
75,000 shares Charles Miller 7-24-98 .16 per share
100,000 shares Malcolm Santer 8-12-98 Services (Consulting)(7)
7% Convertible Debenture RBB Bank 11-16-98 $1,500,000
375,000 warrants RBB Bank 11-16-98 .20 per share
375,000 warrants RBB Bank 11-16-98 .24 per share
2,450,980 shares Harborview Group, Inc. 12/22/98 .16 per share
1,380,392 warrants Harborview Group, Inc. 12/22/98 .2440 and .2448 per share
122,549 Jennifer Brandenburg Smith 12/22/98 .16 per share
49,020 warrants Jennifer Brandenburg Smith 12/22/98 .2440 and .2448 per share
122,549 Jo Sherrin Smith 12/22/98 .16 per share
49,020 warrants Jo Sherrin Smith 12/22/98 ..2440 and .2448 per share
612,745 Joe Feshbach 12/22/98 .16 per share
245,098 warrants Joe Feshbach 12/22/98 .2440 and .2448 per share
382,965 John Zimmerman 12/22/98 .16 per share
153,186 warrants John Zimmerman 12/22/98 .2440 and .2448 per share
61,274 Matt Zimmerman 12/22/98 .16 per share
24,508 warrants Matt Zimmerman 12/22/98 .2440 and .2448 per share
306,372 Myron Weiner 12/22/98 .16 per share
122,508 warrants Myron Weiner 12/22/98 .2440 and .2448 per share
122,549 Robert Franklin Smith, Sr. 12/22/98 .16 per share
49,020 warrants Robert Franklin Smith, Sr. 12/22/98 .2440 and .2448 per share
306,372 Russell Kuhn 12/22/98 .16 per share
122,508 warrants Russell Kuhn 12/22/98 .2440 and .2448 per share
122,549 Shelly Marion Smith 12/22/98 .16 per share
49,020 warrants Shelly Marion Smith 12/22/98 .2440 and .2448 per share
306,372 Victor Sherman 12/22/98 .16 per share
122,508 warrants Victor Sherman 12/22/98 .2440 and .2448 per share
370,370 shares Kwong Wai Au 6-30-99 .27 per share
277,778 warrants Kwong Wai Au 6-30-99 .324 and .378 per share
925,926 shares Michael Berman 6-30-99 .27 per share
463,564 warrants Michael Berman 6-30-99 .324 and .378 per share
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
</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.
[This Space Intentionally Left Blank]
II-6
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation of Advanced Viral Research Corp.(2)
3.2 Bylaws of Advanced Viral Research Corp., as amended(1)
3.3 Amendment to Articles of Incorporation of Advanced Viral Research Corp.(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between Advanced Viral and American Stock Transfer and Trust Company(1)
4.4 Forms of Common Stock Options and Agreements granted by Advanced Viral to TRM Management
Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by Advanced Viral to Plata Partners Limited
Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common Stock granted by Advanced
Viral to Leonard Cohen(6)
4.7 Addendum to Agreement granted by Advanced Viral to Shalom Z. Hirschman, M.D. dated March 24,
1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998, by and between Advanced Viral and RBB
Bank AG.(11)(o)
4.9 7% Convertible Debenture dated November 16, 1998.(11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.20 per share.
(11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.24 per share.
(11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998, by and between Advanced Viral and
various purchasers.**
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common stock of Advanced Viral at
$0.2040 per share.**
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common stock of Advanced Viral at
$0.2448 per share.**
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
4.15 Securities Purchase Agreement dated June 23, 1999, by and between Advanced Viral and various
purchasers.*
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock of Advanced Viral at
$0.324 per share.*
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock of Advanced Viral at
$0.378 per share.*
4.18 Securities Purchase Agreement dated August 3, 1999, by and between Advanced Viral and Focus
Investors, LLC.*
4.19 7% Convertible Debenture dated August 3, 1999.*
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of common stock at $0.2461 per
share.*
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A.*
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor of Advanced Viral dated
November 16, 1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique Medical Actuel and Advanced
Viral(3)
10.3 Letter, dated March 15, 1991 to Advanced Viral from Health Protection Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and Advanced Viral(11)(a
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and Advanced Viral(4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell Inc. and Advanced Viral(7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and Advanced Viral(8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between Lionel Resnick, M.D. and
Advanced Viral(11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and Advanced Viral(12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and
Advanced Viral(11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and Advanced Viral(11)(d
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and Advanced Viral,
as amended(11)(e)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel
Islands and Advanced Viral(11)(f)
10.14 Agreement dated May 24, 1995 between Advanced Viral and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between Advanced Viral and Shalom Z. Hirschman, M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International
Pharmaceutical Corp. and Advanced Viral(12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and Advanced
Viral(11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical Corp.
and Advanced Viral(11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and Advanced Viral(11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between Advanced Viral and
Shalom Z. Hirschman, M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International Pharmaceutical Corp. and
Advanced Viral(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between Advanced Viral and Shalom Z. Hirschman,
M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and Advanced Viral(12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between Advanced Viral and Interfi
Capital Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development Agreement, dated March 13,
1997, between National Institute of Health, Food and Drug Administration and the Centers for Disease
Control and Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between Advanced Viral and RBB
Bank AG.(11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development
Agreement, dated March 4, 1998, between National Institute of Health, Food and Drug Administration
and the Centers for Disease Control and Prevention.(13)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.*
21.1 Subsidiaries of Registrant -- Advance Viral Research Limited, a Bahamian corporation.
23.1 Consent of Rachlin Cohen & Holtz, Independent Certified Public Accountants*
23.2 Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A. (See Exhibit 5.1).
27.1 Financial Data Schedule for Advanced Viral as of and for the Three Months March 31, 1999.*
</TABLE>
* 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.
II-10
<PAGE>
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
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
II-11
<PAGE>
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Advanced
Viral certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on August 30, 1999.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
-------------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement on Form S-1 has been signed herein below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Shalom Z. Hirschman, M.D President and Chief August 30, 1999
- ----------------------------------- Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and August 30, 1999
- ----------------------------------- director
Bernard Friedland
/s/ William Bregman Secretary-Treasurer, August 30, 1999
- ----------------------------------- Principal Financial and
William Bregman Accounting Officer, director
/s/ Louis J. Silver director August 30, 1999
- -----------------------------------
Louis J. Silver
</TABLE>
II-13
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
4.15 Securities Purchase Agreement dated June 23, 1999, by and between Advanced
Viral and various purchasers.
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock of
Advanced Viral at $0.324 per share.
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock of
Advanced Viral at $0.378 per share.
4.18 Securities Purchase Agreement dated August 3, 1999, by and between
Advanced Viral and Focus Investors, LLC.
4.19 7% Convertible Debenture dated August 3, 1999.
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of common
stock at $0.2461 per share.
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel &
Mandler, P.A.
10.32 Registration Rights Agreement dated August 3, 1999 between Advanced Viral
Research and Focus Investors LLC.
23.1 Consent of Rachlin Cohen & Holtz, Independent Certified Public Accountants
27.1 Financial Data Schedule for Advanced Viral as of and for the Six Months Ended
June 30, 1999
</TABLE>
EXHIBIT 4.15
ADVANCED VIRAL RESEARCH CORP.
SECURITIES PURCHASE AGREEMENT
WARRANTS TO PURCHASE
SHARES OF COMMON STOCK, PAR VALUE $.00001 PER SHARE
PURCHASE AGREEMENT
DATED June 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. AUTHORIZATION OF THE SECURITIES.................................................................1
ARTICLE 2. SALE AND PURCHASE OF THE SECURITIES; CLOSING....................................................1
2.1. Sale and Purchase the Securities................................................................1
2.2. Closing.........................................................................................1
ARTICLE 3. PURCHASERS' REPRESENTATIONS AND WARRANTIES......................................................2
3.1. Qualified Buyer.................................................................................2
3.2. Compliance With Laws............................................................................2
3.3. Qualified Investor Questionnaire................................................................2
3.4. Capacity to Enter into Agreement................................................................2
3.5. Ownership in the Company........................................................................3
3.6. Independent Investigation.......................................................................3
3.7. No Government Recommendation or Approval........................................................3
3.8. Further Limitations on Disposition..............................................................3
3.9. Legal Representation............................................................................3
3.10 Separate Purchasers.............................................................................3
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................4
4.1. Organization and Existence, etc.................................................................4
4.2. Subsidiaries and Affiliates.....................................................................4
4.3. Capitalization..................................................................................4
4.4. Authorization...................................................................................5
4.5. Binding Obligations: No Material Adverse Contracts, etc.........................................5
4.6. Compliance with Instruments, etc................................................................5
4.7. Litigation......................................................................................5
4.8. Offering........................................................................................5
4.9. Permits: Governmental and Other Approvals.......................................................5
4.10. SEC Reports.....................................................................................6
4.11. Copyrights, Trademarks and Patents..............................................................6
4.12. Other Material Contracts........................................................................6
4.13. Disclosure......................................................................................6
ARTICLE V CONDITIONS TO PURCHASERS CLOSING.......................................................................7
5.1. Representations and Warranties Correct..........................................................7
5.2. Performance.....................................................................................7
5.3. No Impediments..................................................................................7
5.4. Other Agreements................................................................................7
5.5. Legal Investment................................................................................7
5.6. Due Diligence Investigation.....................................................................7
5.7. Proceedings and Other Documents.................................................................7
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI CONDITIONS TO CLOSING OF THE COMPANY..................................................................8
6.1. Representations.................................................................................8
6.2. Legal Investment................................................................................8
6.3. Payment of Purchase Price.......................................................................8
ARTICLE VII AFFIRMATIVE COVENANTS AND INDEMNITY .................................................................8
7.1. Further Assurances..............................................................................8
7.2. Registration Rights.............................................................................8
7.3. Indemnification.................................................................................9
ARTICLE VIII COMPLIANCE WITH THE SECURITIES ACT ................................................................10
8.1. Legends........................................................................................10
ARTICLE IX MISCELLANEOUS........................................................................................11
9.1. Governing Law..................................................................................11
9.2. Survival.......................................................................................11
9.3. Successors and Assigns.........................................................................11
9.4. Entire Agreement...............................................................................11
9.5. Amendment......................................................................................11
9.6. Notices, etc...................................................................................11
9.7. Delays or Omissions............................................................................12
9.8. Severability...................................................................................12
9.9. Placement Fee..................................................................................12
9.10. Expenses.......................................................................................12
9.11. Litigation.....................................................................................12
9.12. Titles and Subtitles...........................................................................13
9.13. Counterparts...................................................................................13
</TABLE>
-ii-
<PAGE>
June 23, 1999
AGREEMENT dated this 23 day of June, 1999 by and between ADVANCED VIRAL
RESEARCH CORP., a Delaware corporation (the "Company"), with offices at 200
Corporate Boulevard South, Yonkers, New York 10701 and each of those persons,
severally and not jointly, listed as a purchaser on the Schedule of purchasers
attached as Exhibit B hereto. Such persons are hereafter collectively referred
to as the "Purchasers" and each individually as a "Purchaser".
ARTICLE 1.
AUTHORIZATION OF THE SECURITIES
-------------------------------
The Company represents that it has taken all corporate action necessary
to authorize the issuance and sale of 1,851,852 shares of Common Stock of the
Company, par value $.00001 per share ("Common Stock") and warrants to purchase
an aggregate of 925,926 shares of Common Stock of the Company (the "Warrants").
The Common Stock and the Warrants (collectively, the "Securities") are to be
sold to each Purchaser pursuant to this Agreement. For purposes of this
Agreement the term "Shares" shall mean the shares of Common Stock purchased
hereunder and the shares of Common Stock which may be issued from time to time
pursuant to the exercise of the Warrants.
ARTICLE 2.
SALE AND PURCHASE OF THE SECURITIES; CLOSING
--------------------------------------------
2.1. Sale and Purchase the Securities. Subject to the terms and
conditions hereof and in reliance on the representations and warranties
contained herein, or made pursuant hereto, the Company will issue and sell to
each Purchaser as more particularly referred to below, and each Purchaser will
purchase from the Company, on the Closing Date specified in Section 2.2, the
Securities for the purchase price set forth next to the name of such Purchaser
on Exhibit B, at an aggregate purchase price for all Purchasers of $500,000 (the
"Aggregate Purchase Price").
2.2. Closing.
(a) The closing of the purchase and sale of the Securities
(the "Closing") shall be deemed to occur when this Agreement has been executed
by both the Company and Purchaser and the Company has received payment for the
Securities. The date on which this occurs is herein called the "Closing Date."
(b) On the Closing Date there will be delivered to each
Purchaser (i) the shares of Common stock indicated on Exhibit B registered in
his name and (ii) warrant certificates in the forms of Exhibits A-1 and A-2
registered in such names representing the right to purchase the number of shares
of Common Stock set forth therein. The foregoing Securities shall be delivered
by the Company, against delivery by the Purchasers to the Company of an
unendorsed certified or official bank check drawn upon or issued by a bank which
is a member of the New York
1
<PAGE>
Clearinghouse for banks (or wire transfer) for the aggregate purchase price to
be paid by such Purchaser) payable to the order of the Company.
ARTICLE 3.
PURCHASERS' REPRESENTATIONS AND WARRANTIES
------------------------------------------
Each Purchaser represents and warrants to and covenants with the
Company that:
3.1. Qualified Buyer. Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Either alone or together with the
advice of a representative, Purchaser is sophisticated and experienced in
making, and is qualified to make, decisions with respect to investments in
securities presenting an investment decision like that involved in the purchase
of the Securities, including investments in securities issued by the Company.
Purchaser has requested, received, reviewed and considered, either alone or with
a representative, all information Purchaser deems relevant in making an informed
decision to purchase the Securities.
3.2. Compliance With Laws. Purchaser will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) any of the Securities
purchased hereunder except in compliance with the Securities Act, applicable
blue sky laws, and the rules and regulations promulgated thereunder.
3.3. Qualified Investor Questionnaire. Purchaser has completed or
caused to be completed the Confidential U.S. Purchaser Questionnaire For
Individuals, attached hereto as Appendix I. The answers thereto are true and
correct as of the date hereof and will be true and correct as of the Closing
(provided that Purchaser shall be entitled to update such information by
providing notice thereof to the Company prior to the Closing).
3.4. Capacity to Enter into Agreement. Purchaser has full right, power,
authority and capacity to enter into this Agreement and to consummate the
transactions contemplated hereby. Upon the execution and delivery of this
Agreement by Purchaser, this Agreement shall constitute a valid and binding
obligation, enforceable in accordance with its terms, except (a) as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally, and (b) as limited by equitable principles generally.
3.5. Ownership in the Company. Upon completion of the transaction or
upon exercise of any Warrant, Purchaser will not directly or beneficially own
more than 4.9% of the Common Stock of the Company.
3.6. Independent Investigation. In electing to purchase the Securities
hereunder, Purchaser has relied solely upon the representations and warranties
of the Company set forth in this Agreement and on independent investigation made
by Purchaser and his representatives, if any, and Purchaser has not been given
any oral or written representations or assurance from the Company or any
representative of the Company other than as set forth in this Agreement or in a
2
<PAGE>
document executed by a duly authorized representative of the Company making
reference to this Agreement.
3.7. No Government Recommendation or Approval. Purchaser understands
that no United States federal or state agency, or similar agency of any other
country, has passed upon or made any recommendation or endorsement of the
Company, this transaction or the purchase of the Securities.
3.8. Further Limitations on Disposition. Without in any way limiting
the representations set forth above, Purchaser agrees not to make any
disposition of all or any portion of the Securities (or the Shares issuable upon
the exercise of the Warrants) unless and until (a) there is then in effect a
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement, or (b) the disposition is made pursuant to an available exemption
from the registration requirements of the Securities Act and in the case of
clause (b) Purchaser shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such disposition will not
violate any of the securities laws of the United States.
3.9. Legal Representation. Purchaser has had the opportunity to be
represented in this transaction by counsel of his own choice and has been so
advised by counsel for the Company.
3.10 Separate Purchasers. Each Purchaser is a separate investor; no
Purchaser is acting in concert with any other Purchaser or any other person in
connection with the purchase of Securities pursuant to this Agreement.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Other than as provided in the Schedule of Exceptions attached hereto as
Exhibit C, the Company represents and warrants as follows:
4.1. Organization and Existence, etc. The Company is a corporation duly
organized and validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority to carry on its business as now conducted and proposed to be
conducted; the Company has all requisite corporate power and authority to enter
into this Agreement, to issue the Securities as contemplated herein and to carry
out and perform its obligations under the terms and conditions of this
Agreement. The Company does not own or lease any property or engage in any
activity in any jurisdiction which might require qualification to do business as
a foreign corporation in such jurisdiction and where the failure to so qualify
would have a material adverse effect on the financial condition of the Company
or subject the Company to a material liability. To the extent the Company has
not qualified to do business in such jurisdictions, it has, as of the date
hereof, prepared the necessary applications or documents to be filed with the
appropriate authorities in such jurisdictions to obtain such qualifications. The
Company has furnished each Purchaser with true, correct and complete copies of
its Certificate of Incorporation, By-laws and all amendments thereto to date.
3
<PAGE>
4.2. Subsidiaries and Affiliates. Except as set forth in the Schedule
of Exceptions, the Company has no subsidiaries and does not, and upon the
Closing will not, own of record or beneficially any capital stock or equity
interest or investment in any corporation, association or business entity.
4.3. Capitalization.
(a) As of the date hereof, the Company's authorized capital
stock consists of 1,000,000,000 shares of Common Stock, par value $.00001 per
share, of which 301,340,183 are outstanding and 58,567,337 of which are reserved
for issuance to certain persons (not including shares which may be reserved for
issuance upon conversion of a convertible debenture in the principal amount of
$2,000,000) for the purposes stated in the Schedule of Exceptions. As of the
date hereof, the Company does not hold any shares of its capital stock in its
treasury.
(b) All the issued and outstanding shares of capital stock of
the Company shall, as of the Closing, (i) have been duly authorized and validly
issued, (ii) be fully paid and nonassessable, and (iii) have been offered,
issued, sold and delivered by the Company in compliance with applicable federal
and state securities laws. Other than as set forth in Section 4.3(a) and the
Schedule of Exceptions, there are no outstanding preemptive, conversion or other
rights, options, warrants, calls, agreements or commitments granted or issued by
or binding upon the Company, for the purchase or acquisition of any shares of
its capital stock.
4.4. Authorization. All corporate action on the part of the Company and
the directors and stockholders of the Company necessary for the authorization,
execution, delivery and performance by the Company of this Agreement and the
transactions contemplated herein, and for the authorization, issuance and
delivery of the Securities, has been taken or will have been taken prior to the
Closing.
4.5. Binding Obligations: No Material Adverse Contracts, etc. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms. The execution, delivery and performance by the
Company of this Agreement and compliance herewith will not result in any
violation of and will not conflict with, or result in a breach of any of the
terms of, or constitute a default under, any provision of state or Federal law
to which the Company is subject, the Certificate of Incorporation, as amended,
or the By-laws, as amended, of the Company, or any mortgage, indenture,
agreement, instrument, judgment, decree, order, rule or regulation or other
restriction to which the Company is a party or by which it is bound, or, result
in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company pursuant to any such term. Except as set
forth herein no stockholder of the Company has or will have any preemptive
rights or rights of first refusal by reason of the issuance of the Securities.
4.6. Compliance with Instruments, etc. Except as set forth in the
Schedule of Exceptions, the Company is not (a) in default past any grace, notice
or cure period under any indenture, agreement or instrument to which it is a
party or by which it is bound, (b) in violation of its Certificate of
Incorporation, By-laws or of any applicable law, (c) in default with respect to
4
<PAGE>
any order, writ, injunction or decree of any court, administrative agency or
arbitrator, or in default under any order, license, regulation or demand of any
government agency, which default or violation would materially and adversely
affect the business, properties, condition (financial or otherwise) or business
prospects of the Company.
4.7. Litigation. Except as set forth in the Schedule of Exceptions,
there is no action, suit or proceeding pending, or, to the knowledge of the
Company, threatened, against the Company before any court, administrative agency
or arbitrator or any action, suit or proceeding pending, or, to the knowledge of
the Company, threatened, which challenges the validity of any action taken or to
be taken pursuant to or in connection with this Agreement or the issuance of the
Securities.
4.8. Offering. Subject in part to the truth and accuracy of the
representations made by each Purchaser herein and such Purchaser's compliance
with his covenants set forth in this Agreement, the offer, sale and issuance of
the Securities as contemplated by this Agreement are not subject to the
registration requirements of the Securities Act, and the Company, or anyone
acting on its behalf, will not take any action hereafter that would cause such
registration requirements to be applicable.
4.9. Permits: Governmental and Other Approvals. The Company possesses
such franchises, licenses, permits and other authority as are necessary for the
conduct of its business as now being conducted and proposed to be conducted by
the Company and the Company is not in default under any of such franchises,
licenses, permits or other authority. No approval, consent, authorization or
other order of, and no designation, filing, registration, qualification or
recording with, any governmental authority or any other person or entity is
required in connection with the Company's valid execution, delivery and
performance of this Agreement or the offer, issuance and sale of the Securities
by the Company to Purchaser or the consummation of any other transaction
contemplated on the part of the Company hereby.
4.10. SEC Reports.
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") all reports ("SEC Reports") required to be filed
by it under the Securities Act of 1934, as amended (the "Exchange Act"). All of
the SEC Reports filed by the Company comply in all material respects with the
requirements of the Exchange Act. None of the SEC Reports contains as of the
respective dates thereof, any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made. All financial statements contained in the SEC Reports have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the period indicated ("GAAP"). Each balance
sheet presents fairly in accordance with GAAP the financial position of the
Company as of the date of such balance sheet, and each statement of operations,
of stockholders' equity and of cash flows presents fairly in accordance with
GAAP the results of operations, the stockholders' equity and the cash flows of
the Company for the periods then ended.
5
<PAGE>
(b) No event has occurred since March 31, 1999 requiring the
filing of an SEC Report that has not heretofore been filed.
(c) The SEC Reports and this Agreement taken together as a
whole will not, as of the Closing Date, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein,
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
4.11. Copyrights, Trademarks and Patents. Set forth in the Schedule of
Exceptions is a list of all the copyrights, trademark registrations and patents
and applications therefor owned by the Company.
4.12. Other Material Contracts. Set forth in the Schedule of Exceptions
is a list of contracts material to the operations of the Company to which
reference is not made elsewhere in this Article IV.
4.13. Disclosure. The information heretofore provided and to be
provided pursuant to this Agreement, including the Schedule of Exceptions and
the Exhibits thereto, and each of the agreements, documents, certificates and
writings previously delivered to Purchaser or his representatives, do not and
will not contain any untrue statement of material fact and do not and will not
omit to state a material fact required to be stated herein or therein or
necessary in order to make the statements and writings contained herein and
therein not false or misleading in light of the circumstances under which they
were made .To the knowledge of the Company, there is no fact which materially
adversely affects the business, prospects or condition (financial or otherwise)
of the Company which has not been set forth herein.
ARTICLE V
CONDITIONS TO PURCHASERS CLOSING
--------------------------------
Each Purchaser's obligation to purchase the Securities at the
Closing is subject to the fulfillment to such Purchaser's satisfaction on or
prior to the Closing Date of each of the following conditions, any of which may
be waived by such Purchaser:
5.1. Representations and Warranties Correct. The representations and
warranties in Article IV hereof shall be true and correct in all material
respects when made, and shall be true and correct in all material respects on
the Closing Date with the same force and effect as if they had been made on and
as of the Closing Date.
5.2. Performance. All covenants, agreements and conditions contained
in this Agreement to be performed or complied with by the Company on or prior to
the Closing Date shall have been performed or complied with by the Company in
all material respects.
5.3. No Impediments. Neither Purchaser nor the Company shall be
subject to any order, decree or injunction of a court or administrative agency
of competent jurisdiction
6
<PAGE>
which would impose any material limitation on Purchaser's ability to exercise
full rights of ownership of the Securities.
5.4. Other Agreements. The Company shall have issued to Purchaser all
of the Securities.
5.5. Legal Investment. At the time of the Closing, the purchase of the
Securities to be purchased hereunder shall be legally permitted by all laws and
regulations to which Purchaser and the Company are subject.
5.6. Due Diligence Investigation. No Purchaser shall have discovered
any fact, whether or not reflected in the Schedule of Exceptions, which in such
Purchaser's determination would make the consummation of the transactions
contemplated by this Agreement not in his best interests.
5.7. Proceedings and Other Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
shall have been taken and Purchaser shall have received such other documents, in
form and substance reasonably satisfactory to Purchaser, as to such other
matters incident to the transaction contemplated hereby as Purchaser may
reasonably request.
ARTICLE VI
CONDITIONS TO CLOSING OF THE COMPANY
------------------------------------
The Company's obligation to sell the Securities at the Closing is
subject to the fulfillment to its satisfaction on or prior to the Closing Date
of each of the following conditions:
6.1. Representations. The representations made by each Purchaser in
Article III hereof shall be true and correct when made and shall be true and
correct on the Closing Date.
6.2. Legal Investment. At the time of the Closing, the offer, sale and
purchase of the Securities shall be legally permitted by all laws and
regulations to which the Purchasers and the Company are subject.
6.3. Payment of Purchase Price. The Company shall have received
payment in full of the Aggregate Purchase Price.
ARTICLE VII
AFFIRMATIVE COVENANTS AND INDEMNITY
-----------------------------------
The Purchasers and the Company hereby covenant and agree as follows:
7.1. Further Assurances. From time to time the Company shall execute
and deliver to each Purchaser and each Purchaser shall execute and deliver to
the Company such other instruments, certificates, agreements and documents and
take such other action and do all other
7
<PAGE>
things as may be reasonably requested by the other party in order to implement
or effectuate the terms and provisions of this Agreement and any of the
Securities.
7.2. Registration Rights.
(a) The Company shall file a registration statement (the
"Registration Statement") with the Commission, on such form as the Company deems
to be appropriate, to register the Shares under the Securities Act. The Company
shall use its best efforts to cause the Registration Statement to be declared
effective by the Commission on or prior to the 150th day after the Closing (the
"Effective Deadline"). Notwithstanding any other provision contained herein, the
failure of the Company to cause the Registration Statement to be declared
effective by the Commission on or prior to the Effective Deadline shall not be
deemed an event of default under this Agreement which shall subject the Company
to any liability or obligation except as otherwise provided herein.
(b) In the event the Registration Statement is not declared
effective by the Commission prior to the Effective Deadline, the Company shall
pay each Purchaser a penalty equal to the sum of 2% of the "amount" next to each
Purchaser's name on Exhibit B for each full calendar month lapsed after the
Effective Deadline, and a pro rated amount of said 2% based on a month of 30 or
31 days (as applicable to the month in which the Registration Statement is
declared effective). In no event shall the aggregate amount payable as a penalty
hereunder exceed $20,000 for all Purchasers.
(c) Purchaser shall furnish to the Company such information as
the Company shall reasonably request in writing and as shall be required in
connection with the registration.
7.3. Indemnification.
(a) The Company agrees to indemnify and hold each Purchaser
harmless from and against any losses, claims, damages or liabilities to which
such Purchaser may become subject (under the Securities Act or otherwise)
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any Untrue
Statement (as defined below) on or after the effective date of the Registration
Statement, or arise out of any failure by the Company to fulfill any undertaking
included in the Registration Statement and the Company will reimburse such
Purchaser any reasonable legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in any such case
to the extent that such loss, claim, damage or liability arises out of, or is
based upon, an Untrue Statement made in such Registration Statement in reliance
upon and in conformity with written information furnished to the Company by such
Purchaser or on such Purchaser's behalf, specifically for use in preparation of
the Registration Statement, or any statement or omission in any prospectus that
is corrected in any subsequent prospectus that was delivered prior to the
pertinent sale or sales by such Purchaser of his Shares.
8
<PAGE>
(b) Each Purchaser agrees to indemnify and hold harmless the
Company and each person, if any, who controls the Company within the meeting of
Section 15 of the Securities Act, each officer of the Company who signs the
Registration Statement and each director of the Company from and against any
losses, claims, damages or liabilities to which the Company or any such officer,
director or controlling person may become subject (under the Securities Act or
otherwise), insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of, or are based upon, any failure
to comply with such Purchaser's representation and warranties hereunder, or any
Untrue Statement contained in the Registration Statement on or after the
effective date thereof if such Untrue Statement was made in reliance upon and in
conformity with written information furnished by such Purchaser or on such
Purchaser's behalf specifically for use in preparation of the Registration
Statement, as the case may be, for any legal or other expenses reasonably
incurred in investigating, defending or preparing to defend any such action,
proceeding or claim; provided, however, that in no event shall such Purchaser's
indemnity exceed the gross proceeds received by Purchaser from the sale of
Shares covered by such Registration Statement.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
is to be sought against an indemnifying person pursuant to this section, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and such indemnifying person shall have been notified
thereof, such indemnifying person shall be entitled to participate therein, and,
to the extent it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified person. After notice from the
indemnifying person to such indemnified person of its election to assume the
defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate, in the opinion of counsel to the indemnified person, for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person; provided
further, however, that no indemnifying person shall be responsible for the fees
and expenses of more than one separate counsel for all indemnified parties.
(d) "Untrue Statement" means any untrue statement or alleged
untrue statement, or any omission or alleged omission to state in the
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
9
<PAGE>
ARTICLE VIII
COMPLIANCE WITH THE SECURITIES ACT
----------------------------------
8.1. Legends. The certificate(s)representing the Securities delivered
to the Purchasers at Closing shall be stamped or otherwise imprinted with a
legend substantially similar the following ( in addition to any other legend
required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER WRITTEN EVIDENCE IN THE
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER,
SALE OR TRANSFER, PLEDGE, OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
ARTICLE IX
MISCELLANEOUS
-------------
9.1. Governing Law. This Agreement and the rights of the parties
hereunder shall be governed in all respects by the laws of the State of New
York.
9.2. Survival. The representations, warranties, covenants and
agreements made herein shall survive the Closing, for a period of one year from
the date of Closing.
9.3. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding upon
and enforceable by and against, the successors, assigns, heirs, executors and
administrators of the parties hereto; provided, however, that the Company may
not assign its rights hereunder.
9.4. Entire Agreement. This Agreement (including the Exhibits hereto)
and the other documents delivered pursuant hereto and simultaneously herewith
constitute the full and entire understanding and agreement between the parties
with regard to the subject matter hereof and thereof.
9.5. Amendment. This Agreement may not be amended, discharged or
terminated without the written consent of each Purchaser and that of the
Company.
9.6. Notices, etc. All notices, demands or other communications given
hereunder shall be in writing and shall be sufficiently given if delivered
either personally or by a nationally recognized courier service marked for next
business day delivery or sent in a sealed envelope by first class mail, postage
prepaid and either registered or certified, addressed as follows:
10
<PAGE>
(a) if to the Company:
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Attention: Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
(b) if to Purchaser, to the address set forth on Exhibit B to
this Agreement or to such other address with respect to any party hereto as such
party may from time to time notify (as provided above) the other parties hereto.
Any such notice, demand or communication shall be deemed to have been given (i)
on the date of delivery, if delivered personally, (ii) one business day after
delivery to a nationally recognized overnight courier service, if marked for
next day delivery or (iii) five business days after the date of mailing, if
mailed.
Copies of any notice, demand or communication given to the Company
shall be delivered to Wolf, Block, Schorr and Solis-Cohen LLP, 250 Park Avenue,
New York, New York, 10177, Attn.: Robert E. Fischer, Esq., or such other address
as may be directed.
9.7. Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Securities upon any breach or
default of the Company under this Agreement shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence, therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement must be made in writing and shall be effective only
to the extent specifically set forth in such writing. Except as otherwise
provided herein, all remedies, either under this Agreement or by law or
otherwise afforded to any holder, shall be cumulative and not alternative.
9.8. Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
9.9. Placement Fee. Each Purchaser hereby represents and warrants to
the Company that he has not retained a finder or broker in connection with the
transactions contemplated by this Agreement. The Company hereby represents and
warrants to each Purchaser that it has not retained a finder or broker in
connection with the transactions contemplated by this Agreement. The Company
agrees to indemnify and to hold each Purchaser harmless of and from any
liability for commission or compensation in the nature of an agent's or broker's
fee to any broker, person or firm claiming to have been retained by the Company
to act as a finder or broker in connection
11
<PAGE>
with this transaction and the costs and expenses of defending against such
liability or asserted liability. Each Purchaser agrees to indemnify and to hold
the Company harmless of and from any liability for commission or compensation in
the nature of an agent's or broker's fee to any broker, person or firm claiming
to have been retained by or on behalf of such Purchaser to act as a finder or
broker in connection with this transaction and the costs and expenses of
defending against such liability or asserted liability. The provisions of
Article 7.3(c) shall apply to any indemnification under this Section 9.9.
9.10. Expenses. Each of the parties shall bear its own expenses and
legal fees incurred on its behalf with respect to the negotiation, execution and
consummation of the transactions contemplated by this Agreement.
9.11. Litigation. The parties each hereby waive trial by jury in any
action or proceeding of any kind or nature in any court in which an action may
be commenced arising out of this Agreement or by reason of any other cause or
dispute whatsoever between them. The parties hereto agree that the State and
Federal Courts which sit in the State of New York and the County of New York
shall have exclusive jurisdiction to hear and determine any claims or disputes
between the Company and such holders, pertaining directly or indirectly to this
Agreement or to any matter arising therefrom. The parties each expressly submit
and consent in advance to such jurisdiction in any action or proceeding
commenced in such courts provided that such consent shall not be deemed to be a
waiver of personal service of the summons and complaint, or other process or
papers issued therein. The choice of forum set forth in this Section 9.11 shall
not be deemed to preclude the enforcement of any judgment obtained in such forum
or the taking of any action under this Agreement to enforce same in any
appropriate jurisdiction. The parties each waive any objection based upon forum
non conveniens and any objection to venue of any action instituted hereunder.
9.12. Titles and Subtitles. The titles of the articles, sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
9.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
12
<PAGE>
If a Purchaser is in agreement with the foregoing, such Purchaser
should sign where indicated below and thereupon this letter shall become a
binding agreement between such Purchaser and the Company.
Very truly yours,
ADVANCED VIRAL RESEARCH CORP.
By:
------------------------------------------
Name: Shalom Z. Hirschman, M.D.
Title: President and Chief Executive Officer
AGREED:
- -----------------------------
Kwong Wai Au
- -----------------------------
Michael Berman
- -----------------------------
Pak-Lin Law
13
<PAGE>
EXHIBIT B
TO
SECURITIES PURCHASE AGREEMENT
DATED June 23, 1999
BETWEEN ADVANCED VIRAL RESEARCH CORP.
AND THE PURCHASERS THEREIN
<TABLE>
<CAPTION>
Name and Address Number of Shares Number of
of Purchaser Amount of Common Stock Warrants*
- ------------ ------ --------------- --------
<S> <C> <C> <C>
Kwong Wai Au $150,000 [Price/shr of [25% of the
c/o Pacific Trimming common stock is total number of
313 West 37th Street the average of the shares @120%
New York, NY 10018 closing bid prices of the per share
for the ten purchase price
consecutive trading & 25% of the
days ended on the total number of
last trading day shares @ 140%
before the closing] of the per share
purchase price]
Michael Berman $250,000
PMB 456
6929 North Hayden Road
Suite C-4
Scottsdale, AZ 85250
Pak-Lin Law $100,000
20 Confucius Plaza
Apt. 22L
New York, NY 10002
</TABLE>
- --------------------
*50% of such Warrants have an exercise price of [120% of per share purchase
price] per share and 50% of such warrants have an exercise price of [140% of per
share purchase price] per share.
EXHIBIT 4.16
EXHIBIT A-1
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF THIS WARRANT (COLLECTIVELY, THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
UNDER THE SECURITIES ACT.
WARRANT TO PURCHASE
COMMON STOCK, PAR VALUE $.00001 PER SHARE
OF
ADVANCED VIRAL RESEARCH CORP.
-----------------------------------------------------------------------
This certifies that, for value received, ____________________,
or registered assigns ("Warrantholder"), is entitled to purchase from ADVANCED
VIRAL RESEARCH CORP. (the "Company"), subject to the provisions of this Warrant,
at any time and from time to time until 5:00 p.m. Eastern Standard Time on [June
30, 2004] ______ shares [25% of the total number of shares originally purchased
by the Warrant holder] of the Company's Common Stock, par value $.00001 per
share ("Warrant Shares"). The purchase price payable upon the exercise of this
Warrant shall be $___ per Warrant Share. [120% of the the original per share
purchase price] The Warrant Price and the number of Warrant Shares which the
Warrantholder is entitled to purchase is subject to adjustment upon the
occurrence of the contingencies set forth in Section 3 of this Warrant, and as
adjusted from time to time, such purchase price is hereinafter referred to as
the "Warrant Price."
This Warrant is subject to the following terms and conditions:
I. Exercise of Warrant.
A. This Warrant may be exercised in whole or in part but not for a
fractional share. Upon delivery of this Warrant at the offices of the Company or
at such other address as the Company may designate by notice in writing to the
registered holder hereof with the Subscription Form annexed hereto duly
executed, accompanied by payment of the Warrant Price for the number of Warrant
Shares purchased (in cash, by certified, cashier's or other check acceptable to
the Company, by Common Stock of the Company having a Market Value (as
hereinafter defined)
<PAGE>
equal to the aggregate Warrant Price for the Warrant Shares to be purchased, or
any combination of the foregoing), the registered holder of this Warrant shall
be entitled to receive a certificate or certificates for the Warrant Shares so
purchased. Such certificate or certificates shall be promptly delivered to the
Warrantholder. Upon any partial exercise of this Warrant, the Company shall
execute and deliver a new Warrant of like tenor for the balance of the Warrant
Shares purchasable hereunder.
B. In lieu of exercising this Warrant pursuant to Section 1(a), the
holder may elect to receive shares of Common Stock equal to the value of this
Warrant determined in the manner described below (or any portion thereof
remaining unexercised) upon delivery of this Warrant at the offices of the
Company or at such other address as the Company may designate by notice in
writing to the registered holder hereof with the Notice of Cashless Exercise
Form annexed hereto duly executed. In such event the Company shall issue to the
holder a number of shares of the Company's Common Stock computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to
the holder.
Y = the number of shares of Common Stock
purchasable under this Warrant (at the date
of such calculation).
A = the Market Value of the Company's Common
Stock on the business day immediately
preceding the day on which the Notice of
Cashless Exercise is received by the Company.
B = Warrant Price (as adjusted to the date of such
calculation).
C. The Warrant Shares deliverable hereunder shall, upon issuance, be
fully paid and non-assessable and the Company agrees that at all times during
the term of this Warrant it shall cause to be reserved for issuance such number
of shares of its Common Stock as shall be required for issuance and delivery
upon exercise of this Warrant.
D. For purposes of this Warrant, the Market Value of a share of Common
Stock on any date shall be equal to (i) the closing bid price per share as
published by a national securities exchange on which shares of Common Stock (or
other units of the security) are traded (an "Exchange") on such date or, if
there is no bid for Common Stock on such date, the bid price on such exchange at
the close of trading on the next earlier date or, (ii) if shares of Common Stock
are not listed on a national securities exchange on such date, the closing bid
price per share as published on the National Association of Securities Dealers
Automatic Quotation System ("NASDAQ") National Market System if the shares are
quoted on such system on such date, or (iii) the closing bid price in the
over-the-counter market at the close of trading on such date if the shares are
not traded on an exchange or listed on the NASDAQ National Market System, or
(iv) if the Common Stock is not traded on a national securities exchange or in
the over-the-counter market, the fair market value of a share of Common Stock on
such date as determined in good faith by the Board of Directors. If the holder
disagrees with the determination of the Market Value of any securities of the
Company determined by the Board of Directors under Section 1(d)(iv) the
2
<PAGE>
Market Value of such securities shall be determined by an independent appraiser
acceptable to the Company and the holder (or, if they cannot agree on such an
appraiser, by an independent appraiser selected by each of them, and Market
Value shall be the median of the appraisals made by such appraisers). If there
is one appraiser, the cost of the appraisal shall be shared equally between the
Company and the holder. If there are two appraisers, each of the Company and the
holder shall pay for its own appraisal.
II. Transfer or Assignment of Warrant.
A. Any assignment or transfer of this Warrant shall be made by
surrender of this Warrant at the offices of the Company or at such other address
as the Company may designate in writing to the registered holder hereof with the
Assignment Form annexed hereto duly executed and accompanied by payment of any
requisite transfer taxes, and the Company shall, without charge, execute and
deliver a new Warrant of like tenor in the name of the assignee for the portion
so assigned in case of only a partial assignment, with a new Warrant of like
tenor to the assignor for the balance of the Warrant Shares purchasable.
B. Prior to any assignment or transfer of this Warrant, the holder
thereof shall deliver an opinion of counsel to the Company to the effect that
the proposed transfer may be effected without registration under the Act.
III. Adjustment of Warrant Price and Warrant Shares -- Anti-Dilution
Provisions.
A. (1) Except as hereinafter provided, in case the Company shall at any
time after the date hereof issue any shares of Common Stock (including shares
held in the Company's treasury) without consideration, then, and thereafter
successively upon each issuance, the Warrant Price in effect immediately prior
to each such issuance shall forthwith be reduced to a price determined by
multiplying the Warrant Price in effect immediately prior to such issuance by a
fraction:
(a) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to
such issuance, and
(b) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such
issuance.
For the purposes of any computation to be made in accordance with the
provisions of this clause (1), the following provisions shall be applicable:
(i) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be
deemed to have been issued and to be outstanding at the
close of business on the record date fixed for the
determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to
have been issued without consideration. Shares of Common
Stock issued otherwise than as a dividend, shall be
deemed to have been
3
<PAGE>
issued and to be outstanding at the close of business on
the date of issue.
(ii) The number of shares of Common Stock at any time
outstanding shall not include any shares then owned or
held by or for the account of the Company.
(2) In case the Company shall at any time subdivide or combine the
outstanding shares of Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of the subdivision or proportionately
increased in the case of combination to the nearest one cent. Any such
adjustment shall become effective at the close of business on the date that such
subdivision or combination shall become effective.
B. In the event that the number of outstanding shares of Common Stock
is increased by a stock dividend payable in shares of Common Stock or by a
subdivision of the outstanding shares of Common Stock, which may include a stock
split, then from and after the time at which the adjusted Warrant Price becomes
effective pursuant to the foregoing Subsection A of this Section by reason of
such dividend or subdivision, the number of shares issuable upon the exercise of
this Warrant shall be increased in proportion to such increase in outstanding
shares. In the event that the number of outstanding shares of Common Stock is
decreased by a combination of the outstanding shares of Common Stock, then, from
and after the time at which the adjusted Warrant Price becomes effective
pursuant to such Subsection A of this Section by reason of such combination, the
number of shares issuable upon the exercise of this Warrant shall be decreased
in proportion to such decrease in outstanding shares.
C. In the event of an adjustment of the Warrant Price, the number of
shares of Common Stock (or reclassified stock) issuable upon exercise of this
Warrant after such adjustment shall be equal to the number determined by
dividing:
(1) an amount equal to the product of (i) the number of shares of
Common Stock issuable upon exercise of this Warrant immediately prior to such
adjustment, and (ii) the Warrant Price immediately prior to such adjustment, by
(2) the Warrant Price immediately after such adjustment.
D. In the case of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination) or in the case of any consolidation of the Company
with, or merger of the Company with, another corporation, or in the case of any
sale, lease or conveyance of all, or substantially all, of the property, assets,
business and goodwill of the Company as an entity, the holder of this Warrant
shall thereafter have the right upon exercise to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization, reclassification, consolidation, merger or sale by
4
<PAGE>
a holder of the number of shares of Common Stock which the holder of this
Warrant would have received had all Warrant Shares issuable upon exercise of
this Warrant been issued immediately prior to such reorganization,
reclassification, consolidation, merger or sale, at a price equal to the Warrant
Price then in effect pertaining to this Warrant (the kind, amount and price of
such stock and other securities to be subject to adjustment as herein provided).
E. In case the Company shall, at any time prior to the expiration of
this Warrant and prior to the exercise thereof, dissolve, liquidate or wind up
its affairs, the Warrantholder shall be entitled, upon the exercise thereof, to
receive, in lieu of the Warrant Shares of the Company which it would have been
entitled to receive, the same kind and amount of assets as would have been
issued, distributed or paid to it upon such Warrant Shares of the Company, had
it been the holder of record of shares of Common Stock receivable upon the
exercise of this Warrant on the record date for the determination of those
entitled to receive any such liquidating distribution. After any such
dissolution, liquidation or winding up which shall result in any distribution in
excess of the Warrant Price provided for by this Warrant, the Warrantholder may
at its option exercise the same without making payment of the aggregate Warrant
Price and in such case the Company shall upon the distribution to said
Warrantholder consider that the aggregate Warrant Price has been paid in full to
it and in making settlement to said Warrantholder, shall deduct from the amount
payable to such Warrantholder an amount equal to the aggregate Warrant Price.
F. In case the Company shall, at any time prior to the expiration of
this Warrant and prior to the exercise thereof make a distribution of assets
(other than cash) or securities of the Company to its stockholders (the
"Distribution") the Warrantholder shall be entitled, upon the exercise thereof,
to receive, in addition to the Warrant Shares it is entitled to receive, the
same kind and amount of assets or securities as would have been distributed to
it in the Distribution had it been the holder of record of shares of Common
Stock receivable upon exercise of this Warrant on the record date for
determination of those entitled to receive the Distribution.
G. Irrespective of any adjustments in the number of Warrant Shares and
the Warrant Price or the number or kind of shares purchasable upon exercise of
this Warrant, this Warrant may continue to express the same price and number and
kind of shares as originally issued.
IV. Officer's Certificate. Whenever the number of Warrant Shares and the
Warrant Price shall be adjusted pursuant to the provisions hereof, the Company
shall forthwith file, at its principal executive office a statement, signed by
the Chairman of the Board, President, or one of the Vice Presidents of the
Company and by its Chief Financial Officer or one of its Treasurers or Assistant
Treasurers, stating the adjusted number of Warrant Shares and the new Warrant
Price calculated to the nearest one hundredth and setting forth in reasonable
detail the method of calculation and the facts requiring such adjustment and
upon which such calculation is based. Each adjustment shall remain in effect
until a subsequent adjustment hereunder is required. A copy of such statement
shall be mailed to the Warrantholder.
V. Charges, Taxes and Expenses. The issuance of certificates for Warrant
Shares upon any exercise of this Warrant shall be made without charge to the
Warrantholder for any tax or other
5
<PAGE>
expense in respect to the issuance of such certificates, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued
only in the name of the Warrantholder.
VI. Miscellaneous.
A. The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or assigns of the Company and of the holder or
holders hereof and of the shares of Common Stock issued or issuable upon the
exercise hereof.
B. No holder of this Warrant, as such, shall be entitled to vote or
receive dividends or be deemed to be a stockholder of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder of this Warrant, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription rights, or
otherwise.
C. Receipt of this Warrant by the holder hereof shall constitute
acceptance of an agreement to the foregoing terms and conditions.
D. The Warrant and the performance of the parties hereunder shall be
construed and interpreted in accordance with the laws of the State of New York
and the parties hereunder consent and agree that the State and Federal Courts
which sit in the State of New York and the County of New York shall have
exclusive jurisdiction with respect to all controversies and disputes arising
hereunder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer and its corporate seal to be affixed hereto.
Dated: June _____, 1999
ADVANCED VIRAL RESEARCH CORP.
BY: -------------------------
Shalom Hirschman, M.D.
President
6
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER
IF HE DESIRES TO EXERCISE THE WARRANT)
To: ADVANCED VIRAL RESEARCH CORP.
The undersigned hereby exercises the right to purchase
_________ shares of Common Stock, par value $.00001 per share, covered by the
attached Warrant in accordance with the terms and conditions thereof, and
herewith makes payment of the Warrant Price for such shares in full.
--------------------------------------------
SIGNATURE
--------------------------------------------
ADDRESS
DATED: ----------------
<PAGE>
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
------------------------------------------------------
Advanced Viral Research Corp. Aggregate Price of $
a Delaware corporation of Warrant -------------------
200 Corporate Boulevard South
Yonkers, New York 10701 Aggregate Price Being
Exercised: $
-------------------
Attention:
Warrant Price
(per share): $
-------------------
Number of Shares of
Common Stock to be
Issued Under this
Notice:
CASHLESS EXERCISE
-----------------
Gentlemen:
The undersigned, registered holder of the Warrant to Purchase Common
Stock delivered herewith ("Warrant") hereby irrevocably exercises such Warrant
for, and purchases thereunder, shares of the Common Stock of ADVANCED VIRAL
RESEARCH CORP., a Delaware corporation, as provided below. Capitalized terms
used herein, unless otherwise defined herein, shall have the meanings given in
the Warrant. The portion of the Aggregate Price (as hereinafter defined) to be
applied toward the purchase of Common Stock pursuant to this Notice of Exercise
is $__________ , thereby leaving a remainder Aggregate Price (if any) equal to
$__________. Such exercise shall be pursuant to the net issue exercise
provisions of Section I. (b) of the Warrant; therefore, the holder makes no
payment with this Notice of Exercise. The number of shares to be issued pursuant
to this exercise shall be determined by reference to the formula in Section
I.(b)of the Warrant which requires the use of the Market Value (as defined in
Section I.(d) of the Warrant) of the Company's Common Stock on the business day
immediately preceding the day on which this Notice is received by the Company.
To the extent the foregoing exercise is for less than the full Aggregate Price
of the Warrant, the remainder of the Warrant representing a number of Shares
equal to the quotient obtained by dividing the remainder of the Aggregate Price
by the Warrant Price (and otherwise of like form, tenor and effect) may be
exercised under Section
<PAGE>
I.(a) of the Warrant. For purposes of this Notice the term "Aggregate Price"
means the product obtained by multiplying the number of shares of Common Stock
for which the Warrant is exercisable times the Warrant Price.
--------------------------------------------
SIGNATURE
--------------------------------------------
DATE: ADDRESS
-------------
2
<PAGE>
ASSIGNMENT
----------
(To be Executed by the Registered Holder
if he Desires to Transfer the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right to purchase shares of Common
Stock of ADVANCED VIRAL RESEARCH CORP., evidenced by the within Warrant, and
does hereby irrevocably constitute and appoint _________________________
Attorney to transfer the said Warrant on the books of the Company, with full
power of substitution.
--------------------------------------------
SIGNATURE
--------------------------------------------
ADDRESS
DATED:
------------
IN THE PRESENCE OF:
- ------------------
EXHIBIT 4.17
EXHIBIT A-2
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF THIS WARRANT (COLLECTIVELY, THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
UNDER THE SECURITIES ACT.
WARRANT TO PURCHASE
COMMON STOCK, PAR VALUE $.00001 PER SHARE
OF
ADVANCED VIRAL RESEARCH CORP.
-------------------------------------
This certifies that, for value received,
___________________________________________ , or registered assigns
("Warrantholder"), is entitled to purchase from ADVANCED VIRAL RESEARCH CORP.
(the "Company"), subject to the provisions of this Warrant, at any time and from
time to time until 5:00 p.m. Eastern Standard Time on [June 30, 2004] ______
shares [25% of the total number of shares originally purchased by the Warrant
holder] of the Company's Common Stock, par value $.00001 per share ("Warrant
Shares"). The purchase price payable upon the exercise of this Warrant shall be
$___ per Warrant Share. [140% of the the original per share purchase price] The
Warrant Price and the number of Warrant Shares which the Warrantholder is
entitled to purchase is subject to adjustment upon the occurrence of the
contingencies set forth in Section 3 of this Warrant, and as adjusted from time
to time, such purchase price is hereinafter referred to as the "Warrant Price."
This Warrant is subject to the following terms and conditions:
I. Exercise of Warrant.
A. This Warrant may be exercised in whole or in part but not for a
fractional share. Upon delivery of this Warrant at the offices of the Company or
at such other address as the Company may designate by notice in writing to the
registered holder hereof with the Subscription Form annexed hereto duly
executed, accompanied by payment of the Warrant Price for the number of Warrant
Shares purchased (in cash, by certified, cashier's or other check acceptable to
the Company, by Common Stock of the Company having a Market Value (as
hereinafter defined)
<PAGE>
equal to the aggregate Warrant Price for the Warrant Shares to be purchased, or
any combination of the foregoing), the registered holder of this Warrant shall
be entitled to receive a certificate or certificates for the Warrant Shares so
purchased. Such certificate or certificates shall be promptly delivered to the
Warrantholder. Upon any partial exercise of this Warrant, the Company shall
execute and deliver a new Warrant of like tenor for the balance of the Warrant
Shares purchasable hereunder.
B. In lieu of exercising this Warrant pursuant to Section 1(a), the
holder may elect to receive shares of Common Stock equal to the value of this
Warrant determined in the manner described below (or any portion thereof
remaining unexercised) upon delivery of this Warrant at the offices of the
Company or at such other address as the Company may designate by notice in
writing to the registered holder hereof with the Notice of Cashless Exercise
Form annexed hereto duly executed. In such event the Company shall issue to the
holder a number of shares of the Company's Common Stock computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to
the holder.
Y = the number of shares of Common Stock purchasable
under this Warrant (at the date of such calculation).
A = the Market Value of the Company's Common Stock on the
business day immediately preceding the day on which
the Notice of Cashless Exercise is received by the
Company.
B = Warrant Price (as adjusted to the date of such
calculation).
C. The Warrant Shares deliverable hereunder shall, upon issuance, be
fully paid and non-assessable and the Company agrees that at all times during
the term of this Warrant it shall cause to be reserved for issuance such number
of shares of its Common Stock as shall be required for issuance and delivery
upon exercise of this Warrant.
D. For purposes of this Warrant, the Market Value of a share of Common
Stock on any date shall be equal to (i) the closing bid price per share as
published by a national securities exchange on which shares of Common Stock (or
other units of the security) are traded (an "Exchange") on such date or, if
there is no bid for Common Stock on such date, the bid price on such exchange at
the close of trading on the next earlier date or, (ii) if shares of Common Stock
are not listed on a national securities exchange on such date, the closing bid
price per share as published on the National Association of Securities Dealers
Automatic Quotation System ("NASDAQ") National Market System if the shares are
quoted on such system on such date, or (iii) the closing bid price in the
over-the-counter market at the close of trading on such date if the shares are
not traded on an exchange or listed on the NASDAQ National Market System, or
(iv) if the Common Stock is not traded on a national securities exchange or in
the over-the-counter market, the fair market value of a share of Common Stock on
such date as determined in good faith by the Board of Directors. If the holder
disagrees with the determination of the Market Value of any securities of the
Company determined by the Board of Directors under Section 1(d)(iv) the
2
<PAGE>
Market Value of such securities shall be determined by an independent appraiser
acceptable to the Company and the holder (or, if they cannot agree on such an
appraiser, by an independent appraiser selected by each of them, and Market
Value shall be the median of the appraisals made by such appraisers). If there
is one appraiser, the cost of the appraisal shall be shared equally between the
Company and the holder. If there are two appraisers, each of the Company and the
holder shall pay for its own appraisal.
II. Transfer or Assignment of Warrant.
A. Any assignment or transfer of this Warrant shall be made by
surrender of this Warrant at the offices of the Company or at such other address
as the Company may designate in writing to the registered holder hereof with the
Assignment Form annexed hereto duly executed and accompanied by payment of any
requisite transfer taxes, and the Company shall, without charge, execute and
deliver a new Warrant of like tenor in the name of the assignee for the portion
so assigned in case of only a partial assignment, with a new Warrant of like
tenor to the assignor for the balance of the Warrant Shares purchasable.
B. Prior to any assignment or transfer of this Warrant, the holder
thereof shall deliver an opinion of counsel to the Company to the effect that
the proposed transfer may be effected without registration under the Act.
III. Adjustment of Warrant Price and Warrant Shares -- Anti-Dilution
Provisions.
A. (1) Except as hereinafter provided, in case the Company shall at any
time after the date hereof issue any shares of Common Stock (including shares
held in the Company's treasury) without consideration, then, and thereafter
successively upon each issuance, the Warrant Price in effect immediately prior
to each such issuance shall forthwith be reduced to a price determined by
multiplying the Warrant Price in effect immediately prior to such issuance by a
fraction:
(a) the numerator of which shall be the total
number of shares of Common Stock outstanding
immediately prior to such issuance, and
(b) the denominator of which shall be the total
number of shares of Common Stock outstanding
immediately after such issuance.
For the purposes of any computation to be made in accordance with the
provisions of this clause (1), the following provisions shall be applicable:
(i) Shares of Common Stock issuable by way of
dividend or other distribution on any stock
of the Company shall be deemed to have been
issued and to be outstanding at the close of
business on the record date fixed for the
determination of stockholders entitled to
receive such dividend or other distribution
and shall be deemed to have been issued
without consideration. Shares of Common
Stock issued otherwise than as a dividend,
shall be deemed to have been
3
<PAGE>
issued and to be outstanding at the close of
business on the date of issue.
(ii) The number of shares of Common Stock at any
time outstanding shall not include any
shares then owned or held by or for the
account of the Company.
(2) In case the Company shall at any time subdivide or combine
the outstanding shares of Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of the subdivision or proportionately
increased in the case of combination to the nearest one cent. Any such
adjustment shall become effective at the close of business on the date that such
subdivision or combination shall become effective.
B. In the event that the number of outstanding shares of Common Stock
is increased by a stock dividend payable in shares of Common Stock or by a
subdivision of the outstanding shares of Common Stock, which may include a stock
split, then from and after the time at which the adjusted Warrant Price becomes
effective pursuant to the foregoing Subsection A of this Section by reason of
such dividend or subdivision, the number of shares issuable upon the exercise of
this Warrant shall be increased in proportion to such increase in outstanding
shares. In the event that the number of outstanding shares of Common Stock is
decreased by a combination of the outstanding shares of Common Stock, then, from
and after the time at which the adjusted Warrant Price becomes effective
pursuant to such Subsection A of this Section by reason of such combination, the
number of shares issuable upon the exercise of this Warrant shall be decreased
in proportion to such decrease in outstanding shares.
C. In the event of an adjustment of the Warrant Price, the number of
shares of Common Stock (or reclassified stock) issuable upon exercise of this
Warrant after such adjustment shall be equal to the number determined by
dividing:
(1) an amount equal to the product of (i) the number of
shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such adjustment, and
(ii) the Warrant Price immediately prior to such
adjustment, by
(2) the Warrant Price immediately after such adjustment.
D. In the case of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination) or in the case of any consolidation of the Company
with, or merger of the Company with, another corporation, or in the case of any
sale, lease or conveyance of all, or substantially all, of the property, assets,
business and goodwill of the Company as an entity, the holder of this Warrant
shall thereafter have the right upon exercise to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization, reclassification, consolidation, merger or sale by
4
<PAGE>
a holder of the number of shares of Common Stock which the holder of this
Warrant would have received had all Warrant Shares issuable upon exercise of
this Warrant been issued immediately prior to such reorganization,
reclassification, consolidation, merger or sale, at a price equal to the Warrant
Price then in effect pertaining to this Warrant (the kind, amount and price of
such stock and other securities to be subject to adjustment as herein provided).
E. In case the Company shall, at any time prior to the expiration of
this Warrant and prior to the exercise thereof, dissolve, liquidate or wind up
its affairs, the Warrantholder shall be entitled, upon the exercise thereof, to
receive, in lieu of the Warrant Shares of the Company which it would have been
entitled to receive, the same kind and amount of assets as would have been
issued, distributed or paid to it upon such Warrant Shares of the Company, had
it been the holder of record of shares of Common Stock receivable upon the
exercise of this Warrant on the record date for the determination of those
entitled to receive any such liquidating distribution. After any such
dissolution, liquidation or winding up which shall result in any distribution in
excess of the Warrant Price provided for by this Warrant, the Warrantholder may
at its option exercise the same without making payment of the aggregate Warrant
Price and in such case the Company shall upon the distribution to said
Warrantholder consider that the aggregate Warrant Price has been paid in full to
it and in making settlement to said Warrantholder, shall deduct from the amount
payable to such Warrantholder an amount equal to the aggregate Warrant Price.
F. In case the Company shall, at any time prior to the expiration of
this Warrant and prior to the exercise thereof make a distribution of assets
(other than cash) or securities of the Company to its stockholders (the
"Distribution") the Warrantholder shall be entitled, upon the exercise thereof,
to receive, in addition to the Warrant Shares it is entitled to receive, the
same kind and amount of assets or securities as would have been distributed to
it in the Distribution had it been the holder of record of shares of Common
Stock receivable upon exercise of this Warrant on the record date for
determination of those entitled to receive the Distribution.
G. Irrespective of any adjustments in the number of Warrant Shares and
the Warrant Price or the number or kind of shares purchasable upon exercise of
this Warrant, this Warrant may continue to express the same price and number and
kind of shares as originally issued.
IV. Officer's Certificate. Whenever the number of Warrant Shares and the
Warrant Price shall be adjusted pursuant to the provisions hereof, the Company
shall forthwith file, at its principal executive office a statement, signed by
the Chairman of the Board, President, or one of the Vice Presidents of the
Company and by its Chief Financial Officer or one of its Treasurers or Assistant
Treasurers, stating the adjusted number of Warrant Shares and the new Warrant
Price calculated to the nearest one hundredth and setting forth in reasonable
detail the method of calculation and the facts requiring such adjustment and
upon which such calculation is based. Each adjustment shall remain in effect
until a subsequent adjustment hereunder is required. A copy of such statement
shall be mailed to the Warrantholder.
V. Charges, Taxes and Expenses. The issuance of certificates for Warrant
Shares upon any exercise of this Warrant shall be made without charge to the
Warrantholder for any tax or other
5
<PAGE>
expense in respect to the issuance of such certificates, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued
only in the name of the Warrantholder.
VI. Miscellaneous.
A. The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or assigns of the Company and of the holder or
holders hereof and of the shares of Common Stock issued or issuable upon the
exercise hereof.
B. No holder of this Warrant, as such, shall be entitled to vote or
receive dividends or be deemed to be a stockholder of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder of this Warrant, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription rights, or
otherwise.
C. Receipt of this Warrant by the holder hereof shall constitute
acceptance of an agreement to the foregoing terms and conditions.
D. The Warrant and the performance of the parties hereunder shall be
construed and interpreted in accordance with the laws of the State of New York
and the parties hereunder consent and agree that the State and Federal Courts
which sit in the State of New York and the County of New York shall have
exclusive jurisdiction with respect to all controversies and disputes arising
hereunder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer and its corporate seal to be affixed hereto.
Dated: June _____, 1999
ADVANCED VIRAL RESEARCH CORP.
BY:
-------------------------------
Shalom Hirschman, M.D.
President
6
<PAGE>
SUBSCRIPTION FORM
-----------------
(TO BE EXECUTED BY THE REGISTERED HOLDER
IF HE DESIRES TO EXERCISE THE WARRANT)
To: ADVANCED VIRAL RESEARCH CORP.
The undersigned hereby exercises the right to purchase
_________ shares of Common Stock, par value $.00001 per share, covered by the
attached Warrant in accordance with the terms and conditions thereof, and
herewith makes payment of the Warrant Price for such shares in full.
-----------------------------------
SIGNATURE
-----------------------------------
ADDRESS
DATED:
-----------------
<PAGE>
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
------------------------------------------------------
Advanced Viral Research Corp. Aggregate Price of $
a Delaware corporation of Warrant ------------
200 Corporate Boulevard South
Yonkers, New York 10701 Aggregate Price Being
Exercised: $
------------
Attention:
Warrant Price
(per share): $
------------
Number of Shares of
Common Stock to be
Issued Under this
Notice:
CASHLESS EXERCISE
-----------------
Gentlemen:
The undersigned, registered holder of the Warrant to Purchase
Common Stock delivered herewith ("Warrant") hereby irrevocably exercises such
Warrant for, and purchases thereunder, shares of the Common Stock of ADVANCED
VIRAL RESEARCH CORP., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as hereinafter
defined) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $__________ , thereby leaving a remainder Aggregate Price
(if any) equal to $__________. Such exercise shall be pursuant to the net issue
exercise provisions of Section I. (b) of the Warrant; therefore, the holder
makes no payment with this Notice of Exercise. The number of shares to be issued
pursuant to this exercise shall be determined by reference to the formula in
Section I.(b)of the Warrant which requires the use of the Market Value (as
defined in Section I.(d) of the Warrant) of the Company's Common Stock on the
business day immediately preceding the day on which this Notice is received by
the Company. To the extent the foregoing exercise is for less than the full
Aggregate Price of the Warrant, the remainder of the Warrant representing a
number of Shares equal to the quotient obtained by dividing the remainder of the
Aggregate Price by the Warrant Price (and otherwise of like form, tenor and
effect) may be exercised under Section
<PAGE>
I.(a) of the Warrant. For purposes of this Notice the term "Aggregate Price"
means the product obtained by multiplying the number of shares of Common Stock
for which the Warrant is exercisable times the Warrant Price.
-----------------------------------
SIGNATURE
-----------------------------------
DATE: ADDRESS
-------------------
2
<PAGE>
ASSIGNMENT
----------
(To be Executed by the Registered Holder
if he Desires to Transfer the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ____________ the right to purchase shares of Common Stock of
ADVANCED VIRAL RESEARCH CORP., evidenced by the within Warrant, and does hereby
irrevocably constitute and appoint _______________ Attorney to transfer the said
Warrant on the books of the Company, with full power of substitution.
-----------------------------------
SIGNATURE
-----------------------------------
ADDRESS
DATED:
-------------------
IN THE PRESENCE OF:
- ------------------------
EXHIBIT 4.18
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of August 3, 1999, is
entered into by and among ADVANCED VIRAL RESEARCH CORP., a Delaware corporation
(the "Company") and FOCUS INVESTORS LLC, a Delaware limited liability company
(the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company and the Purchaser are executing and delivering
this Agreement in reliance upon the exemptions from registration provided by
Regulation D ("Regulation D") promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), and/or Section 4(2) of the Securities Act; and
WHEREAS, the Purchaser wishes to purchase, and the Company wishes to
issue, upon the terms and subject to the conditions of this Agreement, an
aggregate of 20 units (the "Units"), each Unit consisting of $100,000 principal
amount of the Company's 7% Convertible Debentures (the "Debentures") and Series
W Warrants to purchase 50,000 shares of Common Stock of the Company (the
"Warrants" and, together with the Debentures, the "Securities"). The Debentures
are convertible, at the holder's option, into the Company's common stock, par
value $.00001 per share (the "Common Stock"), on the terms set forth therein,
and the Warrants may be exercised for the purchase of Common Stock, on the terms
set forth therein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE
Closing. The Purchaser hereby agrees to purchase from the
Company on the Closing Date (as defined herein) the Units. The Debentures shall
be issued in substantially the form attached hereto as Exhibit A, and the
Warrants shall be issued in substantially the form attached hereto as Exhibit B.
The purchase price for each Unit shall be $100,000, and shall be payable in same
day funds.
The Debentures and the Warrants to be purchased by the
Purchaser hereunder, in definitive form, and in such denominations and
registered in such names as the Purchaser or its representative, if any, may
request upon notice to the Company, shall be delivered by or on behalf of the
Company for the account of the Purchaser, against payment by the Purchaser or on
behalf of the purchase price therefor by wire transfer to an account of the
Company, all at the offices of Kronish Lieb Weiner & Hellman LLP, at 9:30 a.m.,
New York time on August 3, 1999, or at such other time and date as the
Purchaser (or its representative, as the case may be) and the Company may agree
upon in writing, such date being referred to herein as the "Closing Date."
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Purchaser represents and warrants to, and covenants and
agrees with, the Company as follows:
a. The Purchaser and each of its equity owners is (i)
experienced in making investments of the kind described in this Agreement and
the related documents, (ii) able, by reason of the business and financial
experience of its management, to protect its own interests in connection with
the transactions described in this Agreement and the related documents, and
(iii) able to afford the entire loss of its investment in the Units.
b. All subsequent offers and sales of the Debentures, the
Warrants, and the Common Stock issuable upon conversion or exercise of the
Debentures or the Warrants it shall have purchased, shall be made pursuant to an
effective registration statement under the Securities Act or pursuant to an
applicable exemption from such registration.
c. The Purchaser understands that the Units are being offered
and sold to it in reliance upon exemptions from the registration requirements of
the United States federal securities laws, and that the Company is relying upon
the truth and accuracy of the Purchaser's representations and warranties, and
the Purchaser's compliance with its agreements, each as set forth herein, in
order to determine the availability of such exemptions and the eligibility of
the Purchaser to acquire the Units.
d. The Purchaser: (A) has been provided with sufficient
information with respect to the business of the Company and such documents
relating to the Company as the Purchaser has requested and the Purchaser has
carefully reviewed the same including, without limitation, the Company's Form
10-KSB for the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission ("the Commission"), (B) has been provided with such
additional information with respect to the Company and its business and
financial condition as the Purchaser, or the Purchaser's agent or attorney, has
requested, and (C) has had access to management of the Company and the
opportunity to discuss the information provided by management of the Company and
any questions that the Purchaser had with respect thereto have been answered to
the full satisfaction of the Purchaser.
e. The Purchaser has the requisite corporate power and
authority to enter into this Agreement and the registration rights agreement,
dated as of the date hereof, between the Company and the Purchaser (the
"Registration Rights Agreement").
f. This Agreement and the Registration Rights Agreement and
the transactions contemplated hereby and thereby, have been duly and validly
authorized by the Purchaser; and such agreements, when executed and delivered by
each of the Purchaser and the Company will each be a valid and binding agreement
of the Purchaser, enforceable in accordance with their respective terms, except
to the extent that enforcement of each such agreement may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to creditors' rights
generally and to general principles of equity.
2
<PAGE>
3. REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Purchaser that:
a. Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each of the Company's subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction.
Each of the Company and its subsidiaries is duly qualified as a foreign
corporation in all jurisdictions in which the failure to so qualify would have a
material adverse effect on the Company and its subsidiaries taken as a whole.
Schedule 3(a) lists all subsidiaries of the Company and, except as noted
therein, all of the outstanding capital stock of such subsidiaries is owned of
record and beneficially by the Company.
b. Capitalization. On the date hereof, the authorized capital
of the Company consists of one billion (1,000,000,000) shares of Common Stock,
par value $.00001 per share, of which 303,192,035 shares are issued and
outstanding. Schedule 3(b) sets forth all of the options, warrants and
convertible securities of the Company, and any other rights to acquire
securities of the Company (collectively, the "Derivative Securities") which are
outstanding on the date hereof, including in each case (i) the name and class of
such Derivative Securities, (ii) the issue date of such Derivative Securities,
(iii) the number of shares of Common Stock of the Company into which such
Derivative Securities are convertible as of the date hereof, (iv) the conversion
or exercise price or prices of such Derivative Securities as of the date hereof,
(v) the expiration date of any conversion or exercise rights held by the owners
of such Derivative Securities and (vi) any registration rights associated with
such Derivative Securities.
c. Concerning the Common Stock and the Warrants. The Common
Stock issuable upon conversion of the Debentures, and upon exercise of the
Warrants, when issued, shall be duly and validly issued, fully paid and
non-assessable, will not be subject to preemptive rights and will not subject
the holder thereof to personal liability by reason of being such a holder. There
are currently no preemptive rights of any stockholder of the Company, as such,
to acquire the Units, or the Common Stock issuable to the Purchaser pursuant to
the terms of the Debentures and the Warrants.
d. Reporting Company Status. The Common Stock is registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has duly filed all materials and documents required
to be filed pursuant to all reporting obligations under either Section 13(a) or
15(d) of the Exchange Act, if any, prior to the offer and sale of the Units. The
Common Stock is listed and traded on the OTC Bulletin Board ("OTC" or the
"Bulletin Board"), and the Company is not aware of any pending or contemplated
action or proceeding of any kind to suspend the trading of the Common Stock.
e. Authorized Shares. The Company has available a sufficient
number of authorized and unissued shares of Common Stock as may be necessary to
effect the conversion of the Debentures and the exercise of the Warrants. The
Company understands and acknowledges the potentially dilutive effect to the
Common Stock of the issuance of shares of Common Stock upon
3
<PAGE>
conversion of the Debentures and the exercise of the Warrants. The Company
further acknowledges that its obligation to issue shares of Common Stock upon
conversion of the Debentures and upon exercise of the Warrants is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company and notwithstanding
the commencement of any case under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy
Code"). In the event the Company becomes a debtor under the Bankruptcy Code, the
Company hereby waives to the fullest extent permitted any rights to relief it
may have under 11 U.S.C. ss. 362 in respect of the conversion of the Debentures
and the exercise of the Warrants. The Company agrees, without cost or expense to
the Purchaser, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. ss. 362; provided, however, that the Company makes no
representation that any such relief is attainable.
f. Legality. The Company has the requisite corporate power and
authority to enter into this Agreement and the Registration Rights Agreement,
and to issue and deliver the Debentures, the Warrants, and the Common Stock
issuable upon conversion of the Debentures and the exercise of the Warrants.
g. Transaction Agreements. This Agreement, the Registration
Rights Agreement, the Debentures and the Warrants (collectively, the "Primary
Documents"), and the transactions contemplated hereby and thereby, have been
duly and validly authorized by the Company; this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the other
Primary Documents, when executed and delivered by the Company, will each be, a
valid and binding agreement of the Company, enforceable in accordance with their
respective terms, except to the extent that enforcement of each of the Primary
Documents may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors' rights generally and to general principles of equity.
h. Non-contravention. The execution and delivery of this
Agreement and each of the other Primary Documents, and the consummation by the
Company of the transactions contemplated by this Agreement and each of the other
Primary Documents, does not and will not conflict with or result in a breach by
the Company of any of the terms or provisions of, or constitute a default under,
the Articles of Incorporation or By-laws of the Company, or any material
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which they or any of their
properties or assets are bound, or any existing applicable law, rule, or
regulation or any applicable decree, judgment or order of any court or United
States or foreign federal or state regulatory body, administrative agency, or
any other governmental body having jurisdiction over the Company, its
subsidiaries, or any of their properties or assets. Except as set forth on
Schedule 3(h), neither the filing of the registration statement required to be
filed by the Company pursuant to the Registration Rights Agreement nor the
offering or sale of the Units, the Debentures, or the Warrants as contemplated
by this Agreement gives rise to any rights, other than those which have been
waived or satisfied on or prior to the Closing Date, for or relating to the
registration of any shares of the Common Stock (or will be satisfied upon the
effectiveness of the registration statement covering the Securities contemplated
by the Registration Rights Agreement (the "Required Registration Statement")).
4
<PAGE>
i. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the entry into or the performance of this Agreement and the
other Primary Documents; provided, however, that the performance of this
Agreement and the other Primary Documents is subject to compliance with the
registration requirements of the Commission.
j. SEC Filings. Except as set forth in Schedule 3(j), none of
the reports or documents filed by the Company with the Commission since January
1, 1997 contained, at the time they were filed, any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein, or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
k. Stabilization. Neither the Company, nor any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock.
l. Absence of Certain Changes. Except as disclosed in the
Company's public filings with the Commission, since December 31, 1998, there has
been no material adverse change nor any material adverse development in the
business, properties, operations, financial condition, prospects, outstanding
securities or results of operations of the Company.
m. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Purchaser (i) that could reasonably be
expected to have a material adverse effect upon the condition (financial or
otherwise) or the earnings, business affairs, properties or assets of the
Company or (ii) that could reasonably be expected to materially and adversely
affect the ability of the Company to perform the obligations set forth in the
Primary Documents.
n. Title to Properties; Liens and Encumbrances. The Company
has good and marketable title to all of its material properties and assets, both
real and personal, and has good title to all its leasehold interests, in each
case subject only to mortgages, pledges, liens, security interests, conditional
sale agreements, encumbrances or charges created in the ordinary course of
business.
o. Patents and Other Proprietary Rights. Attached hereto as
Schedule 3(o) is a complete list of all patents, patent applications,
trademarks, service marks and trade names owned by the Company or any of its
subsidiaries and the current status thereof. To the best knowledge of the
Company, the rights of the Company in the scheduled intangible properties do not
conflict with or constitute an infringement on the rights of others.
p. Permits. Except as set forth in Schedule 3(p), the Company
has all franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now conducted, the lack of which would materially
and adversely affect the business or financial
5
<PAGE>
condition of the Company. The Company is not in default in any respect under any
of such franchises, permits, licenses or similar authority.
q. Absence of Litigation. Except as disclosed in the Company's
public filings with the Commission, there is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company or any of its subsidiaries, in which an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole, or the
transactions contemplated by the Primary Documents, or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, the Primary Documents.
r. No Default. Except as set forth in Schedule 3(r), each of
the Company and its subsidiaries is not in default in the performance or
observance of any obligation, covenant or condition contained in any indenture,
mortgage, deed of trust or other instrument or agreement to which it is a party
or by which it or its property may be bound.
s. Transactions with Affiliates. Except as disclosed in the
Company's public filings with the Commission, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors or affiliates that, had they existed on December 31, 1998,
would have been required to be disclosed in the Company's 1998 Annual Report to
stockholders.
t. Employment Matters. The Company is in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including
the regulations and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
u. Insurance. The Company maintains property and casualty,
general liability, personal injury and other similar types of insurance with
financially sound and reputable insurers that is adequate, consistent with
industry standards and the Company's historical claims experience. The Company
has not received notice from, and has no knowledge of any threat by, any insurer
(that has issued any insurance policy to the Company) that such insurer intends
to deny coverage under or cancel, discontinue or not renew any insurance policy
covering the Company or any of its Subsidiaries presently in force.
6
<PAGE>
v. Taxes. All applicable tax returns required to be filed by
the Company and each of its subsidiaries have been prepared and filed in
compliance with all applicable laws, or if not yet filed, have been granted
extensions of the filing dates which extensions have not expired, and all taxes,
assessments, fees and other governmental charges upon the Company, its
subsidiaries, or upon any of their respective properties, income or franchises,
shown in such returns and on assessments received by the Company or its
subsidiaries to be due and payable have been paid, or adequate reserves therefor
have been set up if any of such taxes are being contested in good faith; or if
any of such tax returns have not been filed or if any such taxes have not been
paid or so reserved for, the failure to so file or to pay would not in the
aggregate have a material adverse effect on the business or financial condition
of the Company and its subsidiaries, taken as a whole.
w. Foreign Corrupt Practices Act. Neither the Company nor any
of its directors, officers or other employees has (i) used any Company funds for
any unlawful contribution, endorsement, gift, entertainment or other unlawful
expense relating to any political activity; (ii) made any direct or indirect
unlawful payment of Company funds to any foreign or domestic government official
or employee; (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate,
payoff, influence payment, kickback or other similar payment to any person.
x. Internal Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets.
y. Investment Company Act. The Company is not conducting, and
will not conduct, its business in a manner which would cause it to become, an
"investment company," as defined in Section 3(a) of the Investment Company Act
of 1940, as amended.
z. Agent Fees. Other than a $100,000 payment to Tandem Venture
Partners, Ltd. as placement agent, the Company has not incurred any liability
for any finder's or brokerage fees or agent's commissions in connection with the
offer and sale of the transactions contemplated by this Agreement.
aa. Private Offering. Subject to the accuracy of the
Purchaser's representations and warranties set forth in Section 2 hereof, (i)
the offer, sale and issuance of the Units and the other securities and (ii) the
conversion and/or exercise of such securities into shares of Common Stock, each
as contemplated by this Agreement, are exempt from the registration requirements
of the Securities Act. The Company agrees that neither the Company nor anyone
acting on its behalf will offer any of the Units, the Debentures, the Warrants,
or any similar securities for issuance or sale, or solicit any offer to acquire
any of the same from anyone so as to render the issuance and sale of such
securities subject to the registration requirements of the Securities Act. The
Company has not offered or sold the Units by any form of general solicitation or
general advertising, as such terms are used in Rule 502(c) under the Securities
Act.
7
<PAGE>
bb. Full Disclosure. The representations and warranties of the
Company set forth in this Agreement (and the schedules thereto) do not contain
any untrue statement of a material fact or omit any material fact necessary to
make the statements contained herein, in light of the circumstances under which
they were made, not misleading.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Purchaser acknowledges that,
except as provided in the Registration Rights Agreement, (1) neither the Units,
the Debentures, the Warrants, nor the Common Stock issuable upon conversion of
the Debentures or upon exercise of the Warrants, have been, and are not being,
registered under the Securities Act, and may not be transferred unless (A)
subsequently registered thereunder or (B) they are transferred pursuant to an
exemption from such registration; and (2) any sale of the Debentures, the
Warrants or the Common Stock issuable upon conversion or exchange thereof
(collectively, the "Securities") made in reliance upon Rule 144 under the
Securities Act may be made only in accordance with the terms of said Rule. The
provisions of Section 4(a) and 4(b) hereof, together with the rights of the
Purchaser under this Agreement and the other Primary Documents, shall be binding
upon any subsequent transferee of the Debentures and the Warrants.
b. Restrictive Legend. The Purchaser acknowledges and agrees
that, until such time as the Securities shall have been registered under the
Securities Act or the Purchaser demonstrates to the reasonable satisfaction of
the Company and its counsel that such registration shall no longer be required,
such Securities may be subject to a stop-transfer order placed against the
transfer of such Securities, and such Securities shall bear a restrictive legend
in substantially the following form:
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION SHALL NO
LONGER BE REQUIRED.
c. Filings. The Company undertakes and agrees that it will
make all required filings in connection with the sale of the Securities to the
Purchaser as required by United States laws and regulations, or by any domestic
securities exchange or trading market, and if applicable, the filing of a notice
on Form D (at such time and in such manner as required by the Rules and
Regulations of the Commission), and to provide copies thereof to the Purchaser
promptly after such filing or filings.
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<PAGE>
d. OTC Bulletin Board Listing. The Company agrees and
covenants that it will not seek to have the trading of its Common Stock on the
Bulletin Board suspended or terminated, will use its best efforts to maintain
its eligibility for trading on the Bulletin Board (including, the selection of
one or more broker-dealers as "market makers" in the Common Stock on the
Bulletin Board, and the provision of all information to such parties as they
shall require in order to maintain such eligibility) and, if such trading of its
Common Stock is suspended or terminated, will use its best efforts to requalify
its Common Stock or otherwise cause such trading to resume.
e. Reporting Status. So long as the Purchaser beneficially
owns either (i) at least 10% of the aggregate face amount of the Debentures
originally issued on the Closing Date or (ii) Warrants covering a minimum of 10%
of the shares of Common Stock issuable upon exercise of the Warrants originally
issued on the Closing Date, the Company shall timely file all reports required
to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange
Act and shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.
f. State Securities Filings. The Company shall from time to
time promptly take such action as the Purchaser or any of its representatives,
if applicable, may reasonably request to qualify the Securities for offering and
sale under the securities laws (other than United States federal securities
laws) of the jurisdictions of the United States as shall be so identified to the
Company, and to comply with such laws so as to permit the continuance of sales
therein; provided that in connection therewith, the Company shall not be
required to qualify (i) as a foreign corporation or to file a general consent to
the service of process in any jurisdiction and (ii) in more than five states.
g. Use of Proceeds. The Company will use all of the net
proceeds from the issuance of the Units for research and development with
respect to the Company's products, and for working capital.
h. Reservation of Common Stock. The Company will at all times
have authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the conversion of the Debentures and the
exercise of the Warrants. The Company will use its best efforts at all times to
maintain a number of shares of Common Stock so reserved for issuance that is no
less than two (2) times the number that is then actually issuable upon the
conversion of the Debentures and the exercise in full of the Warrants.
i. Restrictions on Certain Future Financings. (a) The
provisions of this Section 4i shall apply at any time during the period ending
on the date that is one hundred and eighty (180) days following the date of
effectiveness of the Required Registration Statement; provided that if the
Purchaser shall be unable to sell the Common Stock pursuant to the Required
Registration Statement for any number of days after the effectiveness of the
Required Registration Statement, the provisions of this Section 4i shall apply
for an additional number of days equal to the number of days during which the
Purchaser is unable to convert the Debentures as aforesaid. In the event the
Company determines to offer to issue its equity securities (including any
security convertible into, or exercisable or exchangeable into, or exercisable
for, such an equity security) in a financing, then the Company shall promptly
give notice of such offer to the Purchaser (the "Notice of Offer") stating
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<PAGE>
the terms of the offer, including the securities proposed to be sold (the
"Proffered Securities"), the proposed purchase price of the Proffered Securities
(the "Offer Price") and other material terms pertaining thereto. The Purchaser
shall have the right to purchase (the "Purchase Option"), exercisable by notice
of exercise given within 15 days after the Notice of Offer, the Proffered
Securities for the Offer Price. A notice of exercise shall state the time and
date (not later than 30 days after notice of exercise is given) (the "Sale
Date") for consummation of the purchase of the Proffered Securities. Upon the
giving of a notice of exercise, the exercising party shall be obligated on the
Sale Date to purchase the Proffered Securities, and the Company shall be
obligated on such date to sell the same in accordance herewith.
(b) The closing of the purchase and sale of Proffered
Securities pursuant to the exercise of the Purchase Option shall be held at the
principal office of the Company, at the Sale Date (or such other date and time
agreed to between the parties). At such closing, (i) the Purchaser shall deliver
to the Company payment for the Proffered Securities in immediately available
U.S. funds and (ii) the Company shall issue and deliver to the Purchaser such
instruments as the Purchaser shall reasonably request to effect such
transaction.
(c) If the option periods provided for in Section 4i(a) shall
expire without prior exercise of the related options, the Company may sell the
Proffered Securities to any other investor within 90 days after such expiration
at the Offer Price and upon the terms set forth in the Notice of Offer, or on
terms more favorable to the Company than those set forth in the Notice of Offer.
In the event that the Offer Price exceeds $2 million, upon the closing of such
sale pursuant to this Section 4i(c), the rights granted to the Purchaser in
Section 4i(a) shall terminate.
j. Additional Registration Statements. At any time during the
period ending on the first date that follows a total of 90 days following the
effectiveness of the Required Registration Statement during which there has been
no (i) Registration Default or Blackout Event (each as defined in the
Registration Rights Agreement) relating to such Required Registration Statement
or (ii) any other delay in the ability of the Purchaser to sell the Common Stock
pursuant to the Required Registration Statement, the Company agrees that it will
not cause any registration statement (other than the Required Registration
Statement) to be declared effective by the Commission.
k. Ownership. At no time shall the Purchaser (including its
officers, directors and affiliates) maintain in the aggregate beneficial
ownership (as defined for purposes of Section 16 of the Exchange Act) of shares
of Common Stock in excess of 9.9% of the Company's outstanding Common Stock
unless the Purchaser gives the Company at least sixty-one days notice that it
intends to go higher.
l. Return of Debentures on Conversion and Warrants on
Exercise. (i) Upon any conversion by the Purchaser of less than all of the
aggregate principal amount outstanding under a Debenture pursuant to the terms
thereof, the Company shall issue and deliver to the Purchaser within seven (7)
days of the Conversion Date (as defined in the Debenture), a new certificate or
certificates for the principal amount of such Debenture which the Purchaser has
not yet elected to convert (with the number of and denomination of such new
certificate(s) designated by the Purchaser).
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(ii) Upon any partial exercise by the Purchaser of the
Warrants, the Company shall issue and deliver to the Purchaser within seven (7)
days of the date on which such Warrants are exercised, a new Warrant or Warrants
representing the number of adjusted Shares covered thereby, in accordance with
the terms thereof.
m. Replacement Debentures and Warrants. (i) The certificate
representing the Debentures held by the Purchaser shall be exchangeable, at the
option of the Purchaser, at any time and from time to time with reasonable
frequency and upon reasonable notice at the office of Company, for certificates
with different denominations representing an equal aggregate principal amount of
Debentures, as requested by the Purchaser upon surrendering the same. No service
charge will be made for such registration or transfer or exchange.
(ii) The Warrants will be exchangeable, at the option of the
Purchaser, at any time and from time to time with reasonable frequency and upon
reasonable notice at the office of the Company, for other Warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of shares of Common Stock as are purchasable under such Warrants.
No service charge will be made for such transfer or exchange.
n. Dividends or Distributions; Purchases of Equity Securities.
So long as either (i) at least 10% of the aggregate face amount of the
Debentures originally issued on the Closing Date or (ii) Warrants covering a
minimum of 10% of the shares of Common Stock issuable upon exercise of the
Warrants issued on the Closing Date, remain outstanding, the Company agrees that
it shall not (a) declare or pay any dividends or make any distributions to any
holder or holders of Common Stock, or (b) purchase or otherwise acquire for
value, directly or indirectly, any shares of Common Stock or equity security of
the Company.
o. No Senior Indebtedness. Until the six month anniversary of
the Closing Date, the Company agrees that neither the Company nor any direct or
indirect subsidiary of the Company shall create, incur, assume, guarantee,
secure or in any manner become liable in respect of any indebtedness, or permit
any liens, claims or encumbrances to exist against the Company or any direct or
indirect subsidiary of the Company or any of their assets, unless pari passu or
junior to the Debentures in all respects.
p. Maintenance of Corporate Existence, Properties and Leases;
Taxes; Insurance. (i) The Company shall and shall cause each of its Material
Subsidiaries (as hereinafter defined) to maintain in full force and effect its
corporate existence, rights and franchises and all material terms of licenses
and other rights to use licenses, trademarks, trade names, service marks,
copyrights, patents or processes owned or possessed by it and necessary to the
conduct of its business. For purposes of this Agreement, "Material Subsidiary"
means any subsidiary with respect to which the Company has directly or
indirectly invested, loaned, advanced or guaranteed the obligations of, an
aggregate amount exceeding fifteen percent (15%) of the Company's gross assets,
or the Company's proportionate share of the assets or net income of which (based
on the subsidiary's most recent financial statements) exceed fifteen percent
(15%) of the Company's gross assets or net income, respectively, or the gross
revenues of which exceed fifteen percent (15%) of the gross
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<PAGE>
revenues of the Company based upon the most recent financial statements of such
subsidiary and the Company.
(ii) The Company shall and shall cause each of its Material
Subsidiaries to keep each of its properties necessary to the conduct of its
business in good repair, working order and condition, reasonable wear and tear
excepted, and from time to time make all needful and proper repairs, renewals,
replacements, additions and improvements thereto; and the Company shall and
shall cause its subsidiaries to at all times comply with each material provision
of all leases to which it is a party or under which it occupies property.
(iii) The Company shall and shall cause each of its
subsidiaries to promptly pay and discharge, or cause to be paid and discharged
when due and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon the income, profits, assets, property or business of the
Company and its subsidiaries, and all claims or indebtedness (including, without
limitation, claims or demands of workmen, materialmen, vendors, suppliers,
mechanics, carriers, warehousemen and landlords) which, if unpaid might become a
lien upon the assets or property of the Company or subsidiary; provided,
however, that any such tax, assessment, charge or levy need not be paid if the
validity thereof shall be contested timely and in good faith by appropriate
proceedings, if the Company or subsidiary shall have set aside on its books
adequate reserves with respect thereto, and the failure to pay shall not be
prejudicial in any material respect to the holders of the Securities, and
provided, further, that the Company or subsidiary will pay or cause to be paid
any such tax, assessment, charge or levy forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security therefor.
The Company shall and shall cause its subsidiaries to pay or cause to be paid
all other indebtedness incident to the operations of the Company or
subsidiaries.
(iv) The Company shall and shall cause each of its
subsidiaries to keep its assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by theft, fire,
explosion and other risks customarily insured against by companies in the line
of business of the Company or its subsidiaries, in amounts sufficient to prevent
the Company or its subsidiaries from becoming a co-insurer of the property
insured; and the Company shall and shall cause its subsidiaries to maintain,
with financially sound and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated or as may be
required by law, including, without limitation, general liability, fire and
product liability insurance as may be required pursuant to any license agreement
to which the Company or its subsidiaries is a party or by which it is bound.
q. Basic Financial Information. The Company shall furnish the
following reports to the Purchaser (or any transferee of any Securities), so
long as the Purchaser (or any such transferee) beneficially owns at least (i)
10% of the face amount of the Debentures originally issued on the Closing Date
or (ii) Warrants covering a minimum of 10% of the shares of Common Stock
issuable upon exercise of the Warrants issued on the Closing Date:
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<PAGE>
(i) within forty-five (45) days after the end of each of the
quarterly accounting periods in each fiscal year, unaudited consolidated
statements of income and retained earnings of the Company and its subsidiaries
for such quarterly period and for the period from the beginning of such fiscal
year to the end of such quarterly period, together with consolidated balance
sheets of the Company and its subsidiaries as at the end of each quarterly
period, setting forth in each case comparisons to corresponding periods in the
preceding fiscal year, which statements will be prepared in accordance with
generally accepted accounting principles, consistently applied;
(ii) within ninety (90) days after the end of each fiscal
year, consolidated statements of income and retained earnings of the Company and
its subsidiaries for the period from the beginning of each fiscal year to the
end of such fiscal year, and consolidated balance sheets as at the end of such
fiscal year, setting forth in each case in comparative form corresponding
figures for the preceding fiscal year, which statements will be prepared in
accordance with generally accepted accounting principles, consistently applied
(except as approved by the accounting firm examining such statements and
disclosed by the Company), and will be accompanied by a report thereon of
certified public accountants;
(iii) promptly as legally permitted, any additional reports or
other detailed information concerning significant aspects of the operations and
condition, financial or otherwise, of the Company and its subsidiaries, given to
the Company by its independent accountants;
(iv) within ten (10) days after transmission or receipt
thereof, copies of all financial statements, proxy statements and reports which
the Company sends to its stockholders or directors, and copies of all
registration statements and all regular, special or periodic reports which it or
any of its officers or directors files with the Commission or with any
securities exchange on which any of the securities of the Company are then
listed or proposed to be listed, copies of all press releases and other
statements made generally available by the Company to the public concerning
material developments in the business of the Company and its subsidiaries and
copies of material communications sent to or received from stockholders,
directors or committees of the Board of Directors of the Company or any of its
subsidiaries and copies of all material communications sent to and received from
any lender to the Company, all to the extent the Company is legally permitted to
disclose such materials; and
(v) with reasonable promptness such other information and
financial data concerning the Company as any person entitled to receive
materials under this Section 5q may reasonably request.
r. Notice of Adverse Change. The Company shall promptly give
notice to all holders of any Securities (but in any event within seven (7) days)
after becoming aware of the existence of any condition or event which
constitutes, or the occurrence of, any of the following:
(i) any Event of Default under the Debentures;
(ii) the institution of an action, suit or proceeding against
the Company before any court, administrative agency or arbitrator, including,
without limitation, any action of a foreign
13
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government or instrumentality, which, if adversely decided, could materially
adversely affect the business, prospects, properties, financial condition or
results of operations of the Company, whether or not arising in the ordinary
course of business; or
(iii) any information relating to the Company which could
reasonably be expected to materially and adversely affect the assets, property,
business or condition (financial or otherwise) of the Company or its ability to
perform the terms of this Agreement. Any notice given under this Section 5r
shall specify the nature and period of existence of the condition, event,
information, development or circumstance, the anticipated effect hereof and what
actions the Company has taken and/or proposes to take with respect thereto.
s. Compliance With Agreements; Compliance With Laws. The
Company and its subsidiaries shall comply with the material terms and conditions
of all material agreements, commitments or instruments to which the Company or
any of its subsidiaries is a party or by which it or they may be bound. The
Company shall and shall cause each of its subsidiaries to duly comply in all
material respects with any material laws, ordinances, rules and regulations of
any foreign. federal, state or local government or any agency thereof, or any
writ, order or decree, and conform to all valid requirements of governmental
authorities relating to the conduct of their respective businesses, properties
or assets, including, but not limited to, the requirements of ERISA, the
Environmental Protection Act, the Occupational Safety and Health Act, the
Foreign Corrupt Practices Act and the rules and regulations of each of the
agencies administering such acts.
t. Protection of Licenses, etc. The Company shall maintain,
defend and protect to the best of its ability licenses and sublicences (and to
the extent the Company is a licensee or sublicensee under any license or
sublicense, as permitted by the license or sublicense agreement), trademarks,
trade names, service marks, patents and applications therefor and other
proprietary information owned or used by it and shall keep duplicate copies of
any licenses, trademarks, service marks or patents owned or used by it, if any,
at a secure place selected by the Company.
u. Accounts and Records; Inspections. (i) The Company shall
keep true records and books of account in which full, true and correct entries
will be made of all dealings or transactions in relation to the business and
affairs of the Company and its subsidiaries in accordance with generally
accepted accounting principles applied on a consistent basis.
(ii) The Company shall permit each holder of any Securities or
any of such holder's officers, employees or representatives during regular
business hours of the Company, upon reasonable notice and as often as such
holder may reasonably request, to visit and inspect the offices and properties
of the Company and its subsidiaries and (i) to make extracts or copies of the
books, accounts and records of the Company or its subsidiaries, and (ii) to
discuss the affairs, finances and accounts of the Company and its subsidiaries,
with the Company's (or subsidiary's) directors and officers, its independent
pubic accountants, consultants and attorneys.
(iii) Nothing contained in this Section 5u shall be construed
to limit any rights which a holder of any Securities (a "Holder") may have with
respect to the books and records of the Company and its subsidiaries, to inspect
its properties or to discuss its affairs, finances and accounts.
14
<PAGE>
v. Further Assurances. From time to time the Company shall
execute and deliver to the Purchaser and the Purchaser shall execute and deliver
to the Company such other instruments, certificates, agreements and documents
and take such other action and do all other things as may be reasonably
requested by the other party in order to implement or effectuate the terms and
provisions of this Agreement and any of the Securities.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company warrants that no instruction, other than the
instructions referred to in this Section 5 and stop transfer instructions to
give effect to Sections 4(a) and 4(b) hereof prior to the registration and sale
of the Warrants and shares of Common Stock in the manner contemplated by the
Registration Rights Agreement, will be given by the Company to the transfer
agent and that the shares of Common Stock issuable upon conversion of the
Debentures or upon exercise of the Warrants shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement and applicable
law. Nothing in this Section shall affect in any way the Purchaser's obligations
and agreement to comply with all applicable securities laws upon resale of the
Securities. If the Purchaser provides the Company with an opinion of counsel
reasonably satisfactory (as to both the identity of such counsel and the content
of such opinion) to the Company and its counsel that registration of a resale by
the Purchaser of any of the Securities in accordance with clause (1)(B) of
Section 4(a) of this Agreement is not required under the Securities Act, the
Company shall permit the transfer of the Securities and, in the case of the
Common Stock, promptly instruct the Company's transfer agent to issue one or
more certificates for Common Stock without legend in such names and in such
denominations as specified by the Purchaser.
b. The Purchaser shall exercise its right to convert the
Debentures or to exercise the Warrants by faxing an executed and completed
Notice of Conversion or Subscription Form, as applicable, to the Company, and
delivering within three (3) business days thereafter, the original Notice of
Conversion (and the related original debentures) or Subscription Form (and the
related original Warrants) to the Company by hand delivery or by express
courier, duly endorsed. Each date on which a Notice of Conversion or
Subscription Form is faxed in accordance with the provisions hereof shall be
deemed a "Conversion Date." The Company will transmit the certificates
representing the Common Stock issuable upon conversion of any Debenture or upon
exercise of any Warrants (together with the debentures not so converted, or the
Warrants not so exercised) to the Purchaser via express courier as soon as
practicable, but in all events no later than seven (7) days in the case of
conversion of the Debentures or five (5) business days in the case of the
exercise of any Warrant after the Conversion Date (each such delivery date, is
referred to herein as a "Delivery Date"). For purposes of this Agreement, such
conversion of the Debentures or the exercise of the Warrants shall be deemed to
have been made immediately prior to the close of business on the Conversion
Date.
c. (i) The Company understands that a delay in the issuance of
Common Stock beyond the applicable Delivery Date could result in an economic
loss to the Purchaser. As a result, the Company agrees to pay to the Purchaser
for late issuance of Common Stock upon conversion of
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<PAGE>
the Debentures or upon exercise of the Warrants (each such event a "Conversion
Default") the Periodic Amount (as defined below).
(ii) The "Periodic Amount" to be paid by the Company to the
Purchaser as of each thirty (30) day period during which a Conversion Default
shall be in effect (each such period, a "Default Period") shall be equal to two
percent (2%) of the purchase price paid by the Purchaser (the "Purchase Price")
for all of the Units; provided that, with respect to any Default Period during
which the relevant Conversion Defaults shall have been cured, the Periodic
Amount shall be pro rated for the number of days during such period during which
the Conversion Defaults were pending; and provided, however, that the payment of
such Periodic Amounts shall not relieve the Company from its continuing
obligations to convert the Warrants and Shares pursuant to the terms thereof.
(iii) Each Periodic Amount shall be payable by the Company in
cash or other immediately available funds to the Purchaser monthly, without
demand therefor by the Purchaser; provided that, if the Periodic Amount for any
Default Period shall exceed an aggregate of $100,000, the Company shall only be
obligated to pay an aggregate of $100,000 of the such amount in cash, and the
remainder in Shares of Common Stock (such amounts of cash and stock shall be pro
rated for the Purchaser in accordance with the percentage it holds of the
aggregate principal amount outstanding under the Debentures). To the extent any
portion of the Periodic Amount shall be paid in Shares, such Shares shall be
issued at the Applicable Conversion Price (as defined in the Debentures). If the
Company shall not remit the Periodic Amounts payable to Purchaser as set forth
in paragraph (ii) above, the Company will pay Purchaser reasonable costs of
collection, including attorneys' fees, in addition to the Periodic Amounts.
(iv) The parties acknowledge that the damages which may be
incurred by the Purchaser upon a Conversion Default may be difficult to
ascertain. The parties agree that the Periodic Amount represents a reasonable
estimate on the part of the parties, as of the date of this Agreement, of the
amount of such damages.
d. The Company shall pay any payments that are payable to the
Purchaser pursuant to this Section 5 in immediately available funds upon demand.
Nothing herein shall limit the Purchaser's right to pursue actual damages for
the Company's failure to so issue and deliver Common Stock to the Purchaser.
Furthermore, in addition to any other remedies which may be available to the
Purchaser, in the event that the Company fails for any reason to effect delivery
of such Common Stock within five (5) business days after the relevant Delivery
Date, the Purchaser will be entitled to revoke the relevant Notice of Conversion
or Form of Election to Purchase by delivering a notice to such effect to the
Company, whereupon the Company and the Purchaser shall each be restored to their
respective positions immediately prior to delivery of such Notice of Conversion
or Subscription Form. For purposes of this Section 5, "business day" shall mean
any day in which the financial markets of New York are officially open for the
conduct of business therein.
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6. EXPENSES.
The Company covenants and agrees with the Purchaser that the
Company will pay or cause to be paid the following: (a) the fees, disbursements
and expenses of the Purchaser's counsel in connection with the issuance of the
Securities payable on the Closing Date, (b) all expenses in connection with
registration or qualification of the Securities for offering and sale under
state securities laws as provided in Section 4(f) hereof, and (c) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section, including the
fees and disbursements of the Company's counsel, accountants and other
professional advisors, if any; provided that the Company shall not be required
to pay more than $20,000 for the fees, disbursements and expenses under clause
(a) of this Section 6. If the Company fails to satisfy its obligations or to
satisfy any condition set forth in this Agreement, as a result of which the
Securities are not delivered to the Purchaser on the terms and conditions set
forth herein, the Company shall reimburse the Purchaser for any out-of-pocket
expenses reasonably incurred in making preparations for the purchase, sale and
delivery of the Securities not so delivered.
7. GOVERNING LAW; MISCELLANEOUS
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York, without regard to principles
of conflict of laws. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement or any of the
transactions contemplated hereby, and hereby waives, to the maximum extent
permitted by law, any objection, including any objections based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions. This
Agreement may be signed in one or more counterparts, each of which shall be
deemed an original. The headings of this Agreement are for convenience of
reference only and shall not form part of, or affect the interpretation of this
Agreement. This Agreement and each of the Primary Documents have been entered
into freely by each of the parties, following consultation with their respective
counsel, and shall be interpreted fairly in accordance with its respective
terms, without any construction in favor of or against either party. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
unenforceability of this Agreement in any other jurisdiction. This Agreement
shall inure to the benefit of, and be binding upon the successors and assigns of
each of the parties hereto, including any transferees of the Securities. This
Agreement may be amended only by an instrument in writing signed by the party to
be charged with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
8. NOTICES.
Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free
transmission) or two business days following deposit of such notice
17
<PAGE>
with an internationally recognized courier service, with postage prepaid and
addressed to each of the other parties thereunto entitled at the following
addresses, or at such other addresses as a party may designate by five days
advance written notice to each of the other parties hereto.
Company: ADVANCED VIRAL RESEARCH CORP.
200 Corporate Boulevard South
Yonkers, New York 10701
Att.: Shalom Z. Hirschman, M.D.
Tel.: (914) 376-7383
Fax: (914) 376-7368
and to:
ADVANCED VIRAL RESEARCH CORP.
1250 E. Hallandale Beach Blvd.
Hallandale, Florida 33009
Att.: William Bregman
Tel.: (954) 458-7636
Fax: (954) 458-4715
With a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
250 Park Avenue
New York, New York 10177
Att: Robert E. Fischer, Esq.
Tel.: (212) 986-1116
Fax: (212) 986-0604
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Purchaser: FOCUS INVESTORS LLC
c/o WEC Asset Management LLC
One World Trade Center
Suite 4563
New York, New York 10048
Att.: Ethan E. Benovitz
Tel.: (212) 775-9299
Fax: (212) 775-9311
With a copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Att.: Steven Huttler, Esq.
Tel.: (212) 479-6136
Fax: (212) 479-6275
9. SURVIVAL.
The agreements, covenants representations and warranties of
the Company and the Purchaser shall survive the execution and delivery of this
Agreement and the delivery of the Securities hereunder.
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IN WITNESS WHEREOF, this Securities Purchase Agreement has been duly
executed by each of the undersigned.
ADVANCED VIRAL RESEARCH CORP.
By:
--------------------------------------------
Name: Shalom Z. Hirschman
Title: President and Chief Executive Officer
FOCUS INVESTORS LLC
By: WEC Asset Management LLC, Manager
By:
----------------------------------------
Name: Ethan E. Benovitz
Title: Managing Director
20
EXHIBIT 4.19
EXHIBIT A
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION SHALL NO LONGER BE REQUIRED.
FORM OF 7% CONVERTIBLE DEBENTURE DUE AUGUST 3, 2009
$2,000,000 August 3, 1999
New York, New York
1. Consideration. FOR VALUE RECEIVED, ADVANCED VIRAL RESEARCH
CORP., a Delaware corporation (the "undersigned" or the "Company"), hereby
promises to pay to the order of Focus Investors LLC, at its offices located at
c/o West End Management, LLC, One World Trade Center, Suite 4563, New York, NY
10048 or at such other place as the holder hereof (the "holder" or the
"Registered Holder") shall designate to the undersigned in writing, in lawful
money of the United States of America or in New York Clearing House Funds, the
principal amount of two million Dollars ($2,000,000), and to pay interest
(computed on the basis of a 360-day year and the actual number of days elapsed)
on the unpaid principal amount hereof at the rate of seven (7%) percent per
annum. The undersigned promises to pay the said principal sum and interest in
accordance with the terms of this Debenture.
2. Payment. Until this Debenture is completely retired the
undersigned shall make payments of accrued interest on this Debenture on the
first day of January and July in each year (commencing with January 1, 2000),
computed at the rate of 7% per annum on the unpaid principal balance of this
Debenture for the period from the date of this Debenture until the date of such
interest payment. On August 3, 2009 the undersigned shall pay the holder all
unpaid principal and interest on this Debenture.
Principal and interest shall be payable at the most recent
address as the Registered Holder shall have designated to the Company in
writing. No payment of the principal of the Debenture may be made prior to the
Maturity Date by the Company without the consent of the Registered Holder,
except as otherwise provided herein.
3. Overdue Interest Payments. Interest on the indebtedness
evidenced by this
<PAGE>
Debenture after default or maturity accelerated or otherwise shall be due and
payable at the rate of ten (10%) percent per annum, subject to the limitations
of applicable law.
4. Holidays. If this Debenture or any installment hereof
becomes due and payable on a Saturday, Sunday or public holiday under the laws
of the State of New York, the due date hereof shall be extended to the next
succeeding business day and interest shall be payable at the rate of seven (7%)
percent per annum during such extension. All payments received by the holder
shall be applied first to the payment of all accrued interest payable hereunder.
5. Issuance of Debentures. This Debenture has been issued by
the Company pursuant to the authorization of the Board of Directors of the
Company (the "Board") and issued pursuant to a Securities Purchase Agreement,
dated as of August 3, 1999, by and between the Company and the Purchasers
identified therein (the "Securities Purchase Agreement"). Pursuant to the
Securities Purchase Agreement, the Company issued units (the "Units"), each Unit
consisting of $100,000 principal amount of the Debentures and warrants to
purchase (the "Warrants") 50,000 shares of the Company's common stock, par value
$.00001 per share (the "Common Stock"). Pursuant to the Securities Purchase
Agreement, up to $2,000,000 aggregate principal amount of Debentures may be
issued. The Securities Purchase Agreement contains certain additional terms that
are binding upon the Company and each Registered Holder of the Debentures. A
copy of the Securities Purchase Agreement may be obtained by any registered
holder of the Debentures from the Company upon written request. Capitalized
terms used but not defined herein shall have the meanings set forth in the
Securities Purchase Agreement. The Debentures, together with any debentures from
time to time issued in replacement thereof, whether pursuant to transfer and
assignment, partial conversion thereof or otherwise, are collectively referred
to herein as the "Debentures."
6. Conversion. (a) Subject to and in compliance with the
provisions hereof, the holder shall have the right to convert all or a portion
of the outstanding principal amount of this Debenture into such number of shares
of Common Stock (the shares of Common Stock issuable upon conversion of this
Debenture are hereinafter referred to as the "Conversion Shares") as shall equal
the quotient obtained by dividing (x) the principal amount of this Debenture to
be converted by (y) the Applicable Conversion Price (as hereinafter defined) and
by surrender of this Debenture, such surrender to be made in the manner provided
herein; provided, however, that the right to convert outstanding principal of
this Debenture shall terminate at the close of business on the third calendar
day preceding the date fixed for prepayment unless the Company shall default in
making such prepayment.
(b) For purposes hereof the term "Applicable
Conversion Price" shall mean the lesser of (i) $.2461 (the "Fixed Price") and
(ii) the product obtained by multiplying (x) the Average Closing Price (as
hereinafter defined) by (y) .75.
For purposes hereof the "Average Closing Price" with
respect to any
2
<PAGE>
conversion elected to be made by the holder shall be the average of the daily
closing prices (each such price is referred to individually as a "Floating
Reference Price" and, collectively, as the "Floating Reference Prices") for the
three consecutive trading days, as selected by the holder, out of the ten
trading days immediately preceding the date on which the holder gives the
Company a written notice of the holder's election to convert outstanding
principal of this Debenture. The closing price on any trading day shall be (a)
if the Common Stock is then listed or quoted on either the NASD Bulletin Board,
the NASDAQ SmallCap Market or the NASDAQ National Market, the reported closing
bid price for the Common Stock as reported by Bloomberg, L.P. ("Bloomberg") or
The Wall Street Journal (the "Journal") on such day (or, if not so reported, as
otherwise reported by The Nasdaq Small Cap Market or the NASD Bulletin Board, as
the case may be), (b) if the Common Stock is listed on either the American Stock
Exchange or New York Stock Exchange, the last reported sales price for the
Common Stock on such exchange on such day as reported by Bloomberg or the
Journal or (c) if no such prices are reported for the Common Stock by Bloomberg
or the Journal, then the average of such prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the prices of the Common Stock cannot be calculated on such date on any of
the foregoing bases, such prices on such date shall be the fair market value as
mutually determined by the Company and the Registered Holder for which the
calculation is required in order to determine the Applicable Conversion Price;
provided, however, that if the Company and the Registered Holder are unable to
mutually determine the fair market value, such fair market value shall be
determined by a nationally recognized investment banking firm or firm of
independent chartered accountants of recognized standing (which firm may be the
firm that regularly examines the financial statements of the Company (an
"Appraiser") selected in good faith by the Board and holders of a majority in
interest of the Debentures. "Trading day" shall mean any day on which the
Company's Common Stock is traded for any period on the principal securities
exchange or other securities market on which the Common Stock is then being
traded.
(c) If, during any period following the issuance of
this Debenture, as a result of the occurrence of any of the events set forth in
Section 3(f) or 3(g) of the Registration Rights Agreement, dated as of August 3,
1999, by and between the Company and the purchasers set forth therein (the
"Registration Rights Agreement"), the Purchasers set forth therein is not able
to sell shares of Common Stock issuable upon conversion of this Debenture
pursuant to a registration statement filed pursuant to such agreement, the
Registered Holder shall have the right, for any purpose under this Debenture
during such period and thereafter, to designate as the Applicable Conversion
Price any Conversion Price that would have been applicable during such period
had the Registered Holder delivered a Notice of Conversion with respect to any
portion of this Debenture. "Conversion Date" shall have the meaning given such
term in Section 5(b) of the Securities Purchase Agreement.
(d) The Registered Holder shall convert this
Debenture in accordance with Section 5(b) of the Securities Purchase Agreement.
If the Company fails to deliver to the holder a certificate or certificates for
shares of Common Stock in the period set forth in the Securities Purchase
Agreement, the Company shall pay to the holder a penalty. The penalty shall be
$1,000
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if the certificate or certificates are not delivered until the fourth business
day after the delivery of the Notice of Conversion and the penalty shall double
every business day until the certificate or certificates are so delivered, but
in no event shall such penalty exceed $100,000. For example, if the certificates
are delivered on the sixth business day after delivery of the Notice of
Conversion and surrender of the Debenture the penalty shall be $4,000.
(e) If the entire outstanding principal amount of
this Debenture is not converted, the Company shall also issue and deliver to
such holder a new Debenture of like tenor in the principal amount equal to the
principal which was not converted and dated the effective date of conversion.
Each conversion shall be deemed to have been effected immediately prior to the
close of business on the date on which a Notice of Conversion shall have been
delivered as aforesaid, and the person or persons in whose name or names any
certificate of certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby at such time on such date.
(f) All shares of Common Stock delivered upon
conversion of this Debenture will, upon delivery, be duly authorized, validly
issued and fully paid and nonassessable.
(g) No fractional shares of Common Stock shall be
issued upon conversion of this Debenture. Instead of any fractional share of
Common Stock which would otherwise be deliverable upon the conversion of a
principal of this Debenture the Company shall pay to the holder an amount in
cash (computed to the nearest cent) equal to the Average Closing Price
multiplied by the fraction of a share of Common Stock represented by such
fractional interest.
(h) The issuance of certificates for shares of Common
Stock upon any conversion of this Debenture shall be made without charge to the
payee hereof for any tax or other expense in respect to the issuance of such
certificates, all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued only in the name of the registered holder of
this Debenture.
7. Redemption by Company. (a) If while this Debenture is
outstanding there shall occur a Change in Control of the Company (as defined
below), then, at the option of the Registered Holder, the Company shall, on the
effective date of and subject to the consummation of such Change in Control,
redeem this Debenture for cash from the Registered Holder at a redemption price
equal to 125% of the aggregate principal and accrued interest outstanding under
this Debenture. Nothing in this subsection shall limit the Registered Holder's
right to convert this Debenture on or prior to such Change in Control. For
purposes hereof, a "Change in Control" shall be deemed to have occurred if (A)
any person or group (as defined for purposes of Regulation 13D of the Securities
Exchange Act of 1934, as amended) (excluding persons who on the date hereof are
beneficial owners of shares of the Company's voting stock and affiliates of such
persons) shall have become the beneficial owner or owners of more than 50% of
the outstanding voting stock of the Company; (B) there shall have occurred a
merger or consolidation in which the Company or an
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affiliate of the Company is not the survivor or in which holders of the Common
Stock of the Company shall have become entitled to receive cash, securities of
the Company other than voting common stock or securities of any other person;
(C) at any time persons constituting the Existing Board of Directors cease for
any reason whatsoever to constitute at least a majority of the members of the
Board of Directors of the Company; or (D) there shall have occurred a sale of
all or substantially all the assets of the Company. For purposes hereof, the
term "Existing Board of Directors" shall mean the persons constituting the Board
of Directors of the Company on the date hereof, together with each new director
whose election, or nomination for election by the Company's stockholders is
approved by a vote of the majority of the members of the Existing Board of
Directors who are in office immediately prior to the election or nomination of
such director.
(b) If the Company elects to redeem the Debentures
pursuant to any of the terms or conditions set forth in this Section 7, the
Company shall remit the redemption price to the Registered Holder thereof
immediately upon such redemption.
8. Covenants.
(a) The Company will pay all taxes, assessments and
governmental charges lawfully levied or assessed upon it, its property and any
part thereof, and upon its income for profits, and any part thereof, before the
same shall become delinquent; and will duly observe, and conform to, all lawful
requirements of any governmental authority relative to any of its property, and
all covenants, terms and conditions upon or under which any of its property is
held; provided that nothing in this Section shall require the Company to observe
or conform to any requirement of governmental authority or to pay any such tax,
assessment or governmental charges so long as the validity thereof shall be
contested in good faith.
(b) Subject to the other provisions of this
Debenture, the Company at all times will maintain its corporate existence and
right to carry on its business and will duly procure all necessary renewals and
extensions thereof and use its best efforts to maintain, preserve and renew all
of its rights, powers, privileges and franchises; provided, however, that
nothing herein contained shall be construed to prevent the Company from ceasing
or omitting to exercise any rights, powers, privileges or franchises which, in
the judgment of the Board, can no longer be profitably exercised, nor to prevent
the consolidation, merger or liquidation of any subsidiary or subsidiaries of
the Company with or into the Company.
(c) The Company will at no time close its stock
transfer books against the transfer of any shares of Common Stock issued or
issuable upon the conversion of, or in lieu of payments on, the Debentures, in
any manner which interferes with the timely conversion of such Debentures.
(d) As used in this Debenture, the term "Common
Stock" shall mean the Company's authorized common stock, par value $0.00001. The
Company shall not, without the
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prior written consent of the Registered Holder of this Debenture, issue any
shares of its capital stock, other than as permitted by Section 4 of the
Securities Purchase Agreement or in exchange for Debentures as provided
hereunder. The term "Common Stock" includes all stock of any class or classes
(however designated) of the Company, authorized on or after the date hereof, the
holders of which shall have the right, without limitation as to amount, either
to all or to a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on any shares
entitled to preference, and the holders of which shall ordinarily be entitled to
vote for the election of the directors of the Company.
(e) The Company will not, by amendment of its
Articles of Incorporation or By-laws or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder or pursuant to the Securities Purchase Agreement by the Company, and
will at all times assist in good faith in the carrying out of all the provisions
of this Debenture and the Securities Purchase Agreement and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the Registered Holders of the Debentures against
impairment.
(f) In the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each
Registered Holder of the Debentures, at least fifteen (15) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
9. Limitation on Certain Corporate Acts. The Company hereby
covenants and agrees that upon any consolidation or merger or upon the transfer
of all or substantially all of the property or assets of the Company, the due
and punctual payment of the principal and interest on all the Debentures
according to their tenor and the due and punctual performance and observance of
all the terms, covenants and conditions of the Debentures and the Securities
Purchase Agreement to be kept and performed by the Company shall be expressly
assumed by the corporation formed by such consolidation, or into which the
Company shall have merged or by the purchaser of such property or assets; and
such assumption shall be an express condition of such merger or consolidation
agreement or agreement for the transfer of property or assets.
10. Events of Default. In case one or more of the following
events of default shall have occurred:
(a) (i) default in the due and punctual payment of
principal of any of the Debentures as and when the same becomes due and payable
either at maturity or otherwise or (ii)
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default in the due and punctual payment of interest upon any of the Debentures
as and when the same becomes due and payable either at maturity or otherwise;
provided, however, that a default in the due and punctual payment of interest
upon any of the Debentures for any two three-day periods over the term of the
Debentures shall not be deemed an event of default;
(b) failure to deliver the shares of Common Stock
required to be delivered upon conversion of Debentures in the manner and at the
time required by Section 5 of the Securities Purchase Agreement; or
(c) failure of the Company to have authorized the
number of shares of Common Stock issuable upon conversion of the Debentures or
exercise of the Warrants; or
(d) failure on the part of the Company to duly
observe or perform any of its other covenants or agreements contained in the
Debentures or in the Securities Purchase Agreement, or to cure any material
breach in a material representation or covenant contained in the Securities
Purchase Agreement or the Registration Rights Agreement for a period of ten (10)
days after the date on which written notice of such failure or breach requiring
the same to be remedied has been given by a Registered Holder to the Company; or
(e) a decree or order by a court having jurisdiction
has been entered adjudging the Company (or any Material Subsidiary)a bankrupt or
insolvent, or approving a petition seeking reorganization of the Company (or any
Material Subsidiary) under any applicable bankruptcy law and such decree or
order has continued undischarged or unstayed for a period of sixty (60) days; or
a decree or order of a court having jurisdiction for the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the
Company (or any Material Subsidiary) or of all or substantially all of its
property, or for the winding-up or liquidation of its affairs, has been entered,
and has remained in force undischarged or unstayed for a period of sixty (60)
days; or
(f) the Company (or any Material Subsidiary)
institutes proceedings to be adjudicated a voluntary bankrupt, or consents to
the filing of a bankruptcy proceeding against it, or files a petition or answer
or consent seeking reorganization under applicable law, or consents to the
filing of any such petition or to the appointment of a receiver or liquidator or
trustee or assignee in bankruptcy or insolvency of it or of all or substantially
all of its property, or makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts generally as they become due;
or if the Company (or any Material Subsidiary) shall suffer any writ of
attachment or execution or any similar process to be issued or levied against it
or any significant part of its property which is not released, stayed, bonded or
vacated within ninety (90) days after its issue or levy; or if the Company (or
any Material Subsidiary) takes corporate action in furtherance of any of the
aforesaid purposes or conditions; or
(g) if any default shall occur under any indenture,
mortgage, agreement,
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instrument or commitment evidencing or under which there is at the time
outstanding any indebtedness of the Company (or a Material Subsidiary, as
hereinafter defined), in excess of $50,000, or which results in such
indebtedness, in an aggregate amount (with other defaulted indebtedness) in
excess of $50,000 becoming due and payable prior to its due date and if such
indenture or instrument so requires, the holder or holders thereof (or a trustee
on their behalf) shall have declared such indebtedness due and payable; or
(h) if any of the Company or its subsidiaries shall
default in the observance or performance of any material term or provision of a
material agreement to which it is a party or by which it is bound, and such
default is not waived or cured within the applicable grace period; or
(i) if a final judgment which, either alone or
together with other outstanding final judgments against the Company and its
subsidiaries, exceeds an aggregate of $50,000 shall be rendered against the
Company (or any Material Subsidiary) and such judgment shall have continued
undischarged or unstayed for thirty (30) days after entry thereof;
then, and in each and every such case, so long as such event of default has not
been remedied and unless the principal of all the Debentures has already become
due and payable, the holders of not less than fifty-one percent (51%) in
principal amount of the Debentures then outstanding, by notice in writing to the
Company, may declare the principal of all the Debentures then outstanding and
the interest accrued thereof, if not already due and payable, to be due and
payable immediately, and upon any such declaration the same shall become and
shall be immediately due and payable, anything herein contained to the contrary
notwithstanding.
For purposes of this Section 10, "Material
Subsidiary" means any subsidiary with respect to which the Company has directly
or indirectly invested, loaned, advanced or guaranteed the obligations of, an
aggregate amount exceeding fifteen percent (15%) of the Company's gross assets,
or the Company's proportionate share of the assets or net income of which (based
on the subsidiary's most recent financial statements) exceed fifteen percent
(15%) of the Company's gross assets or net income, respectively, or the gross
revenues of which exceed fifteen percent (15%) of the gross revenues of the
Company based upon the most recent financial statements of such subsidiary and
the Company.
11. Transferability. This Debenture is transferable, in whole
or in part, only in accordance with the terms of Section 5 of the Securities
Purchase Agreement. The Registered Holder may submit a written request, in
person or by his duly authorized attorney, for a transfer of the Debenture on
the register of the Company maintained at its principal offices. The Company may
deem and treat the person in whose name this Debenture is registered as the
absolute owner hereof, for the purpose of receiving payment of the principal
thereof and interest hereon, whether or not the same shall be overdue, and for
all other purposes whatsoever, including but without limitation, the giving of
any written notices required hereunder, and the Company shall not be affected by
any notice to the contrary.
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12. Stock Splits; Dividends; Adjustments; Reorganizations.
(a) If the Company, at any time while the Debentures
are outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on any equity securities (including investments or securities
convertible into or exchangeable for such equity securities) in shares of Common
Stock, (ii) issue any securities payable in shares of Common Stock, (iii)
subdivide the outstanding shares of Common Stock into a larger number of shares,
(iv) combine outstanding shares of Common Stock into a smaller number of shares,
the Fixed Price and each Floating Reference Price prior to the date of any such
occurrence (collectively, the "Reference Prices") shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 12(a) shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of an issuance, a subdivision or a combination.
(b) In the event that the Company issues or sells any
Common Stock or securities which are convertible into or exchangeable for its
Common Stock or any convertible or exchangeable securities, or any warrants or
other rights to subscribe for or to purchase or any options for the purchase of
its Common Stock or any such convertible or exchangeable securities (other than
shares or options issued pursuant to the Company's employee or director option
plans or shares issued upon exercise of options, warrants or rights outstanding
on the date of the Securities Purchase Agreement and listed in the Company's
most recent periodic report filed under the Exchange Act) at an effective
purchase price per share which is less than the Fixed Price then in effect, then
the Fixed Price in effect immediately prior to such issue or sale shall be
reduced effective concurrently with such issue or sale to an amount determined
by multiplying such Fixed Price then in effect by a fraction, (x) the numerator
of which shall be the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issue or sale, plus (2) the number of
shares of Common Stock which the aggregate consideration received by the Company
for such additional shares would purchase at such Fixed Price then in effect;
and (y) the denominator of which shall be the number of shares of Common Stock
of the Company outstanding immediately after such issue or sale.
For the purposes of the foregoing adjustment, in the
case of the issuance of any convertible or exchangeable securities, warrants,
options or other rights to subscribe for or to purchase or exchange for, shares
of Common Stock ("Exchangeable Securities"), the maximum number of shares of
Common Stock issuable upon exercise, conversion or exchange of such Exchangeable
Securities shall be deemed to be outstanding, provided that no further
adjustment shall be made upon the actual issuance of Common Stock upon exercise,
exchange or conversion of such Exchangeable Securities.
(c) If the Company, at any time while the Debentures
are outstanding,
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shall distribute to all holders of Shares of Common Stock evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 12(b) above) then in each such
case the Fixed Price thereafter shall be determined by multiplying the Fixed
Price in effect immediately prior to the record date fixed for determination of
shareholders entitled to receive such distribution by a fraction of which the
denominator shall be the Market Price for Shares of Common Stock (as defined
below) determined as of the record date mentioned above, and of which the
numerator shall be such Market Price for Shares of Common Stock on such record
date less the then fair market value at such record date of the portion of such
assets or evidences of indebtedness so distributed applicable to one outstanding
share of Common Stock as determined by the Board in good faith; provided,
however that in the event of a distribution exceeding 25% of the net assets of
the Company, such fair market value shall be determined by an Appraiser selected
in good faith by the Board and holders of a majority in interest of the
Debentures. In either case the adjustments shall be described in a statement
provided to all holders of Debentures of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
outstanding share of Common Stock. Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.
"Market Price for Shares of Common Stock" shall mean
the price of one share of Common Stock determined as follows:
(i) If the Common Stock is listed on NASDAQ,
the closing bid price on the date of valuation;
(ii) If the Common Stock is listed on the
New York Stock Exchange or the American Stock Exchange, the closing bid price on
such exchange on the date of valuation;
(iii) If neither (i) nor (ii) apply but the
Common Stock is quoted in the over-the-counter market, another recognized
exchange, on the pink sheets or the OTC Bulletin Board, the lesser of (A) the
lowest sales price or (B) the mean between the last reported "bid" and "asked"
prices thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii)
above applies, the market value as determined by a nationally recognized
investment banking firm or other nationally recognized financial advisor
retained by the Company for such purpose, taking into consideration, among other
factors, the earnings history, book value and prospects for the Company, and the
prices at which shares of Common Stock recently have been traded. Such
determination shall be conclusive and binding on all persons.
(d) (1) In the event that at any time or from time to
time after the Closing Date, the Common Stock issuable upon the conversion of
the Debentures is changed into the same or a different number of shares of any
class or classes of stock, whether by merger, consolidation, recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or
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stock dividend or reorganization provided for elsewhere in this Paragraph 12),
then and as a condition to each such event provision shall be made in a manner
reasonably acceptable to the holders of Debentures so that each holder of
Debentures shall have the right thereafter to convert such Debenture into the
kind of stock receivable upon such recapitalization, reclassification or other
change by holders of shares of Common Stock, all subject to further adjustment
as provided herein. In such event, the formulae set forth herein for conversion
and redemption shall be equitably adjusted to reflect such change in number of
shares or, if shares of a new class of stock are issued, to reflect the market
price of the class or classes of stock (applying the same factors used in
determining the Fixed Price) issued in connection with the above described
transaction.
(2) If at any time or from time to time
after the Closing Date there is a capital reorganization of the Common Stock,
including by way of a sale of all or substantially all of the assets of the
Company (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Paragraph
12), then, as a part of and a condition to such reorganization, provision shall
be made in a manner reasonably acceptable to the holders of the Debentures so
that the holders of the Debentures shall thereafter be entitled to receive upon
conversion of the Debentures the number of shares of stock or other securities
or property to which a holder of the number of shares of Common Stock
deliverable upon conversion would have been entitled on such capital
reorganization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Paragraph 12 with respect to the rights of
the holders of the Debentures after the reorganization to the end that the
provisions of this Paragraph 12 shall be applicable after that event and be as
nearly equivalent as may be practicable, including, by way of illustration and
not limitation, by equitably adjusting the formulae set forth herein for
conversion and redemption to reflect the market price of the securities or
property (applying the same factors used in determining the Market Price for
Shares of Common Stock) issued in connection with the above described
transaction.
(e) Whenever any element of the Applicable Conversion
Price is adjusted pursuant to Section 12(a), (b), (c) or (d), the Company shall
promptly mail to each holder of the Debentures, a notice setting forth the
Applicable Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(f) In the event of any taking by the Company of a
record date of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any security or right convertible or exchangeable into or
entitling the holder thereof to receive additional shares of Common Stock, or
any right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Company, shall deliver to each holder of Debentures at least [15] days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution, security
or right and the amount and character of such dividend, distribution, security
or right.
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13. Remedies Cumulative. The rights, powers and remedies given
to the payee under this Debenture shall be in addition to all rights, powers and
remedies given to it by virtue of the Securities Purchase Agreement, any
document or instrument executed in connection therewith, or any statute or rule
of law.
14. Non-Waiver. Any forbearance, failure or delay by the payee
in exercising any right, power or remedy under this Debenture, the Securities
Purchase Agreement, any documents or instruments executed in connection
therewith or otherwise available to the payee shall not be deemed to be a waiver
of such right, power or remedy, nor shall any single or partial exercise of any
right, power or remedy preclude the further exercise thereof.
15. Modifications and Waivers. No modification or waiver of
any provision of this Debenture, the Securities Purchase Agreement or any
documents or instruments executed in connection therewith shall be effective
unless it shall be in writing and signed by the payee, and any such modification
or waiver shall apply only in the specific instance for which given.
16. Attorney's Fees. If this Debenture shall not be paid when
due and shall be placed by the Registered Holder hereof in the hands of an
attorney for collection, through legal proceedings or otherwise, or if this
Debenture shall not be converted into shares of Common Stock on the Conversion
Date, subject to the provisions of Section 5 hereof, and an action is brought by
the Registered Holder with respect thereto, the Company shall pay attorney's
fees to the Registered Holder hereof, together with reasonable costs and
expenses of collection or enforcement incurred in connection with any such
action.
17. Enforcement; Specific Performance. (a) In case any one or
more Events of Default shall occur and be continuing, the Registered Holder or
Registered Holders of a minimum of 51% of the face amount of the Debentures then
outstanding may proceed to protect and enforce the rights of such holder by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or for an injunction
against a violation of any of the terms hereof or thereof, or in aid of the
exercise of any power granted hereby or thereby or by law. Each holder agrees
that it will give written notice to the other holders prior to instituting any
such action. [51% REQUIRED TO ENFORCE.]
(b) The Company expressly agrees that each Registered Holder
may not have adequate remedies at law if the Company does not perform its
obligations under this Debenture. Upon a breach of the terms or covenants of
this Debenture by the Company, the Registered Holder shall, each in addition to
all other remedies, be entitled to obtain injunctive relief, and an order for
specific performance of the Company's obligations hereunder.
18. Miscellaneous. This Debenture and the rights and
obligations of the parties hereto, shall be governed, construed and interpreted
according to the laws of the State of New York. The Company agrees that any
final judgment after exhaustion of all appeals or the expiration of time
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<PAGE>
to appeal in any such action or proceeding shall be conclusive and binding, and
may be enforced in any federal or state court in the United States by suit on
the judgment or in any other manner provided by law. Nothing contained in this
Debenture shall affect or limit the right of the Registered Holder to serve any
process or notice or motion or other application in any other manner permitted
by law, or limit or affect the right of the Registered Holder to bring any
action or proceeding against the Company or any of its property in the courts of
any other jurisdiction. The Company hereby consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Debenture, and hereby waives, to
the maximum extent permitted by law, any objection, including any objections
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions.
19. Payee Defined. The term "payee" as used herein shall be
deemed to include the payee and its successors, endorsees and assigns.
20. Waiver of Presentment, etc. The undersigned hereby waives
presentment, demand for payment, protest, notice of protest and notice of
non-payment hereof.
21. Headings. The headings contained in this Debenture are for
reference purposes only and shall not affect the meaning of interpretation of
this Debenture.
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IN WITNESS WHEREOF, the Company has caused this Debenture to
be executed as of the date first written above.
By:
--------------------------------------------
Name: Shalom Z. Hirschman, M.D.
Title: President and Chief Executive Officer
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NOTICE OF CONVERSION
The conversion form appearing below should only be executed by
the Registered Holder desiring to convert all or part of the principal amount of
the Debenture attached hereto.
CONVERSION FORM
Date: ____________________________________________
TO: ADVANCED VIRAL RESEARCH CORP.
1250 E. Hallandale Beach Boulevard
Hallandale, FL 33009
ADVANCED VIRAL RESEARCH CORP.
200 Corporate Boulevard South
Yonkers, New York 10701
The undersigned hereby exercises the conversion privilege upon
the terms and conditions set forth in the attached Debenture, to the extent of
the maximum number of shares of Common Stock issuable pursuant to the terms of
Section 6 of the Debenture, and accordingly, authorizes the Company to apply
$__________ principal amount of the attached Debenture to payment in full for
such shares of Common Stock. Please register such shares and make delivery
thereof as follows:
Registered in the Name of (Giving First or Middle Name in Full)
Name _____________________________________________________
(Please Print)
Address _____________________________________________________
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DELIVERY INSTRUCTIONS
To be completed ONLY if Certificates are to be mailed to
persons other than the Registered Holder.
Name _____________________________________________________
(Please Print)
Address _____________________________________________________
Signature_____________________________________________________
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<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfer unto _______________________________________________________ the within
Debenture and all rights thereunder, hereby irrevocably authorizing the Company
to transfer said Debenture on the books of the Company, with full power of
substitution in the premises.
Dated: __________________________________________________
Signature: __________________________________________________
Print Name: __________________________________________________
17
EXHIBIT 4.20
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE
COMMON STOCK, PAR VALUE $.00001 PER SHARE
OF
ADVANCED VIRAL RESEARCH CORP.
-------------------------------------
This certifies that, for value received, Focus Investors LLC,
or registered assigns ("Warrantholder"), is entitled to purchase from ADVANCED
VIRAL RESEARCH CORP. (the "Company"), subject to the provisions of this Warrant,
at any time and from time to time until 5:00 p.m. Eastern Standard Time on
August 3, 2004 one million (1,000,000) shares of the Company's Common Stock, par
value $.00001 per share ("Warrant Shares"). The purchase price payable upon the
exercise of this Warrant shall be $.2461 per Warrant Share. The Warrant Price
and the number of Warrant Shares which the Warrantholder is entitled to purchase
is subject to adjustment upon the occurrence of the contingencies set forth in
Section 3 of this Warrant; as adjusted from time to time, such purchase price is
hereinafter referred to as the "Warrant Price."
This Warrant is one of the Warrants to Purchase Common Stock (the
"Warrants"), evidencing the right to purchase Common Stock of the Company,
issued pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated August 3, 1999, between the Company and the Purchasers
identified therein. The Securities Purchase Agreement contains certain
additional terms that are binding upon the Company and each Warrantholder. A
copy of the Securities Purchase Agreement may be obtained by any registered
Warrantholder from the Company upon written request. Capitalized terms used but
not defined herein shall have the meanings set forth in the Securities Purchase
Agreement.
This Warrant is subject to the following terms and conditions:
<PAGE>
I. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part
but not for a fractional share. Upon delivery of this Warrant at the offices of
the Company or at such other address as the Company may designate by notice in
writing to the registered holder hereof with the Subscription Form annexed
hereto duly executed, accompanied by payment of the Warrant Price for the number
of Warrant Shares purchased (in cash, by certified, cashier's or other check
acceptable to the Company, by Common Stock of the Company having a Market Value
(as hereinafter defined) equal to the aggregate Warrant Price for the Warrant
Shares to be purchased, or any combination of the foregoing), the registered
holder of this Warrant shall be entitled to receive a certificate or
certificates for the Warrant Shares so purchased. Such certificate or
certificates shall be promptly delivered to the Warrantholder. Upon any partial
exercise of this Warrant, the Company shall promptly execute and deliver a new
Warrant of like tenor for the balance of the Warrant Shares purchasable
hereunder.
(b) In lieu of exercising this Warrant pursuant to
Section 1(a), the holder may elect to receive shares of Common Stock equal to
the value of this Warrant determined in the manner described below (or any
portion thereof remaining unexercised) upon delivery of this Warrant at the
offices of the Company or at such other address as the Company may designate by
notice in writing to the registered holder hereof with the Notice of Cashless
Exercise Form annexed hereto duly executed. In such event the Company shall
issue to the holder a number of shares of the Company's Common Stock computed
using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the holder.
Y = the number of shares of Common Stock purchasable under this Warrant
(at the date of such calculation).
A = the Market Value of the Company's Common Stock on the business day
immediately preceding the day on which the Notice of Cashless
Exercise is received by the Company.
B = Warrant Price (as adjusted to the date of such calculation).
(c) The Warrant Shares deliverable hereunder shall,
upon issuance, be fully paid and non-assessable and the Company agrees that at
all times during the term of this Warrant it shall cause to be reserved for
issuance such number of shares of its Common Stock as shall be required for
issuance and delivery upon exercise of this Warrant.
(d) For purposes of this Warrant, the Market Value of
a share of Common Stock on any date shall be determined as follows:
(i) If the Common Stock is listed on
NASDAQ, the closing bid price on the
date of valuation;
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(ii) If the Common Stock is listed on the
New York Stock Exchange or the
American Stock Exchange, the closing
bid price on such exchange on the
date of valuation;
(iii) If neither (i) nor (ii) apply but
the Common Stock is quoted in the
over-the-counter market, another
recognized exchange, on the pink
sheets or the OTC Bulletin Board,
the lesser of (A) the lowest sales
price or (B) the mean between the
last reported "bid" and "asked"
prices thereof on the date of
valuation; and
(iv) if the Common Stock is not traded on
a national securities exchange or in
the over-the-counter market, the
fair market value of a share of
Common Stock on such date as
determined in good faith by the
Board of Directors.
If the holder disagrees with the determination of the Market Value of any
securities of the Company determined by the Board of Directors under Section
1(d)(iv), the Market Value of such securities shall be determined by an
independent appraiser acceptable to the Company and the holder (or, if they
cannot agree on such an appraiser, by an independent appraiser selected by each
of them, and Market Value shall be the median of the appraisals made by such
appraisers). If there is one appraiser, the cost of the appraisal shall be
shared equally between the Company and the holder. If there are two appraisers,
each of the Company and the holder shall pay for its own appraisal.
(e) The Company will, at the time of the exercise,
exchange or transfer of this Warrant, upon the request of the registered
Warrantholder hereof, acknowledge in writing its continuing obligation to afford
to such Warrantholder or transferee any rights (including, without limitation,
any right to registration of the Company's shares of Common Stock) to which such
Warrantholder or transferee shall continue to be entitled after such exercise,
exchange or transfer in accordance with the provisions of this Warrant, provided
that if the registered Warrantholder of this Warrant shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such Warrantholder or transferee any such rights.
II. Transfer or Assignment of Warrant. (a) Any assignment
or transfer of this Warrant shall be made by surrender of this Warrant at the
offices of the Company or at such other address as the Company may designate in
writing to the registered holder hereof with the Assignment Form annexed hereto
duly executed and accompanied by payment of any requisite transfer taxes, and
the Company shall, without charge, execute and deliver a new Warrant of like
tenor in the name of the assignee for the portion so assigned in case of only a
partial assignment, with a new Warrant of like tenor to the assignor for the
balance of the Warrant Shares purchasable.
(b) Prior to any assignment or transfer of this
Warrant, the holder thereof shall deliver an opinion of counsel to the Company
to the effect that the proposed transfer may be effected without registration
under the Act.
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III. Adjustment of Warrant Price and Warrant Shares --
Anti-Dilution Provisions.
A. (1) Except as hereinafter provided, in
case the Company shall at any time after the date
hereof issue any shares of Common Stock (including
shares held in the Company's treasury) without
consideration, then, and thereafter successively upon
each issuance, the Warrant Price in effect
immediately prior to each such issuance shall
forthwith be reduced to a price determined by
multiplying the Warrant Price in effect immediately
prior to such issuance by a fraction:
(a) the numerator of which shall
be the total number of shares
of Common Stock outstanding
immediately prior to such
issuance, and
(b) the denominator of which shall
be the total number of shares
of Common Stock outstanding
immediately after such
issuance.
For the purposes of any computation to be made in accordance
with the provisions of this clause (1), the following provisions shall be
applicable:
(i) Shares of Common Stock
issuable by way of dividend
or other distribution on any
stock of the Company shall be
deemed to have been issued
and to be outstanding at the
close of business on the
record date fixed for the
determination of stockholders
entitled to receive such
dividend or other
distribution and shall be
deemed to have been issued
without consideration. Shares
of Common Stock issued
otherwise than as a dividend
or other distribution, shall
be deemed to have been issued
and to be outstanding at the
close of business on the date
of issue.
(ii) The number of shares of
Common Stock at any time
outstanding shall not include
any shares then owned or held
by or for the account of the
Company.
(2) In case the Company shall at any
time subdivide or combine the outstanding
shares of Common Stock, the Warrant Price
shall forthwith be proportionately decreased
in the case of the subdivision or
proportionately increased in the case of
combination
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to the nearest one cent. Any such adjustment
shall become effective at the close of
business on the date that such subdivision
or combination shall become effective.
B. In the event that the number of outstanding shares
of Common Stock is increased by a stock dividend payable in
shares of Common Stock or by a subdivision of the outstanding
shares of Common Stock, which may include a stock split, then
from and after the time at which the adjusted Warrant Price
becomes effective pursuant to the foregoing Subsection A of
this Section by reason of such dividend or subdivision, the
number of shares issuable upon the exercise of this Warrant
shall be increased in proportion to such increase in
outstanding shares. In the event that the number of
outstanding shares of Common Stock is decreased by a
combination of the outstanding shares of Common Stock, then,
from and after the time at which the adjusted Warrant Price
becomes effective pursuant to such Subsection A of this
Section by reason of such combination, the number of shares
issuable upon the exercise of this Warrant shall be decreased
in proportion to such decrease in outstanding shares.
C. In the event of an adjustment of the Warrant
Price, the number of shares of Common Stock (or reclassified
stock) issuable upon exercise of this Warrant after such
adjustment shall be equal to the number determined by
dividing:
(1) an amount equal to the product of
(i) the number of shares of Common
Stock issuable upon exercise of this
Warrant immediately prior to such
adjustment, and (ii) the Warrant
Price immediately prior to such
adjustment, by
(2) the Warrant Price immediately after
such adjustment.
D. In the case of (1) any reorganization or
reclassification of the outstanding shares of Common Stock
(other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a
subdivision or combination) or (2) any consolidation of the
Company with, or merger of the Company with, another
corporation, or in the case of any sale, lease or conveyance
of all, or substantially all, of the property, assets,
business and goodwill of the Company as an entity, the holder
of this Warrant shall thereafter have the right upon exercise
to purchase the kind and amount of shares of stock and other
securities and property receivable upon such reorganization,
reclassification, consolidation, merger or sale by a holder of
the number of shares of Common Stock which the holder of this
Warrant would have received had all Warrant Shares issuable
upon exercise of this Warrant been issued immediately prior to
such reorganization, reclassification, consolidation, merger
or sale, at a price equal to the Warrant Price then in effect
pertaining to this Warrant (the kind, amount and price of such
stock and other
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securities to be subject to adjustment as herein provided).
The Company shall not effect a transaction of the type
described in clause (2) of this sub-paragraph (D) unless upon
or prior to the consummation thereof, the Company's successor
corporation, or if the Company shall be the surviving company
in any such transaction but is not the issuer of the shares of
stock, securities or other property to be delivered to the
holders of the Company's outstanding shares of Common Stock at
the effective time thereof, then such issuer, shall assume in
writing the obligation hereunder to deliver to the
Warrantholder of this Warrant such shares of stock,
securities, cash or other property as such holder shall be
entitled to purchase in accordance with the provisions hereof.
E. In case the Company shall, at any time prior to
the expiration of this Warrant and prior to the exercise
thereof, dissolve, liquidate or wind up its affairs, the
Warrantholder shall be entitled, upon the exercise thereof, to
receive, in lieu of the Warrant Shares of the Company which it
would have been entitled to receive, the same kind and amount
of assets as would have been issued, distributed or paid to it
upon such Warrant Shares of the Company, had it been the
holder of record of shares of Common Stock receivable upon the
exercise of this Warrant on the record date for the
determination of those entitled to receive any such
liquidating distribution. After any such dissolution,
liquidation or winding up which shall result in any
distribution in excess of the Warrant Price provided for by
this Warrant, the Warrantholder may at its option exercise the
same without making payment of the aggregate Warrant Price and
in such case the Company shall upon the distribution to said
Warrantholder consider that the aggregate Warrant Price has
been paid in full to it and in making settlement to said
Warrantholder, shall deduct from the amount payable to such
Warrantholder an amount equal to the aggregate Warrant Price.
Except as otherwise expressly provided in the prior paragraph,
in the event of any dissolution of the Company following the
transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its
expense deliver or cause to be delivered the stock and other
securities and property (including cash, where applicable)
receivable by the holders of the Warrants after the effective
date of such dissolution pursuant to this sub-paragraph (E) to
a bank or trust company having its principal office in New
York City, as trustee for the holder or holders of the
Warrants.
F. Except as otherwise expressly provided in this
Section II, upon any reorganization, consolidation, merger or
transfer (and any dissolution following any transfer) referred
to in this Section II, this Warrant shall continue in full
force and effect and the terms hereof shall be applicable to
the shares of stock and other securities and property
receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger
or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the
issuer of any such stock or other securities, including, in
the case of any
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such transfer, the person acquiring all or substantially all
of the properties or assets of the Company, whether or not
such person shall have expressly assumed the terms of this
Warrant.
G. In case the Company shall, at any time prior to
the expiration of this Warrant and prior to the exercise
thereof make a distribution of assets (other than cash) or
securities of the Company to its stockholders (the
"Distribution") the Warrantholder shall be entitled, upon the
exercise thereof, to receive, in addition to the Warrant
Shares it is entitled to receive, the same kind and amount of
assets or securities as would have been distributed to it in
the Distribution had it been the holder of record of shares of
Common Stock receivable upon exercise of this Warrant on the
record date for determination of those entitled to receive the
Distribution.
H. Irrespective of any adjustments in the number of
Warrant Shares and the Warrant Price or the number or kind of
shares purchasable upon exercise of this Warrant, this Warrant
may continue to express the same price and number and kind of
shares as originally issued.
III. Officer's Certificate. Whenever the number of Warrant
Shares and the Warrant Price shall be adjusted pursuant to the provisions
hereof, the Company shall forthwith file at its principal executive office an
officers' certificate, signed by the Chairman of the Board, President, or one of
the Vice Presidents of the Company and by its Chief Financial Officer or one of
its Treasurers or Assistant Treasurers, stating the adjusted number of Warrant
Shares and the new Warrant Price calculated to the nearest one hundredth and
setting forth in reasonable detail the method of calculation and the facts
requiring such adjustment and upon which such calculation is based. Each
adjustment shall remain in effect until a subsequent adjustment hereunder is
required. A copy of such statement shall be mailed to the Warrantholder at its
address in the records of the Company in accordance with the notice provision of
the Securities Purchase Agreement. The Company will forthwith mail a copy of
each such certificate to each holder of a Warrant, and will, on the written
request at any time of any holder of a Warrant, furnish to such holder a like
certificate setting forth the Warrant Price and the number and type of Shares at
the time in effect and showing how it was calculated.
IV. Charges, Taxes and Expenses. The issuance of
certificates for Warrant Shares upon any exercise of this Warrant shall be made
without charge to the Warrantholder for any tax or other expense in respect to
the issuance of such certificates, all of which taxes and expenses shall be paid
by the Company, and such certificates shall be issued only in the name of the
Warrantholder.
V. No Dilution or Impairment. The Company will not, by
amendment of its Articles of Incorporation or By-laws, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of the Warrants, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary
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or appropriate in order to protect the rights of the holders of the Warrants, as
specified herein and in the Securities Purchase Agreement, against dilution (to
the extent specifically provided herein) or other impairment. Without limiting
the generality of the foregoing, the Company (a) will not increase the par value
of any shares of stock receivable on the exercise of the Warrants above the
amount payable therefor on such exercise, and (b) will not effect a subdivision
or split up of shares or similar transaction with respect to any class of the
Common Stock without effecting an equivalent transaction with respect to all
other classes of Common Stock.
VI. Notice of Record Date. In case of
(a) any taking by the Company of a record of the
holders of any class of its securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other distribution,
or any right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or any voluntary or involuntary
dissolution, liquidation or winding up of the Company, or
(c) events shall have occurred resulting in the
voluntary or involuntary dissolution, liquidation or winding up of the Company
then and in each such event the Company will mail or cause to be mailed to each
holder of a Warrant a notice specifying (i) the date on which any record is to
be taken for the purpose of any such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, (ii)
the date on which any such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding up is to
take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall be mailed at least thirty (30) days prior to
the date specified in such notice on which any such action is to be taken.
VII. Exchange of Warrants. On surrender for exchange of
any Warrant, properly endorsed, to the Company, the Company, at its expense,
will issue and deliver to or on the order of the holder thereof a new Warrant or
Warrants of like tenor, in the name of such holder or as such holder (on payment
by such holder or any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common Stock
called for on the face or faces of the Warrant or Warrants so surrendered.
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VIII. Replacement of Warrants. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction of any Warrant, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Warrant, the Company, at
its expense, will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
IX. Warrant Agent. The Company may, by written notice to
each holder of a Warrant, appoint an agent having an office in New York, New
York, for the purpose of issuing shares of Common Stock on the exercise of the
Warrants pursuant to Section I, exchanging Warrants pursuant to Section VII, and
replacing Warrants pursuant to Section VIII, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
X. Remedies. The Company stipulates that the remedies at
law of the holder of this Warrant in the event of any default or threatened
default by the Company in the performance of or compliance with any of the terms
of this Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
XI. Negotiability, Etc. This Warrant is issued upon the
following terms, to all of which each Warrantholder or owner hereof by the
taking hereof consents and agrees:
(a) subject to the terms of Section II of this
Warrant and Section 4 of the Securities Purchase Agreement, title to this
Warrant may be transferred by endorsement (by the Warrantholder hereof executing
the form of assignment at the end hereof) and delivery in the same manner as in
the case of a negotiable instrument transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly
endorsed is authorized to represent himself as absolute owner hereof and is
empowered to transfer absolute title hereto by endorsement and delivery hereof
to a bona fide purchaser hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in favor of each such
bona fide purchaser, and each such bona fide purchaser shall acquire absolute
title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of
the Company, the Company may treat the register Warrantholder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
XII. Notices. All notices and other communications from
the Company to the registered Warrantholder of this Warrant shall be given in
writing (unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free
transmission) or two business days following deposit of such notice with an
internationally
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recognized courier service, with postage prepaid and addressed, to such address
as may have been furnished to the Company in writing by such registered
Warrantholder or, until any such registered Warrantholder furnishes to the
Company an address, then to, and at the address of, the last registered
Warrantholder of this Warrant who has so furnished an address to the Company.
XIII. Miscellaneous.
(a) The terms of this Warrant shall be binding upon
and shall inure to the benefit of any successors or assigns of the Company and
of the holder or holders hereof and of the shares of Common Stock issued or
issuable upon the exercise hereof.
(b) Except as otherwise set forth herein, no holder
of this Warrant, as such, shall be entitled to vote or receive dividends or be
deemed to be a stockholder of the Company for any purpose, nor shall anything
contained in this Warrant be construed to confer upon the holder of this
Warrant, as such, any rights of a stockholder of the Company or any right to
vote, give or withhold consent to any corporate action, receive notice of
meetings, receive dividends or subscription rights, or otherwise.
(c) Receipt of this Warrant by the holder hereof
shall constitute acceptance of an agreement to the foregoing terms and
conditions.
(d) The Warrant and the performance of the parties
hereunder shall be construed and interpreted in accordance with the laws of the
State of New York and the parties hereunder consent and agree that the State and
Federal Courts which sit in the State of New York and the County of New York
shall have exclusive jurisdiction with respect to all controversies and disputes
arising hereunder.
(e) This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer and its corporate seal to be affixed
hereto.
Dated: August 3, 1999
ADVANCED VIRAL RESEARCH CORP.
BY:
-------------------------------------
Shalom Hirschman, M.D.
President and Chief Executive Officer
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SUBSCRIPTION FORM
-----------------
(TO BE EXECUTED BY THE REGISTERED HOLDER
IF HE DESIRES TO EXERCISE THE WARRANT)
To: ADVANCED VIRAL RESEARCH CORP.
The undersigned hereby exercises the right to
purchase _________ shares of Common Stock, par value $.00001 per share, covered
by the attached Warrant in accordance with the terms and conditions thereof, and
herewith makes payment of the Warrant Price for such shares in full. The
undersigned requests that a certificate for such shares of Common Stock be
registered in the name of ____________________________________, whose address is
_______________________________________________, and that such Certificate be
delivered to __________________________________________________ whose address is
_____________________________________________.
-----------------------------------
NAME (please print)
-----------------------------------
SIGNATURE
(Signature must conform in all
respects to the name of the
registered Warrantholder, as
specified on the face of the
Warrant.)
-----------------------------------
SOCIAL SECURITY NUMBER (or Other
Identifying Number of Holder)
-----------------------------------
ADDRESS
DATED:
-------------------------
<PAGE>
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
------------------------------------------------------
(TO BE EXECUTED BY THE REGISTERED WARRANTHOLDER IN
ADDITION TO THE SUBSCRIPTION FORM, IF HE DESIRES
TO EXERCISE THE WARRANT IN A CASHLESS EXERCISE)
Advanced Viral Research Corp. Aggregate Price of $
a Delaware corporation of Warrant ---------------
200 Corporate Boulevard South
Yonkers, New York 10701 Aggregate Price
Being
Exercised: $
---------------
Attention:
Warrant Price
(per share): $
---------------
Number of Shares
of Common Stock
to be Issued Under
this Notice:
---------------
CASHLESS EXERCISE
-----------------
Gentlemen:
The undersigned, registered holder of the Warrant to
Purchase Common Stock delivered herewith ("Warrant") hereby irrevocably
exercises such Warrant for, and purchases thereunder, shares of the Common Stock
of ADVANCED VIRAL RESEARCH CORP., a Delaware corporation, as provided below.
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings given in the Warrant. The portion of the Aggregate Price (as
hereinafter defined) to be applied toward the purchase of Common Stock pursuant
to this Notice of Exercise is $________________, thereby leaving a remainder
Aggregate Price (if any) equal to $________________. Such exercise shall be
pursuant to the net issue exercise provisions of Section I. (b) of the Warrant;
therefore, the holder makes no payment with this Notice of Exercise. The number
of shares to be
<PAGE>
issued pursuant to this exercise shall be determined by reference to the formula
in Section I.(b)of the Warrant which requires the use of the Market Value (as
defined in Section I.(d) of the Warrant) of the Company's Common Stock in
accordance with the provisions thereof. To the extent the foregoing exercise is
for less than the full Aggregate Price of the Warrant, the remainder of the
Warrant representing a number of Shares equal to the quotient obtained by
dividing the remainder of the Aggregate Price by the Warrant Price (and
otherwise of like form, tenor and effect) may be exercised under Section I.(a)
of the Warrant. For purposes of this Notice the term "Aggregate Price" means the
product obtained by multiplying the number of shares of Common Stock for which
the Warrant is exercisable times the Warrant Price.
------------------------------------
SIGNATURE
------------------------------------
DATE: ADDRESS
---------------------
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<PAGE>
ASSIGNMENT
----------
(To be Executed by the registered Warrantholder
if he Desires to Transfer the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells,
assigns and transfers unto ________________ (please print name and address of
transferee) the right to purchase shares of Common Stock of ADVANCED VIRAL
RESEARCH CORP., evidenced by the within Warrant, and does hereby irrevocably
constitute and appoint __________________ Attorney to transfer the said Warrant
on the books of the Company, with full power of substitution.
------------------------------------
NAME (please print)
------------------------------------
SIGNATURE
(Signature must conform in all
respects to the name of the
registered Warrantholder, as
specified on the face of the
Warrant.)
------------------------------------
SOCIAL SECURITY NUMBER (or Other
Identifying Number of Holder)
IN THE PRESENCE OF:
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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
August 30, 1999
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
Gentlemen:
You have requested our opinion, as counsel to Advanced Viral Research
Corp., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-1 (Registration No. 333-70523, as amended (the
"Registration Statement"), filed by the Company with the U.S. Securities and
Exchange Commission (the "Commission").
The Registration Statement relates to an offering of up to 89,912,993
shares (the "Shares") of the common stock of the Company, par value $0.00001 per
share, by certain shareholders, which include:
(i) 6,769,128 shares of common stock held by certain
shareholders;
(ii) 20,833,333 shares of the Company's common stock
issuable upon the conversion of a convertible
debenture issued in November 1998 (the "1998
Debenture"), which number of shares is subject
to adjustment and could be materially less or
more, depending upon factors that cannot be
predicted at this time, including, among others,
the future market price of the Company's common
stock;
(ii) 26,666,667 shares of the Company's common stock
issuable upon the conversion of a convertible
debenture issued in August 1999 (the "1999
Debenture"), which number of shares is subject
to adjustment and could be materially less or
more, depending upon factors that cannot be
predicted at this time, including, among others,
the future market price of the Company's common
stock;
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(iii) 7,378,450 shares of the Company's common stock issuable upon
the exercise of certain warrants (the "Warrants"); and
(iii) 28,265,415 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 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 1998 Debenture, the 1999 Debenture, the Warrants, the Options and all
agreements relating thereto, will constitute legally issued securities of the
Company, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference of this law firm in the Prospectus
under the heading "LEGAL MATTERS." In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Respectfully submitted,
/s/ BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
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BERMAN WOLFE & RENNERT VOGEL & MANDLER, P.A.
EXHIBIT 10.32
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of August 3, 1999 (this
"Agreement"), is made by and among ADVANCED VIRAL RESEARCH CORP., a Delaware
corporation, with headquarters located at 200 Corporate Boulevard South,
Yonkers, New York 10701 (the "Company"), FOCUS INVESTORS LLC, a Delaware limited
liability company, with headquarters at One World Trade Center, Suite 4563, New
York, NY 10048 (the "Purchaser").
W I T N E S S E T H:
WHEREAS, pursuant to a Securities Purchase Agreement, dated as of
August 3, 1999, among the Purchaser and the Company (the "Securities Purchase
Agreement"), the Company has agreed to issue and sell to the Purchaser 20 Units
(individually, a "Unit" and collectively, the "Units"), each Unit consisting of
$100,000 aggregate principal amount of the Company's 7% Convertible Debentures
(the "Debentures") and Series W Warrants (the "Warrants") to purchase 50,000
shares of common stock of the Company, par value $.00001per share (the "Common
Stock")
WHEREAS, pursuant to the terms of the Debentures and the Warrants, (i)
upon the conversion of the Debentures and (ii) upon exercise of the Warrants,
the Company will issue shares of Common Stock (the shares of Common Stock
issuable to the Purchaser upon the conversion of the Debentures or upon the
exercise of the Warrants are collectively referred to herein as the "Shares") to
the Purchaser; and
WHEREAS, to induce the Purchaser to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended (the "Securities Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchaser hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing one or more Registration Statement
or Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering securities
on a continuous basis ("Rule 415"), and the declaration or ordering of
effectiveness of such Registration Statement by the Securities and Exchange
Commission (the "Commission").
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(ii) "Registrable Securities" means the Shares.
(iii) "Registration Statement" means a registration statement
of the Company under the Securities Act.
Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in the Securities Purchase Agreement, the Debentures
or the Warrants, as the case may be.
2. Registration.
(a) Mandatory Registration. The Company shall utilize best efforts to
(i) amend the Company's existing Registration Statement on Form S-1
(Registration Statement No. 333-70523) or (ii) to file a Registration Statement
on Form S-3, to cover resale of Shares issued to the Purchaser upon conversion
of the Debentures and upon exercise of the Warrants; provided, however, that in
the event that the resale of the Shares is covered by a Registration on Form S-3
rather than on an amended Registration Statement No. 333-70523, such
Registration on Form S-3 shall be declared effective prior to Registration
Statement No. 333-70523. The number of Shares to be included in the Registration
Statement shall be equal to at least two (2) times the sum of: (i) the number of
shares of Common Stock that are issuable upon conversion of the Debentures on
the date of filing, without regard to any limitation on any holder's ability to
convert the Debentures, and (ii) the Shares issuable upon exercise of the
Warrants on the date of filing, without any regard to any limitation on any
holder's ability to exercise the Warrants. If the Company shall not succeed in
obtaining such approval from the Commission, within thirty (30) days of the
Closing Date (the "Required Filing Date"), the Company shall file with the
Commission a Registration Statement on Form S-3 the Shares, as set forth in the
preceding sentence. Such Registration Statement or amended Registration
Statement, as the case may be, shall state that, in accordance with Rule 416
under the Securities Act, it also covers such indeterminate number of additional
Shares as may become issuable upon conversion of such Debentures or exercise of
such Warrants (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions and (ii) to the extent that is consistent with
the interpretations of the Commission of such rule at such time, resulting from
any adjustment in the applicable Conversion Price of such Debentures or the
Exercise Price of such Warrants. If at any time one and one-half (1 1/2) times
the sum of (i) the number of Shares into which such Debentures may be converted,
and (ii) the maximum number of shares issuable upon exercise of the Warrants,
exceeds the total number of Shares so registered, the Company shall (A) if such
Registration Statement has not been declared effective by the Commission at that
time, amend the Registration Statement filed by the Company pursuant to the
preceding portions of this paragraph, to register such number of Shares as shall
equal two (2) times the sum of (I) the number of Shares into which such
Debentures may be converted and (II) the maximum number of shares issuable upon
exercise of the Warrants, or (B) if such Registration Statement has been
declared effective by the Commission at that time, file with the Commission an
additional Registration Statement on S-3 to register all of such Shares that
have not already been so registered; provided, however, that the determination
as to whether the Company is obligated to register additional Shares resulting
solely from a diminution in the conversion price of the Debentures shall be
determined by using the average of the closing
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prices of the Shares over a ten consecutive trading day period, with the closing
prices determined in accordance with Section 6(b) of the Debentures. The Company
shall use its best efforts to cause any such Registration Statement or amended
Registration Statement, as the case may be, to become effective within (i) if
the Commission elects not to conduct a review of the Registration Statement,
ninety (90) days following the Closing Date; or (ii) if the Registration
Statement is reviewed by the Commission, 120 days following the Closing Date
(such 90th or 120th day, as the case may be, is referred to herein as the
"Required Effective Date"). The failure of the Company to cause such
Registration Statement to become effective during such respective time periods
shall have the effect set forth in Section 2(b) below. Notwithstanding the use
of the terms "Required Filing Date" and "Required Effective Date" that are used
herein, the Company shall use its best efforts to file each required
Registration Statement as soon as possible after the Closing Date and to cause
each such Registration Statement to become effective as soon as possible
thereafter. If the Company shall be required to file an additional Registration
Statement in accordance with this paragraph (rather than amending the
Registration Statement (Registration No. 333-70523) referred to above), no
securities of the Company other than the Registrable Securities shall be
included in such Registration Statement. The Company shall keep each
Registration Statement effective pursuant to Rule 415 at all times until such
date as is the earlier of (i) the date on which all of the Registrable
Securities have been sold and (ii) the date on which the Registrable Securities
(in the opinion of counsel to the Purchaser) may be immediately sold without
restriction (including without limitation as to volume by each holder thereof)
without registration under the Securities Act (the "Registration Period").
(b) Payments by the Company.
(i) (A) If the Registration Statement covering the Registrable
Securities is not filed in proper form with the Commission on or prior to the
Required Filing Date, (B) if the Registration Statement covering the Registrable
Securities is not effective on or prior to the Required Effective Date, (C) if
the number of Shares qualified for trading on the OTC Bulletin Board or reserved
by the Company for issuance shall be insufficient for issuance upon the
conversion of the Debentures and the exercise of the Warrants, or (D) upon the
occurrence of a Blackout Event (as described in Section 3(f) or Section 3(g)
below) (each of the events described in clauses (A) through (D) of this
paragraph are referred to herein as a "Registration Default"), the Company will
make payments to the Purchaser in such amounts and at such times as shall be
determined pursuant to this Section 2(b).
(ii) The amount (the "Periodic Amount") to be paid by the
Company to the Purchaser as of each thirty (30) day period during which a
Registration Default shall be in effect (each such period, a "Default Period")
shall be equal to two percent (2%) of the purchase price paid by the Purchaser
(the "Purchase Price") for all of the Units; provided that, with respect to any
Default Period during which the relevant Registration Defaults shall have been
cured, the Periodic Amount shall be pro rated for the number of days during such
period during which the Registration Defaults were pending; and provided,
however, that the payment of such Periodic Amounts shall not relieve the Company
from its continuing obligations to register the Shares pursuant to Section 2(a).
Notwithstanding anything to the contrary contained herein, (A) the Company's
obligation to pay to
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<PAGE>
the Purchaser the Periodic Amount in connection with any Registration Default
described in Section 2(b)(i)(C) or (D) shall not commence until such
Registration Default has continued for an aggregate of five consecutive days at
any time after the Required Effective Date, (B) the Company may elect not to pay
to the Purchaser the Periodic Amount in connection with any Registration Default
described in Section 2(b)(i)(B) or (D) that shall not be under the control of
the Company with respect to any two ten (10) Trading Day (as hereinafter
defined) periods in the aggregate during any 12- month period with at least a
ten (10) Trading Day interval between such periods, and (C) the aggregate
Periodic Amount for Registration Defaults that shall not be under the control of
the Company shall not exceed the amount which would be payable if the Default
Period continued for 365 days in the aggregate. The term "Trading Day" shall
mean any day on which the OTC Bulletin Board, or any other market or exchange
which at the time is the principal trading exchange or market for the Common
Stock, is open for business.
(iii) Each Periodic Amount shall be payable by the Company in
cash or other immediately available funds to the Purchaser monthly, without
demand therefor by the Purchaser; provided that, if the Periodic Amount for any
Default Period shall exceed an aggregate of $100,000, the Company shall only be
obligated to pay an aggregate of $100,000 of the such amount in cash, and the
remainder in Shares of Common Stock. To the extent any portion of the Periodic
Amount shall be paid in Shares, such Shares shall be issued at the Applicable
Conversion Price (as defined in the Debentures). If the Company shall not remit
the Periodic Amounts payable to the Purchaser as set forth in paragraph (ii)
above, the Company will pay to the Purchaser reasonable costs of collection,
including attorneys' fees, in addition to the Periodic Amounts.
(iv) The parties acknowledge that the damages which may be
incurred by the Purchaser if the Registration Statement is not filed by the
Required Filing Date, if the Registration Statement has not been declared
effective by the Required Effective Date, if an insufficient number of Shares of
Common Stock shall be listed or reserved for issuance, or if the provisions of
Section 3(f) or 3(g) become applicable, may be difficult to ascertain. The
parties agree that the Periodic Amount represents a reasonable estimate on the
part of the parties, as of the date of this Agreement, of the amount of such
damages.
(c) Eligibility for Form S-3. The Company represents and warrants that
it meets all of the requirements for the use of Form S-3 for the Registration of
the sale by the Purchaser and any transferees thereof who purchases the
Registrable Securities, and the Company shall file all reports required to be
filed by the Company with the Commission in a timely manner, and shall take such
other actions as may be necessary to maintain such eligibility for the use of
Form S-3.
(d) Priority in filing. The Company covenants that beginning on the
Closing Date and until such time as a Registration Statement pursuant to Section
2(a) of this Agreement has been filed and becomes effective, the Company will
not file any other registration statement without the written consent of the
Purchaser.
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3. Obligations of the Company.
In connection with the registration of the Registrable Securities, the
Company shall do each of the following:
(a) Prepare and file with the Commission the Registration Statements
required by Section 2 of this Agreement and such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectuses used in connection with such Registration Statements, each in such
form as to which the Purchaser and its counsel shall not have objected, as may
be necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all of the
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(b) Furnish to the Purchaser, if the Registrable Securities of the
Purchaser are included in the Registration Statement, and its legal counsel
identified to the Company, promptly after the same is prepared and publicly
distributed, filed with the Commission, or received by the Company, a copy of
the Registration Statement, each preliminary prospectus, each final prospectus,
and all amendments and supplements thereto and such other documents, as the
Purchaser may reasonably request in order to facilitate the disposition of its
Registrable Securities;
(c) Furnish to the Purchaser and its counsel copies of any
correspondence between the Company and the Commission with respect to any
Registration Statement or amendment or supplement thereto filed pursuant to this
Agreement;
(d) Use all reasonable efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Purchaser may
reasonably request (not to exceed five such jurisdictions in the aggregate),
(ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times during the Registration Period, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period and (iv) take all other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions, provided that in connection therewith, the Company shall not be
required to qualify as a foreign corporation or to file a general consent to the
service of process in any jurisdiction;
(e) Qualify such securities for trading on the OTC Bulletin Board and
list such securities on all the other national securities exchanges on which any
securities of the Company are then listed, and file any filings required by the
OTC Bulletin Board and/or such other exchanges;
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(f) As promptly as practicable after becoming aware of such event,
notify the Purchaser of the occurrence of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and to use its best efforts to promptly prepare a
supplement or amendment to the Registration Statement or other appropriate
filing with the Commission to correct such untrue statement of omission, and to
deliver a number of copies of such supplement or amendment to the Purchaser as
the Purchaser may reasonably request;
(g) As promptly as practicable after becoming aware of such event,
notify the Purchaser (or, in the event of an underwritten offering, the managing
underwriters) of the issuance by the Commission or any stop order or other
suspension of the effectiveness of the Registration Statement at the earliest
possible time, and to use its best efforts to promptly obtain the withdrawal of
such stop order or other suspension of effectiveness (the occurrence of any of
the events described in paragraphs (f) and (g) of this Section 3 is referred to
herein as a "Blackout Event");
(h) During the period commencing upon (i) the third day following the
Purchaser's receipt of a notification pursuant to Section 3(f) above or (ii) the
third day following the entry of a stop order or other suspension of the
effectiveness of the Registration Statement described in Section 3(g) above, and
ending at such time as (y) the Company shall have completed the applicable
filings (and if applicable, such filings shall have been declared effective) and
shall have delivered to the Purchaser the documents required pursuant to Section
3(e) above or (z) such stop order or other suspension of the effectiveness of
the Registration Statement shall have been removed, the Company shall be liable
to remit the payments required to be paid to the Purchaser pursuant to Section
2(b) above;
(i) Suspend the use of any prospectus used in connection with the
Registration Statement only in the event, and for such period of time as, such a
suspension is required by the rules and regulations of the Commission;
(j) Enter into such customary agreements for secondary offerings
(including a customary underwriting agreement with the underwriter or
underwriters, if any) and take all such other actions reasonably requested by
the Purchaser in connection therewith in order to expedite or facilitate the
disposition of such Registrable Securities. Whether or not an underwriting
agreement is entered into and whether or not the Registrable Securities are to
be sold in an underwritten offering the Company shall:
(i) make such representations and warranties to the Purchaser
and the underwriter or underwriters, if any, in form, substance and
scope as are customarily made by issuers to underwriters in secondary
offerings;
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(ii) cause to be delivered to the sellers of Registrable
Securities and the underwriter or underwriters, if any, opinions of
independent counsel to the Company (which counsel and opinions shall be
reasonably satisfactory in form, scope and substance to the Purchaser
and the underwriter(s), if any, and their counsel), (A) on and dated as
of the effective day (or in the case of an underwritten offering, dated
the date of delivery of any Registrable Securities sold pursuant
thereto) of the Registration Statement stating that (x) the
Registration Statement complies in all material respects with the
requirements of the Securities Act and the rules and regulations of the
Commission thereunder, (y) to the best of such counsel's knowledge, the
Registration Statement does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(z) to the best of such counsel's knowledge, the documents incorporated
by reference in the prospectus accompanying the Registration Statement,
at the time they were filed with the Commission or as amended, complied
in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations thereunder and, when read together with the other
information in such prospectus, do not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(B) within ninety (90) days following the end of each fiscal year
thereafter, an opinion of independent counsel to the Company, updating
the opinion referred to in clause (A) of this paragraph;
(iii) if an underwriting agreement is entered into, the same
shall include customary indemnification and contribution provisions to
and from the underwriters and procedures for secondary underwritten
offerings;
(iv) deliver such documents and certificates as may be
reasonably requested by Purchaser of the Registrable Securities being
sold or the managing underwriter or underwriters, if any, to evidence
compliance with clause (i) above and with any customary conditions
contained in the underwriting agreement, if any; and
(v) deliver to the Purchaser on the effective day (or in the
case of an underwritten offering, dated the date of delivery of any
Registrable Securities sold pursuant thereto) of the Registration
Statement, and at the beginning of each fiscal quarter thereafter, a
certificate in form and substance as shall be reasonably satisfactory
to the Purchaser, executed by an executive officer of the Company and
to the effect that all the representations and warranties of the
Company contained in the Securities Purchase Agreement are still true
and correct except as disclosed in such certificate; the Company shall,
as to each such certificate delivered at the beginning of each fiscal
quarter, update or cause to be updated each such certificate during
such quarter so that it shall remain current, complete and correct
throughout such quarter; and such updates received by the Purchaser
during such quarter, if any, shall have been reasonably satisfactory to
the Purchaser.
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(k) Make available for inspection by the Purchaser, its
representative(s), any underwriter participating in any disposition pursuant to
a Registration Statement, and any attorney or accountant retained by the
Purchaser or any underwriter, all financial and other records customary for
purposes of the Purchaser's due diligence examination of the Company and review
of any Registration Statement, all filings made with the Commission subsequent
to the Closing, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with such Registration Statement, provided that such
parties agree to keep such information confidential;
(l) Cooperate with the Purchaser to facilitate the timely preparation
and delivery of certificates for the Registrable Securities to be offered
pursuant to the Registration Statement and to enable such certificates for the
Registrable Securities to be in such denominations or amounts, as the case may
be, as the Purchaser may reasonably request, and registered in such names as the
Purchaser may request; and, within three (3) business days after a Registration
Statement which includes Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel selected by
the Company to deliver, to the transfer agent for the Registrable Securities
(with copies to the Purchaser) an appropriate instruction and opinion of such
counsel; and
(m) Permit counsel to the Purchaser to review the Registration
Statement and all amendments and supplements thereto within a reasonable period
of time (but not less than one full business day) prior to each filing, and to
incorporate those changes, if provided to the Company or its counsel within such
one full business day period mentioned above, suggested by such counsel.
4. Obligations of the Purchaser.
In connection with the registration of the Registrable Securities, the
Purchaser shall have the following obligations:
(a) Take all other reasonable actions necessary to expedite and
facilitate the disposition by the Purchaser of the Registrable Securities
pursuant to the Registration Statement;
(b) Furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of the
Registrable Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities. The intended method or methods of
disposition and/or sale (Plan of Distribution) of the Registrable Securities as
so provided by the Purchaser shall be included without alteration in the
Registration Statement covering the Registrable Securities and shall not be
changed without written consent of the Purchaser. At least five (5) business
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify the Purchaser of the information the Company requires
from the Purchaser if the Purchaser elects to have any of its Registrable
Securities included in the Registration Statement.
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In order to participate in an underwritten offering under Section 2, the
Purchaser shall be required to provide such documents as the underwriter may
reasonably require;
(c) The Purchaser, by its acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless the Purchaser has notified the Company in writing of its
election to exclude all of the Purchaser's Registrable Securities from such
Registration Statement; and
(d) The Purchaser agrees that, upon receipt of any notice from the
Company of the happening of any Blackout Event of the kind described in Section
3(f) or 3(g) above, it will immediately discontinue disposition of its
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such copies of the supplemented or amended
prospectus contemplated by Section 3(f) or 3(g) shall be furnished to the
Purchaser.
5. Expenses of Registration.
All expenses, other than underwriting discounts and commissions and
other fees and expenses of investment bankers and other than brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualification fees, printing and accounting fees, and
the fees and disbursements of counsel for the Company, and the fees of one
counsel to the Purchaser with respect to each Registration Statement filed
pursuant hereto shall be borne by the Company; provided that the Company shall
not be obligated to pay an amount in excess of $5,000 in the aggregate with
respect to the fees of such counsel to the Purchaser.
6. Indemnification.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
(a) The Company will indemnify and hold harmless the Purchaser, each of
its officers, directors and partners, and each person, if any, who controls the
Purchaser within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities or
expenses (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission to state therein a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
(ii) any untrue statement of a material fact contained in any preliminary
prospectus if used prior to the effective date of such Registration Statement,
or contained in the final prospectus (as amended or supplemented, if the Company
files
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<PAGE>
any amendment thereof or supplement thereto with the Commission) or the omission
to state therein any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading, or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state or foreign securities law or any
rule or regulation under the Securities Act, the Exchange Act or any state or
foreign securities law (the matters in foregoing clauses (i) through (iii)
being, collectively, "Violations"). The Company shall, subject to the provisions
of Section 6(b) below, reimburse the Purchaser, promptly as such expenses are
incurred and are due and payable, for any legal and other costs, expenses and
disbursements in giving testimony or furnishing documents in response to a
subpoena or otherwise, including without limitation, the costs, expenses and
disbursements, as and when incurred, of investigating, preparing or defending
any such action, suit, proceeding or investigation (whether or not in connection
with litigation in which the Purchaser is a party), incurred by it in connection
with the investigation or defense of any such Claim. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(a) shall not (i) apply to any Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof supplement thereto; (ii) with respect to
any preliminary prospectus, inure to the benefit of any such person from whom
the person asserting any such Claim purchased the Registrable Securities that
are the subject thereof (or to the benefit of any person controlling such
person) if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the final prospectus, as then amended or
supplemented, if such final prospectus was timely made available by the Company
pursuant to Section 3(b) hereof; (iii) be available to the extent that such
Claim is based upon a failure of the Purchaser to deliver or to cause to be
delivered the prospectus made available by the Company, if such prospectus was
timely made available by the Company pursuant to Section 3(b) hereof; or (iv)
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Purchaser
pursuant to Section 9. The Purchaser will indemnify the Company and its officers
and directors against any Claims arising out of or based upon a Violation which
occurs in reliance upon and in conformity with information furnished in writing
to the Company, by or on behalf of the Purchaser, expressly for use in
connection with the preparation of the Registration Statement, subject to such
limitations and conditions as are applicable to the Indemnification provided by
the Company in this Section 6.
(b) Promptly after receipt by an Indemnified Person under this Section
6 of notice of the commencement of any action (including any governmental
action), such Indemnified Person shall, if a Claim in respect thereof is to be
made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and to the extent
that the indemnifying party so desires, jointly with any other indemnifying
party similarly notified, to assume control of the
10
<PAGE>
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person; provided, however, that an Indemnified Person shall have
the right to retain its own counsel with the reasonable fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person and any
other party represented by such counsel in such proceeding. In such event, the
Company shall pay for only one separate legal counsel for the Purchaser, and
such legal counsel shall be selected by the Purchaser. The failure to deliver
written notice to an indemnifying party within a reasonable time after the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person under this Section 6, except to the extent
that the indemnifying party is materially prejudiced in its ability to defend
such action. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
(c) No indemnifying party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Person of an unconditional and irrevocable release from all
liability in respect of such claim or litigation.
(d) Notwithstanding the foregoing, to the extent that any provisions
relating to indemnification or contribution contained in the underwriting
agreements entered into among the Company, the underwriters and the Purchaser in
connection with an underwritten public offering are in conflict with the
foregoing provisions, the provisions in such underwriting agreements shall be
controlling as to the Registrable Securities included in the public offering;
provided, however, that if, as a result of this Section 6(d), the Purchaser, its
officers, directors, partners or any person controlling the Purchaser is or are
held liable with respect to any Claim for which they would be entitled to
indemnification hereunder but for this Section 6(d) in an amount which exceeds
the aggregate proceeds received by the Purchaser from the sale of Registrable
Securities included in a registration pursuant to such underwriting agreement
(the "Excess Liability"), the Company shall reimburse the Purchaser for such
Excess Liability.
7. Contribution.
To the extent any indemnification by an indemnifying party is
prohibited or limited under applicable law, the indemnifying party agrees to
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage, liability or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the Indemnified Person on the other hand in connection with the
statements or omissions which resulted in such Claim, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and the Indemnified Person shall be determined by reference to, among other
things, whether the untrue statement of a material fact or the omission to state
a material fact on
11
<PAGE>
which such Claim is based relates to information supplied by the indemnifying
party or by the Indemnified Person, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. Notwithstanding the forgoing, (a) no seller of Registrable Securities
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty of such fraudulent misrepresentation
and (b) contribution by any seller of Registrable Securities shall be limited in
amount to the net proceeds received by such seller from the sale of such
Registrable Securities. The Company and the Purchaser agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Purchaser and any other party were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in this Section.
8. Reports Under Exchange Act.
With a view to making available to the Purchaser the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the Commission that may at any time permit the Purchaser to sell securities
of the Company to the public without registration ("Rule 144"), the Company
agrees to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144;
(ii) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) furnish to the Purchaser, so long as the Purchaser owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of the Securities
Act and the Exchange Act, (ii) a copy of the most recent annual or periodic
report of the Company and such other reports and documents so filed by the
Company and (iii) such other information as may be reasonably requested to
permit the Purchaser to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of the Registration Rights.
The rights to have the Company register Registrable Securities pursuant
to this Agreement shall be automatically assigned by the Purchaser to any
transferee of all or any portion of the Debentures or the Warrants held by the
Purchaser if: (a) the Purchaser agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee and
(ii) the Securities with respect to which such registration rights are being
transferred or assigned; (c) at or before the time the Company receives the
written notice
12
<PAGE>
contemplated by clause (b) of this sentence, the transferee or assignee agrees
in writing with the Company to be bound by all of the provisions contained
herein; and (d) the transferee of the relevant Securities complies with the
restrictions on the Purchaser set forth in Section 4 of the Securities Purchase
Agreement.
10. Amendment of Registration Rights.
Any provision of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), from time to time, only with the written
consent of the Company and holders of 75% of the then outstanding principal
amount of the Debentures. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon the Purchaser and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of the
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free
transmission) or two business days following deposit of such notice with an
internationally recognized courier service, with postage prepaid and addressed
to each of the other parties thereunto entitled at the following addresses, or
at such other addresses as a party may designate by five days advance written
notice to each of the other parties hereto.
Company: ADVANCED VIRAL RESEARCH
200 Corporate Boulevard South
Yonkers, New York 10701
Att.: Shalom Z. Hirschman, M.D.
Tel.: (914) 376-7383
Fax: (914) 376-7368
13
<PAGE>
and to:
ADVANCED VIRAL RESEARCH CORP.
1250 E. Hallandale Beach Blvd.
Hallandale, Florida 33009
Att.: William Bregman
Tel.: (954) 458-7636
Fax: (954) 458-4715
With a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
250 Park Avenue
New York, New York 10177
Att: Robert E. Fischer, Esq.
Tel.: (212) 986-1116
Fax: (212) 986-0604
Purchaser: FOCUS INVESTORS LLC
c/o West End Asset Management LLC
One World Trade Center
Suite 4563
New York, New York 10048
Att.: Ethan E. Benovitz
Tel.: (212) 775-9299
Fax.: (212) 775-9311
with a copy to:
KRONISH LIEB WEINER &HELLMAN LLP
1114 Avenue of the Americas
New York, New York 10036
Att: Steven Huttler, Esq.
Tel.: (212) 479-6136
Fax: (212) 479-6275
14
<PAGE>
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York, except for provisions with respect to
internal corporate matters of the Company which shall be governed by the
corporate laws of the State of Delaware. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. This Agreement has been entered into
freely by each of the parties, following consultation with their respective
counsel, and shall be interpreted fairly in accordance with its terms, without
any construction in favor of or against either party. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such validity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth, or referred to
herein and in the other Primary Documents. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed.
ADVANCED VIRAL RESEARCH CORP.
By: ___________________________________
Name: Shalom Z. Hirschman
Title: President and Chief Executive Officer
FOCUS INVESTORS LLC
By: WEC Asset Management LLC, Manager
By: ________________________________
Name: Ethan E. Benovitz
Title: Managing Director
16
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
August 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 95,618
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 160,953
<PP&E> 1,090,339<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,747,862
<CURRENT-LIABILITIES> 425,790
<BONDS> 0
0
0
<COMMON> 3,013
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,747,862
<SALES> 4,590
<TOTAL-REVENUES> 26,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,852,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,043
<INCOME-PRETAX> (1,965,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,965,832)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<FN>
<F1>PP&E REPRESENT NET AMOUNTS.
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