<PAGE> 1
As filed with the Securities and Exchange Commission on October 31, 2000.
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
ADVANCED VIRAL RESEARCH CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 5129 59-2646820
---------- ------ -----------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial IRS Employer
incorporation or organization) Classification Code Number) Identification Number
</TABLE>
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
---------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
---------------------------------------------------------------------
(Name, address and telephone number of agent for service)
---------------------
COPIES TO:
CHARLES J. RENNERT
Berman Wolfe Rennert Vogel & Mandler, P.A.
Bank of America Tower, Suite 3500, 100 Southeast Second Street
Miami, Florida 33131-2130
Phone: (305) 577-4177 Fax: (305) 373-6036
---------------------
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 the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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 delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
---------------------
<PAGE> 2
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Per Share Aggregate Offering Price Registration Fee
--------------------------- ------------- ------------------------ ------------------------ ----------------
<S> <C> <C> <C> <C>
Common stock par Up to (2) $20,000,000 (3) $5,280.00
value $0.00001 per share 81,818,864 (1)
Common stock par 10,000,000 (4) $1.00 $10,000,000 $2,640.00
value $0.00001 per share
Total Fee $7,920.00
</TABLE>
-----------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended.
Represents shares which may be issued pursuant to our equity line of credit
agreement with Spinneret Financial Systems, Inc. The number of shares of
common stock issued will vary based on the purchase price per share.
(2) The price per common share will vary based on the closing bid prices of our
common stock as reported on the Bulletin Board during the valuation periods
provided in the private equity line of credit agreement described in the
registration statement. The purchase price will be equal to average of the
three lowest daily closing bid prices during the valuation period. The
agreement allows us to sell shares to Spinneret Financial Systems over a
period of 30 months from the date of the agreement.
(3) This represents the maximum purchase price that Spinneret Financial Systems
may pay to us under the private equity line of credit agreement. The
maximum net proceeds we can receive is $20,000,000 less a 5% placement fee
payable to our placement agent, May Davis Group, Inc. and escrow fees and
expenses per drawdown.
(4) This represents (i) shares issuable upon the exercise of a Class A Warrant
to purchase 5,000,000 shares of our common stock at an exercise price per
share equal to $1.00, exercisable in part or in whole at any time by May
Davis at its discretion until September 18, 2005, and (ii) shares issuable
upon the exercise of a Class B Warrant to purchase 5,000,000 shares of our
common stock at an exercise price equal to the greater of $1.00 or 110% of
the bid price of the common stock on the applicable advance date under the
private equity line of credit agreement. The Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of
warrant shares equal to the product obtained by multiplying 5,000,000 by a
fraction, the numerator of which is the amount of the advance payable on
the applicable advance date and the denominator of which is $20,000,000.
----------------------------
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.
<PAGE> 3
Subject to completion, dated October 31, 2000
91,818,864 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
The shareholders named on page 53 are selling up to 91,818,864 shares
of our common stock.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On October 28, 2000,
the low and high bid prices for the common stock on the Bulletin Board were
$0.37 and $0.41, respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
------------------------
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 October __, 2000.
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> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................5
About this Prospectus............................................................................................10
Where to Find More Information...................................................................................10
Forward-looking Statements May Prove Inaccurate ................................................................11
Market Price of and Dividends on the Common Stock and Related Shareholder Matters................................12
Capitalization...................................................................................................13
Selected Consolidated Financial Data.............................................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations............................16
Business.........................................................................................................31
Management.......................................................................................................45
Selling Shareholders.............................................................................................52
Certain Relationships and Related Transactions...................................................................53
Description of Common Stock......................................................................................53
Use of Proceeds..................................................................................................53
Plan of Distribution.............................................................................................53
Legal Matters....................................................................................................57
Experts..........................................................................................................57
Disclosure of Commission Position on Indemnification for Securities Act Liabilities..............................57
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
ADVANCED VIRAL RESEARCH CORP.
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug with the
trade name RETICULOSE(TM) (the current formulation of which is now known as and
hereinafter referred to as PRODUCT R(TM)) for the treatment of certain viral
diseases such as:
o human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
o hepatitis B and hepatis C, both liver diseases
o human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer; and
o rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
Reticulose, now known as "Product R," until a new drug application, or NDA, is
approved by the FDA. FDA approval of an NDA first requires clinical testing of
Product R in human trials, which cannot be conducted until we first satisfy the
regulatory protocols and the substantial preapproval requirements imposed by the
FDA upon the introduction of any new or unapproved drug product pursuant to a
notice of claimed investigational exemption for a new drug, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States.
Shalom Z. Hirschman, M.D., our President, has monitored the testing of
Product R and has recently performed analyses of Product R with our laboratory
personnel, which we believe may be used in connection with the FDA approval
process. In addition, we have 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 Product R in the
United States.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701 and 1250 East Hallandale Beach Boulevard, Suite 501, Hallandale,
Florida 33009. Our telephone number in Yonkers, New York is (914) 376-7383 and
our telephone number in Hallandale, Florida is (954) 458-7636 .
1
<PAGE> 6
THE OFFERING
On September 18, 2000, we signed a private equity line of credit
agreement with Spinneret Financial Systems, Inc. for the future issuance and
purchase of shares of our common stock. The private equity line of credit
agreement establishes what is sometimes termed an equity line of credit or an
equity drawdown facility. Spinneret has committed up to $20,000,000 to purchase
shares of our common stock. Beginning on the date that a registration statement
covering the resale of the shares issuable pursuant to the equity line of credit
is declared effective by the Commission, and continuing for thirty (30) months
thereafter, we may, from time to time, in our sole discretion, sell or "put"
shares of our common stock to Spinneret at a price equal to the market price of
the common stock. Spinneret's obligation to purchase the shares of our common
stock is subject to the satisfaction of the conditions included on page 38 of
this prospectus. Once every fifteen (15) trading days, we may request an advance
the maximum amount of which is dependent, among other things, on the trading
volume of our common stock. The number of shares that we will issue to Spinneret
in return for the advance will be determined by dividing the amount of the
advance by the average of the three lowest reported closing bid prices of our
common stock over a 25 trading day period ending on the advance notice date, as
set forth in private equity line of credit agreement. In addition, the agreement
provides that the closing bid price of the common stock on the advance notice
date shall not be less than the average of the three lowest closing bid prices
of our common stock for the 25 trading day period ending on the date we request
an advance.
We will receive the amount of the advance less any escrow agent fees
and a five percent (5%) cash placement fee payable to the placement agent, May
Davis Group, Inc., which introduced Spinneret to us. May Davis is not obligated
to purchase any of our shares, but as an additional placement fee, we have
issued to May Davis a Class A Warrant to purchase 5,000,000 shares of our common
stock at an exercise price per share equal to $1.00, exercisable in part or in
whole at any time by May Davis at its discretion until September 18, 2005, and a
Class B Warrant to purchase 5,000,000 shares of our common stock at an exercise
price equal to the greater of $1.00 or 110% of the bid price of the common stock
on the applicable advance date under the private equity line of credit
agreement. The Class B Warrant is exercisable pro rata on or after each advance
date with respect to that number of warrant shares equal to the product obtained
by multiplying 5,000,000 by a fraction, the numerator of which is the amount of
the advance payable on the applicable advance date and the denominator of which
is $20,000,000, until sixty months from the date of issuance. We may redeem the
warrants at a redemption price of $.01 per share provided that the bid price for
our common stock equals at least $4.00 per share for a period of ten (10)
consecutive trading days, as described therein. May Davis is also entitled to
certain "piggyback" registration rights with respect to the shares of common
stock issuable upon exercise of the warrants pursuant to a registration rights
agreement.
In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral has agreed that he, she or it
will not, directly or indirectly, without the prior written consent of
Spinneret, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of (whether pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended, or otherwise) any shares of our common
stock, including options, rights, warrants or other securities underlying,
convertible into, exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of our common stock (whether or not
beneficially owned by the undersigned), or any beneficial interest therein for a
period of ten (10) trading days following the receipt of an advance notice by
Advanced Viral pursuant to the agreement.
2
<PAGE> 7
<TABLE>
<CAPTION>
<S> <C>
Securities offered (1)............................... Up to 91,818,864 shares of common stock
Common stock to be outstanding
after the offering (2)............................... 453,713,239 shares of common stock, assuming
issuance of the 81,818,864 shares pursuant to our
equity line of credit and exercise of all warrants for
which shares are being registered in this prospectus
Use of proceeds...................................... We will not receive any proceeds from the sale of
common stock by the selling shareholders. We will
receive the cash proceeds, if any, from the exercise
of the warrants held by selling shareholders. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risk factors......................................... An investment in the shares involves a high degree
of risk. See "Risk Factors."
OTC Bulletin Board trading symbol...................."ADVR"
</TABLE>
---------------
(1) Represents (i) up to 81,818,864 shares of our common stock issuable upon
the exercise from time to time of a private equity line of credit
established by Spinneret Financial Systems; and (ii) up to 10,000,000
shares of our common stock issuable upon the exercise of certain warrants
to May Davis Group, Inc. under the equity line of credit agreement, of
which only the Class A Warrant to purchase 5,000,000 shares of common stock
is currently exercisable. The Class B Warrant to purchase 5,000,000 shares
of common stock at an exercise price equal to the greater of $1.00 or 110%
of the bid price of the common stock on the applicable advance date under
the private equity line of credit agreement, is exercisable pro rata on or
after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty
months from the date of issuance.
(2) As of October 24, 2000. Does not include approximately 65,173,798 shares
issuable upon exercise of certain outstanding options and warrants that are
not held by the selling shareholders.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus. The statement of operations
data for the six months ended June 30, 2000 and the balance sheet data as of
June 30, 2000 are derived from our unaudited consolidated financials included
elsewhere in this prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
6 Months Ended
1995 1996 1997 1998 1999 June 30, 2000
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $27,328 $24,111 $2,278 $656 $10,953 $4,961
Net loss ($401,884) ($1,154,740) ($4,141,729) ($4,557,710) ($6,174,262) $ (3,390,848)
Net loss per common share ($0.00) ($0.00) ($0.02) ($0.02) ($0.02) ($.01)
Weighted average # of shares 248,002,608 257,645,815 274,534,277 294,809,073 302,361,109 328,713,278
</TABLE>
SUMMARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
As of
1995 1996 1997 1998 1999 June 30, 2000
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $796,241 $1,716,800 $4,189,842 $3,304,953 $2,861,574 $ 5,009,675
Long-term liabilities - - $2,384,793 $1,625,299 $4,676,652 $ 209,470
Stockholders' equity per $0.00 $0.01 $0.01 $0.00 $0.00 $0.01
common share
Shares outstanding at year end 251,181,774 267,031,058 277,962,574 296,422,907 303,472,035 360,914,200
</TABLE>
4
<PAGE> 9
RISK FACTORS
OUR SECURITIES ARE HIGHLY SPECULATIVE. YOU SHOULDN'T PURCHASE THEM
UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CONSIDER VERY
CAREFULLY THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO PURCHASE OUR
SECURITIES.
1. BECAUSE OUR SHARES ARE 'PENNY STOCKS,' YOU MAY BE UNABLE TO RESELL THEM
IN THE SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than
$5 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the purchaser,
provide them with a disclosure schedule explaining the penny stock market and
its risks, and receive the purchaser's written agreement to the transaction
prior to the sale. These requirements limit the ability of broker/dealers to
sell penny stocks. Also, because of the extra requirements, many broker/dealers
are unwilling to sell penny stocks at all. As a result, you maybe unable to
resell the stock you buy in this offering and could lose your entire investment.
2. THE EXERCISE OR CONVERSION OF OUR OUTSTANDING CONVERTIBLE SECURITIES,
OR DRAW DOWNS UNDER THE EQUITY LINE OF CREDIT COULD HAVE A SIGNIFICANT
NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, in addition to the 361,895,098
shares of our common stock currently outstanding:
o we have outstanding stock options to purchase an aggregate of
50,755,380 shares of common stock at exercise prices ranging
from $0.15 to $0.36, of which 47,573,460 are currently
exercisable;
o we have outstanding warrants to purchase an aggregate of
24,418,418 shares of common stock at prices ranging from
$0.199 to $1.00, of which 19,418,418 are currently
exercisable; and
o up to 81,818,141 shares may be offered and sold, from time to
time, by Spinneret Financial Systems, Inc. which may purchase
such shares pursuant to our equity line of credit agreement,
assuming a purchase price equal to the average of the three
lowest daily closing bid prices for the 25 consecutive trading
days prior to October 24, 2000 ($0.3667), multiplied by 0.67
($0.2444). Under the terms of the equity line of credit
agreement, we can "put" up to an aggregate of $20,000,000 of
our common stock to Spinneret Financial Systems. The purchase
price per common share will vary based on the closing bid
prices of our common stock as reported on the Bulletin Board
during the valuation periods provided in the equity line of
credit agreement. For a full description of the equity line of
credit agreement, see pages 38-40 of this prospectus.
If all the foregoing securities and put rights were fully exercised
and/or converted, as the case may be, there would be outstanding approximately
an additional 156,991,939 shares of common stock. The sale or availability for
sale of this number of shares of common stock in the
5
<PAGE> 10
public market could depress the market price of the common stock. Additionally,
the sale or availability for sale of this number of shares may lessen the
likelihood that additional equity financing will be available to us, on
favorable or unfavorable terms.
3. IT IS UNLIKELY THAT OUR COMPANY WILL BE ABLE TO CONTINUE AS A GOING
CONCERN WITHOUT A SIGNIFICANT IMPROVEMENT IN OUR FINANCIAL CONDITION,
WHICH HAS CONSTRAINED OUR ABILITY TO FINANCE NECESSARY RESEARCH,
DEVELOPMENT AND OTHER OPERATING EXPENSES AS NEEDED.
Our independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999
includes an explanatory paragraph regarding our ability to continue as a going
concern. During the next 12 months, we expect to spend approximately $10,000,000
($4,000,000 of which was raised during the first quarter of fiscal 2000) to
conduct research and development related activities, including approximately
$4,000,000 related to the preparation of the IND for submission to the FDA. We
currently are unable to calculate the amount we will require in additional
funding to complete the FDA approval process, including conducting clinical
trials and filing the NDA application. Our ability to continue operations is
dependent upon our continued sale of our securities for funds to meet our cash
requirements, and as a result our ability to continue as a going concern is
doubtful.
Unless we are able to generate sufficient revenue or raise additional
funds when needed, it is likely that we will be unable to continue our planned
activities, even if we are making progress with our research and development
projects. The longer the duration of the regulatory approval process, the more
unlikely it is that we will be able to raise such funds on favorable terms or at
all, or that any funds raised will be sufficient to complete the FDA approval
process to achieve our goal of commercial distribution in the United States and
elsewhere. Furthermore, there is no guarantee that approval of Product R by the
FDA or any other regulatory authority, or additional financing from the sale of
our securities, will translate into any material change in our financial
condition. The extensive delays and costs of complying with the FDA regulations
makes it unlikely that we will have adequate funds to finance the necessary
clinical studies and related costs.
Subject to certain volume restrictions and the requirement that there
be an effective registration statement covering the resale of the shares of
common stock to be sold, we have the ability to sell up to $20,000,000 worth of
common stock under the private equity line of credit agreement, but the timing
and amount of capital raised can vary significantly depending upon various
factors, including the market price of our common stock. We cannot be certain
that Spinneret will have the ability to purchase any of the shares of common
stock put to it pursuant to the equity line of credit agreement. Accordingly, we
may not be able to raise necessary capital in the manner we expect pursuant to
the equity line of credit agreement.
Because the maximum amount of any draw down request under the equity
line of credit agreement is subject to a formula based on the average of the
three lowest closing bid prices of our common stock reported on the Bulletin
Board for the 25 consecutive trading days prior to the request multiplied by the
total trading volume for the same period, a decline in the trading volume or
price of our common stock may reduce the amount we can draw down under the
private equity line of credit agreement. In addition, business and economic
conditions may not make it feasible to draw down under the private equity line
of credit agreement at every opportunity, and drawdowns are available only every
16 trading days. We may need to raise additional capital to fund our research
and development activities. Spinneret may also decline to
6
<PAGE> 11
purchase shares under a draw request under the private equity line of credit
agreement if the conditions set forth in such agreement are not met.
We may not be able to obtain additional financing on terms favorable to
us, if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively to continue or complete the
research and development of Product R.
4. THE EXERCISE OF OUR EQUITY LINE OF CREDIT MAY MAKE IT DIFFICULT TO
EVALUATE A SHAREHOLDER'S EQUITY POSITION IN OUR COMPANY.
The number of shares of our common stock which is issuable upon
exercise from time to time under our equity line of credit will fluctuate based
on the average of the three lowest reported closing bid prices of our common
stock over a 25 trading day period ending on the advance notice date. Therefore,
the percentage of our common stock held by a shareholder on any given day may be
substantially different from another day depending on our closing bid prices, as
the number of shares of our common stock issuable pursuant to our equity line of
credit may vary significantly from day to day.
We expect to use the net proceeds from the draw downs under the equity
line of credit agreement with Spinneret for general corporate purposes. We will
have significant flexibility in applying the net proceeds. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the net proceeds. If we fail to apply the net
proceeds effectively, our business could be negatively affected.
5. IF WE DO NOT OBTAIN THE FDA'S APPROVAL TO CONDUCT CLINICAL TESTS OF
PRODUCT R IN THE UNITED STATES, WE WILL NOT BE ABLE TO COMPLETE ITS
DEVELOPMENT AND MAY NOT BE ABLE TO SELL IT ANYWHERE.
Product R is the only product we are developing, We will not be able to
sell it in the United States unless we submit, and the FDA approves, a new drug
application, or NDA. We must conduct clinical trials of Product R in humans
before we submit an NDA. However, we cannot begin clinical trials in the United
States until the FDA approves our notice of claimed investigational exemption
for a new drug, or IND. We have not yet submitted an IND for Product R and we
don't know if or when we will submit one. The FDA will not approve our IND if we
haven't satisfied regulatory protocols and other preapproval requirements
required for the introduction of a new or unapproved drug.
If we submit an IND and the FDA approves it, we won't be able to begin
clinical testing unless we are able to obtain the additional financing we need
in order to conduct the trials. It is also possible that clinical trials, if
conducted, will not prove that Product R is safe or effective in treating
viruses of any kind, in which case we won't be able to submit an NDA and we
won't be able to sell Product R in the United States.
We haven't been able to sell Product R outside the United States
because we don't have a free sales certificate for Product R. A free sales
certificate is a document issued by the country in
7
<PAGE> 12
which a pharmaceutical product is manufactured, certifying that the country
permits the "free sale" of the product in that country. The Bahamas, where our
manufacturing facility is located, has no procedure in place to issue a free
sales certificate for any therapeutic drug, including Product R. Most countries
require that a pharmaceutical product be at least registered and certified for
free sale in the country in which it is manufactured before allowing the
registration of the product in that country. Because we are unable to obtain a
certificate from the Bahamas, we are not able to meet registration requirements
in the countries which require the certificate, and will be unable to sell
Product R in those countries.
6. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT REVENUE,
AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.
Although we were formed in 1985, we are still in the development stage.
From inception through June 30, 2000, we had an accumulated deficit of
approximately $23,100,000. We expect that our deficit will continue to increase.
The only product revenues we have ever had are insignificant amounts related to
our distribution of Product R for testing purposes. We do not currently have any
source of product revenue. At this time we have no basis to believe that we will
ever generate operating revenues from the sale of Product R.
7. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT. IF WE ARE UNABLE TO
PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation or
other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and could
result in substantial cost to us and diversion of our efforts. In June 2000,
Advanced Viral filed an action and complaint in the New York Supreme Court,
Westchester County, against Commonwealth Pharmaceuticals, et al alleging a
breach of an exclusive distribution agreement, misappropriation of trade secrets
and confidential information, conversion and conspiracy to convert Advanced
Viral's property interests in Reticulose. In August 2000, Commonwealth
Pharmaceuticals and certain affiliates filed a counterclaim suit against
Advanced Viral in the United States District Court for the Eastern District of
Michigan alleging ownership of the exclusive/broad rights in Reticulose, and
seeking, among other things: (i) a declaratory judgment of the claimants'
exclusive ownership of the broad/exclusive rights to Reticulose and the subject
patent; (ii) an injunction against Advanced Viral from further attempts to use,
market or assert any claims of ownership over any broad/exclusive rights in
Reticulose, or the use, publication or disclosure of information regarding
Reticulose; (iii) return of such information to the claimants; (iv) that
Advanced Viral assign any Reticulose-related trademarks to the claimants and (v)
that Advanced Viral pay damages, profits, costs and attorneys' fees. See
"Business - Legal Proceedings."
8
<PAGE> 13
In September 2000, our case in New York was dismissed. We are
considering requesting that the New York court reinstate our claim in the New
York case. The case in the Federal Court continues. At this point, we have
answered the complaint against us in the Federal Court and have entered a number
of counterclaims which are in substance the same as our claims in the New York
case.
We currently have 15 patent applications pending with the United States
Patent and Trademark Office (the "PTO") and 17 patent applications pending in
other countries relating to Product R. In the United States, we have one allowed
patent and three issued patents from the PTO. We also rely on trade secrets,
know-how and continuing technological advancements to protect our proprietary
technology. We require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. However, these parties may not honor these agreements and we
may not be able to successfully protect our rights to unpatented trade secrets
and know-how. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
To facilitate development of our proprietary technology base, we may
need to obtain licenses to patents or other proprietary rights from other
parties. If we are unable to obtain such licenses, our product development
efforts may be delayed.
We may collaborate with universities and governmental research
organizations which, as a result, may acquire certain rights to any inventions
or technical information derived from such collaboration.
We are uncertain as to whether the outcome of the aforementioned
litigation will have a material adverse impact on our business. We may incur
substantial costs in asserting any patent rights and in defending such suit and
other suits against us related to intellectual property rights. Such disputes
could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or patent
applications. An opposition or revocation proceeding could be instituted in the
patent offices of foreign jurisdictions. An adverse decision in any such
proceeding could result in the loss of our rights to a patent or invention.
8. OUR BUSINESS COULD BE HARMED IF WE LOSE THE SERVICES OF THE KEY
PERSONNEL UPON WHOM WE DEPEND.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of our three full-time executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. The loss or unavailability to us of the services of
Bernard Friedland or Dr. Hirschman, President and Chief Executive Officer, could
have a material negative impact on our business prospects and any potential
earning capacity, and, therefore, we have obtained "key-man" insurance on the
lives of Mr. Friedland and Dr.
9
<PAGE> 14
Hirschman in the amounts of $400,000 and $1,000,000, respectively. If our level
of operations significantly increase, the business may depend upon our abilities
to attract and hire additional management and staff employees. It is possible
that we will be unable to secure such additional management and staff when
necessary.
9. 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 115,525,093 shares of our common stock, or approximately
31.9% of the shares of common stock deemed outstanding on such date for the
purposes of the percentage calculation, including certain shares underlying
options held by Dr. Hirschman. As there are no cumulative voting rights, current
management, by virtue of their stock ownership, can be expected to influence
substantially the election of our board of directors and thereby continue to
impact substantially our business, affairs and policies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission to register 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, NW, Room 1024, Washington, D.C. 20549;
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661; and
10
<PAGE> 15
- 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.
200 Corporate Boulevard South
Yonkers, New York 10701
(914) 376-7383
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to important factors, disclosed in this prospectus, that could cause
actual results to differ materially from such expectations, including those
factors discussed in "Risk Factors."
We will not publicly update or revise any forward-looking statements,
whether because of new information, future events or otherwise. In light of
these risks, uncertainties, and assumptions, the forward-looking events
discussed in the prospectus might not occur.
11
<PAGE> 16
MARKET PRICE OF AND DIVIDENDS ON THE COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for the periods indicated. 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
------- --------
1998
First Quarter.......................................$0.18 $0.4375
Second Quarter.......................................0.245 0.46
Third Quarter........................................0.16 0.30
Fourth Quarter.......................................0.155 0.23
1999
First Quarter........................................0.175 0.35
Second Quarter.......................................0.202 0.322
Third Quarter........................................0.1875 0.2344
Fourth Quarter.......................................0.19 0.27
2000
First Quarter........................................0.185 1.40
Second Quarter.......................................0.33 0.61
Third Quarter........................................0.445 0.648
Fourth Quarter through October 20, 2000..............0.35 0.45
SHAREHOLDERS
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,764 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.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2000: (1)
on a historical basis and (2) as adjusted to give effect to the sale of (i) an
assumed 81,818,864 shares of common stock which may be offered by Spinneret
Financial Systems in this offering and the application of the net proceeds we
may receive for our shares from Spinneret under the private equity line of
credit agreement and (ii) 10,000,000 shares of common stock which are issuable
or may be issuable to May Davis pursuant to the Class A Warrant and the Class B
Warrant. The actual change in common stock and additional paid in capital will
depend on the actual amount raised and the market price of our common stock at
that time. In addition, we will pay May Davis a placement fee of five percent
(5%) of the draw. See "Use of Proceeds." This table should be read in
conjunction with our financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial data appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Actual as Adjusted *
------ -----------
<S> <C> <C>
Stockholders' equity:
Common stock, $0.00001 par value; 1,000,000,000 shares authorized; $ 3,608 $ 4,526
360,914,200 shares outstanding actual; 452,732,341 shares outstanding pro
forma as adjusted
Additional paid-in-capital $ 29,145,187 $ 58,780,623
Deficit accumulated during the development stage $(23,116,086) $(23,116,086)
Discount on warrants $ 1,852,592) $ 1,852,592)
Total stockholders' equity: $ 4,180,117 $ 33,816,471
</TABLE>
--------------------
* DOES NOT REFLECT 980,898 SHARES OF COMMON STOCK ISSUED BETWEEN JULY 1, 2000
AND OCTOBER 24, 2000, NOR 65,173,798 SHARES SUBJECT TO OUTSTANDING OPTIONS AND
WARRANTS AS OF OCTOBER 24, 2000.
13
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------- 6 Months Ended
1995 1996 1997 1998 1999 June 30, 2000
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 27,328 $ 24,111 $ 2,278 $ 656 $ 10,953 $ 4,961
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Research and development 34,931 255,660 817,603 1,659,456 1,745,937 1,283,102
General and administrative 420,757 983,256 1,681,436 1,420,427 2,244,205 1,365,825
Depreciation 14,679 18,731 26,288 110,120 230,785 143,969
------------- ------------- ------------- ------------- ------------- -------------
470,367 1,257,647 2,525,327 3,190,003 4,220,927 2,792,896
------------- ------------- ------------- ------------- ------------- -------------
Net loss from operations (443,039) (1,233,536) (2,523,049) (3,189,347) (4,209,974) (2,787,935)
------------- ------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income 16,155 46,796 111,845 102,043 42,744 74,591
Other 25,000 32,000 7,800 293 -- --
Interest expense -- -- (1,738,325) (1,470,699) (2,007,032) (677,504)
------------- ------------- ------------- ------------- ------------- -------------
41,155 78,796 (1,618,680) (1,368,363) (1,964,288) (602,913)
------------- ------------- ------------- ------------- ------------- -------------
Net loss $ (401,884) $ (1,154,740) $ (4,141,729) $ (4,557,710) $ (6,174,262) $ (3,390,848)
============= ============= ============= ============= ============= =============
Net loss per share of common $ 0.00 $ 0.00 ($ 0.02) ($ 0.02) ($ 0.02) ($ 0.01)
------------- ------------- ------------- ------------- ------------- -------------
Stock - basic and diluted
Weighted average number of 248,002,608 257,645,815 274,534,277 294,809,073 302,361,109 328,713,278
============= ============= ============= ============= ============= =============
Commons shares outstanding
</TABLE>
14
<PAGE> 19
SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 65,230 $ 61,396 $ 236,059 $ 924,420 $ 836,876 $ 2,571,008
Investments 479,000 1,378,841 2,984,902 821,047 -- --
Inventory 18,091 19,729 19,729 19,729 19,729 19,729
------------- ------------- ------------- ------------- ------------- -------------
Other current assets 12,967 16,081 20,240 29,818 59,734 119,654
Total current assets 575,288 1,476,047 3,260,930 1,795,014 916,339 2,710,391
Property and equipment 214,494 207,209 485,661 1,049,593 1,375,923 1,704,922
Other assets 6,459 33,544 443,251 460,346 569,312 594,362
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 2,861,574 $ 5,009,675
============= ============= ============= ============= ============= =============
Liabilities and Stockholders'
Equity (Deficiency)
Current liabilities:
Accounts payable and
accrued liabilities $ 14,651 $ 54,474 $ 375,606 $ 279,024 $ 728,872 $ 547,478
Current portion of
capital lease obligation -- -- -- 38,355 50,315 52,540
Current portion of note
payable -- -- -- -- 19,035 20,070
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 14,651 54,474 375,606 317,379 798,282 670,088
------------- ------------- ------------- ------------- ------------- -------------
Long-term liabilities:
Common stock to be issued -- -- -- -- -- --
Convertible debenture, net -- -- 2,384,793 1,457,919 4,446,629 15,000
Capital lease obligation-
Non-current portion -- -- -- 167,380 152,059 125,261
Note payable-non-current portion -- -- -- -- 77,964 69,209
------------- ------------- ------------- ------------- ------------- -------------
Total long-term liabilities -- -- 2,384,793 1,625,299 4,676,652 209,470
------------- ------------- ------------- ------------- ------------- -------------
Deposit on securities purchase
agreement -- -- -- 600,000 -- --
------------- ------------- ------------- ------------- ------------- -------------
Stockholders' equity (deficiency):
Common stock, 1,000,000,000
shares of par value
$0.00001 Authorized 2,512 2,671 2,779 2,964 3,034 3,608
Additional paid-in capital 4,475,875 7,003,351 10,512,767 14,325,076 17,537,333 29,145,187
Subscription receivable -- (19,000) (19,000) -- -- --
Deficit accumulated during
the development stage (3,696,797) (4,851,537) (8,993,266) (13,550,976) (19,725,238)
Deferred compensation cost -- (473,159) (73,837) (14,769) -- --
Discount on warrants -- -- -- -- (428,489) (1,852,592)
Total stockholders' equity
(deficiency) 781,590 1,662,636 1,429,443 762,295 (2,613,360) 4,180,117
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 2,861,574 $ 5,009,675
============= ============= ============= ============= ============= =============
Shares outstanding at
period end 251,181,774 267,031,058 277,962,574 296,422,907 303,472,035 360,914,200
============= ============= ============= ============= ============= =============
</TABLE>
-------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND THE RELATED NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS. 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 ADVANCED VIRAL'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999.
OVERVIEW
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not yet generated significant
operating revenues, and as of June 30, 2000 we had incurred a cumulative net
loss of approximately $23,100,000. Our ability to generate substantial operating
revenue depends upon our success in gaining FDA approval for the commercial use
and distribution of Product R (the prior formulation of which was known as
"Reticulose"). All of our research and development efforts have been devoted to
the development of Product R.
In order to commence clinical trials for regulatory approval of Product
R 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
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 Product R in the United States. The
IND will seek approval to conduct a study testing the effectiveness of Product R
on human subjects with AIDS and other diseases. In the IND we intend to include,
among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be
conducted on humans; and
o information assuring the identification, quality and purity of
Product R and a description of the physical, chemical and
microbiological characteristics of Product R.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Product R as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in considering the IND
application, if it is ever filed. FDA approval to begin human clinical trials of
Product R pursuant to an approved IND will require significant cash
expenditures. Furthermore, Product R may never be approved for commercial
distribution by any country.
16
<PAGE> 21
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. Because our research and
development expenses and clinical trial expenses will be charged against
earnings for financial reporting purposes, we expect that losses from operations
will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
During the years ended December 31, 1999 and 1998, we incurred losses
of approximately $6,174,000 and $4,558,000, respectively, compared to
approximately $4,142,000 in 1997. Our increased losses for the fiscal years
ended December 31, 1999 and 1998 as compared with the fiscal year ended December
31, 1997 were attributable primarily to:
General and Administrative Expenses. General and
administrative expenses were approximately $1,681,000, $1,420,000 and $2,244,000
in 1997, 1998 and 1999, respectively. The decrease in general and administrative
expense from 1997 to 1998 resulted from the amortization of deferred
compensation costs associated with options granted to non-employees and recorded
as compensation expense in 1997 ($340,000), and also from the fact that 50% of
Dr. Hirschman's salary ($162,500) was accounted for as research and development
expense in 1998. The increase in general and administrative expense from 1998 to
1999 resulted from increased consulting fees (approximately $124,000 in 1998 to
$345,000 in 1999) primarily resulting from the GloboMax agreement, increased
health insurance costs (approximately $80,000 in 1998 to $160,000 in 1999),
increased professional fees (approximately $335,000 in 1998 and $425,000 in
1999) primarily for expenses relating to SEC registrations for convertible
debentures and warrants issued by Advanced Viral during 1998 and 1999, and
increased compensation expense related to modification of existing options
outstanding and payroll expenses ($450,000 in 1998 and $788,000 in 1999)
primarily due to the salaries of our President and Chief Financial Officer and
accounted for compensation expense.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development
expense increased from approximately $818,000 in 1997, to $1,659,000 in 1998, to
approximately $1,746,000 in 1999. The increase from 1997 to 1998 resulted
primarily from the maintenance of the Yonkers, New York laboratory. The
approximate costs of rent, personnel, operating costs and laboratory supplies
associated with the Yonkers laboratory for the years ended 1997, 1998 and 1999
were charged to research and development expense as follows: $60,000, $950,000
and $1,325,000.
DEPRECIATION EXPENSE. Depreciation expense increased from
approximately $26,000 in 1997, $110,000 in 1998 to $231,000 in 1999 as a result
of the acquisition of furniture, fixtures and equipment for the Yonkers office
and laboratory, along with the additional leasehold improvements for laboratory
space leased during 1998 and 1999.
17
<PAGE> 22
INTEREST EXPENSE. Interest expense for the years ended 1997,
1998 and 1999 was approximately $1,738,000, $1,471,000 and $2,007,000,
respectively. Included in interest expense for these periods was:
o the beneficial conversion feature on certain
convertible debentures of approximately $1,553,000,
$836,000 and $1,045,000 for the years ended 1997,
1998 and 1999, respectively;
o interest expense associated with certain convertible
debentures of approximately $29,000, $95,000 and
$163,000 for the years ended 1997, 1998 and 1999,
respectively;
o amortization of discount on certain warrants of
approximately $291,000 and $148,000 for the years
ended 1998 and 1999, respectively;
o amortization of loan costs of approximately $112,000,
$230,000 and $331,000 for the years ended 1997, 1998
and 1999, respectively; and
o additional financing costs related to effective date
of certain registration statements of $286,000 in
1999.
REVENUES. There were $10,953 and $656 in sales revenue in 1999
and 1998, respectively, compared to $2,278 in sales revenues for 1997. All sales
revenue resulted from distributors purchasing Product R for testing purposes.
The decrease in sales revenue from 1997 is due to the fact that in 1997, we sold
ampules of Product R outside the United States to independent organizations
solely for testing purposes. In 1998, the majority of the research and
development was conducted by our laboratory personnel, accordingly, sales to
outside entities for testing purposes were nominal. Interest income was
approximately $43,000 and $102,000 in 1999 and 1998, respectively, compared to
approximately $112,000 in 1997.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the three and six month periods ended June 30, 2000, we incurred
losses of approximately $1,336,000 and $3,391,000, respectively, vs.
approximately $1,176,000 and $2,086,000 for the three and six month periods
ended June 30, 1999. Our increased losses were attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSE. Our increased losses during
the three and six months ended June 30, 2000 are principally due to increased
general and administrative expense (approximately $610,000 and $1,366,000 for
the three and six months ended June 30, 2000 vs. $499,000 and $937,000 for the
three and six months ended June 30, 1999, respectively). Included in the general
and administrative expenses are:
(1) an increase in consulting and professional fees
(approximately $142,000 and $469,000 for the three
and six months ended June 30, 2000 vs. $126,000 and
18
<PAGE> 23
$271,000 for the three and six months ended June 30,
1999, respectively) primarily attributable to the
engagement of an investor relations firm and a
consulting agreement with Harbor View Group;
(2) an increase in payroll and related expenses
(approximately $252,000 and $488,000 for the three
and six months ended June 30, 2000 vs. $161,000 and
$333,000 for the three and six months ended June 30,
1999, respectively) attributable to increased
employee and officer salaries and the addition of a
Chief Financial Officer position.
DEPRECIATION EXPENSE. Our increased losses during the three and
six months ended June 30, 2000 are also due to increased depreciation expense
(approximately $76,000 and $144,000 for the three and six months ended June 30,
2000 vs. $59,000 and $96,000 for the three months ended June 30, 1999,
respectively) due to the purchase of additional machinery and equipment and
leasehold improvements.
INTEREST INCOME (EXPENSE). Our increased losses during the three
and six months ended June 30, 2000 are also due to increases and decreases in
interest expense (approximately $113,000 and $678,000 for the three and six
months ended June 30, 2000 vs. $217,000 and $312,000 for the three and six
months ended June 30, 1999, respectively). Interest income for the three and six
months ended June 30, 2000 was approximately $50,000 and $75,000 vs. $6,000 and
$21,000 for the three and six months ended June 30, 1999, respectively. Included
in the interest expense are:
o amortization of loan costs and other interest expense
(as reduced by other items previously accrued at year
end) of approximately $8,000 and $65,000 for the
three and six months ended June 30, 2000 vs. $60,000
and $118,000 for the three and six months ended June
30, 1999, respectively;
o beneficial conversion feature on certain convertible
debentures of approximately $387,000 for the six
months ended June 30, 2000;
o amortization of discount on certain warrants of
approximately $106,000 and $226,000 for the three and
six months ended June 30, 2000 vs. $36,000 and
$73,000 for the three and six months ended June 30,
1999, respectively;
o additional financing costs related to the effective
date of certain registration statements of $120,000
for the six months ended June 30, 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Our increased losses during the
three months ended June 30, 2000 are also due to increased research and
development expenses (approximately $588,000 and $1,283,000 for the three and
six months ended June 30, 2000 vs. $409,000 and $767,000 for the three and six
months ended June 30, 1999, respectively). Included in the research and
development expenses are:
19
<PAGE> 24
o consulting expenses payable to GloboMax LLC, a firm
assisting us with the preparation and filing of the
IND, of approximately $106,000 and $374,000 for the
three and six months ended June 30, 2000 vs. $110,000
for the three and six months ended June 30, 1999;
o expenditures in connection with the drug approval
process in Argentina of approximately $71,000 and
$116,000 for the three and six months ended June 30,
2000 vs. $48,000 for the three and six months ended
June 30, 1999, respectively; and
o additional expenditures for payroll and related costs
and occupancy expenses for the New York facility
(approximately $286,000 and $597,000 for the three
and six months ended June 30, 2000 vs. $231,000 and
$444,000 for the three and six months ended June 30,
1999, respectively).
REVENUES. We had sales of approximately $2,000 and $5,000 for the
three and six months ended June 30, 2000 vs. $2,000 and $5,000 for the three and
six months ended June 30, 1999, respectively. All sales during these periods
were to distributors purchasing Product R for testing purposes.
LIQUIDITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
As of December 31, 1999, we had current assets of approximately
$916,000, compared to approximately $1,795,000 at December 31, 1998. We had
total assets of approximately $2,862,000 and $3,305,000 at December 31, 1999 and
1998, respectively. The decrease in current and total assets was primarily
attributable to the use of investment capital to fund increased operating
expenditures.
During 1999, we used cash of approximately $4,148,000 for operating
activities, as compared to approximately $3,365,000 in 1998. During 1999, we:
o incurred non-cash expenses of approximately $331,000
and $148,000, respectively, relating to amortization
of loan costs and discount on warrants relating to
convertible debentures issued in 1997, 1998 and 1999;
o incurred non-cash expenses of approximately
$1,045,000 relating to amortization of deferred
interest associated with the beneficial conversion
feature of the 1998 and 1999 convertible debentures;
o expended approximately $770,000 in professional and
consulting fees;
o expended approximately $229,000 in laboratory
supplies;
20
<PAGE> 25
o expended approximately $1,685,000 for payroll and
related costs;
During 1999, cash flows provided by investing and financing activities
was primarily due to the proceeds from the issuance of the 1998 and 1999
convertible debentures of approximately $3,000,000, and proceeds from the sale
of securities of approximately $700,000. In addition, we expended approximately
$407,000 for leasehold improvements and furniture and equipment at our Yonkers,
New York office.
SIX MONTHS ENDED JUNE 30, 2000
As of June 30, 2000, we had current assets of approximately $2,710,000,
compared to approximately $916,000 at December 31, 1999. We had total assets of
approximately $5,010,000 and $2,862,000 at June 30, 2000 and December 31, 1999,
respectively. The increase in current and total assets was primarily
attributable to proceeds received from the sale of securities and the exercise
of outstanding options (please refer to Statement of Stockholders Equity
contained in the Consolidated Condensed Financial Statements and the related
Notes to Consolidated Condensed Financial Statements included herein.
During the six months ended June 30, 2000, we used cash of
approximately $2,594,000 for operating activities, as compared to approximately
$1,727,000 for the six months ended June 30, 1999. During the six months ended
June 30, 2000, we:
o expended approximately $488,000 for payroll and
related costs;
o incurred non-cash expenses of approximately $387,000
relating to amortization of deferred interest
associated with the beneficial conversion feature of
the second tranche of the December 1999 convertible
debentures;
o expended approximately $469,000 for professional and
consulting fees;
o incurred non-cash expenses relating to amortization
of loan costs and discount on warrants of
approximately $106,000 and $226,000, respectively,
relating to convertible debentures issued in 1998,
1999 and 2000; and
o incurred non-cash expenses of approximately $156,000
relating to the issuance of warrants for consulting
services.
During the six months ended June 30, 2000, cash flows provided by
financing activities was primarily due to the proceeds from the sale of
convertible debentures, sale of common stock and exercise of options in 1999 and
2000 of approximately $4,815,000. During the six months ended June 30, 2000,
cash flow used for investing activities were for expenditures of approximately
$473,000 for leasehold improvements and furniture and equipment at our Yonkers,
New York office.
21
<PAGE> 26
Under the terms of an agreement with RBB Bank, A.G. entered in November
1998 pursuant to which RBB purchased a 7% convertible debenture and related
warrants, we were 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 were 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 $16,050 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. The registration statement was declared effective by the Commission
on December 16, 1999. Pursuant to an agreement in January 2000, the purchasers
in this transaction were paid an aggregate cash penalty of $96,300 in connection
with the registration statement.
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 were required to file with the Commission a registration
statement to register the common stock issued under the purchase agreement, and
upon exercise of the warrants to allow the resale of such common stock to the
public. The agreement provides that if the registration statement is not
declared effective by the Commission prior to December 3, 1999, 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. The registration statement was declared
effective by the Commission on December 29, 1999.
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 were required to file with the
Commission a registration statement to register shares of the common stock
issuable upon conversion of the debentures and upon exercise of the warrants to
allow the purchaser to resell such common stock to the public. The purchase
agreement provides that, if the registration statement is not declared effective
prior to December 1, 1999, or if the number of shares qualified for trading on
the OTC Bulletin Board or
22
<PAGE> 27
reserved for issuance is insufficient for issuance upon the conversion of the
debentures and the exercise of the warrants, or if a blackout event occurs (as
described in the agreement, each of these events referred to as a "default"), we
will be required to pay the purchaser a penalty for each 30 day period during
which a default shall be in effect equal to $40,000, pro rated for the number of
days during each period the defaults were pending. To the extent the periodic
amounts for all default periods exceed $100,000 in the aggregate, the excess
amount shall be paid in shares of common stock, as set forth in the agreement.
The agreement further provides that until the registration statement has been
filed and becomes effective, we will not file any other registration statement
without the written consent of Focus Investors. The registration statement was
declared effective by the Commission on December 29, 1999.
Under the terms of a securities purchase agreement with Endeavour
Capital Fund S.A. dated December 28, 1999 and related documents thereto pursuant
to which Endeavour purchased 7% convertible debentures and related warrants, we
were required to file with the Commission a registration statement to register
shares of the common stock issuable upon conversion of the debentures (together
with interest on the debentures, which is payable in common stock on conversion)
and upon and upon exercise of the warrants to allow the purchaser to resell such
common stock to the public. The purchase agreement provides that, if the
registration statement is not declared effective prior to April 1, 2000, or if
the purchaser is restricted from making sales of registrable securities covered
by a previously effective registration statement at any time after the effective
date other than during a permitted suspension period (as defined in the
agreement), then, we will be required to pay the purchaser $40,000 (2% of the
purchase price) for each 30- day period of such default (except that, prior to
the initial effectiveness of this registration statement, the amount will be
$30,000 (1.5% of the purchase price) during the first two 30-day periods of such
default). The registration statement was declared effective by the Commission on
January 18, 2000.
In February 2000 pursuant to a securities purchase agreement, we sold
to Harbor View Group and various other purchasers 13,636,357 shares of common
stock, and warrants to purchase an aggregate of 5,454,544 shares of common stock
in a private offering transaction. Under the terms of the agreement, we were
required to use our best efforts to file a registration statement to register
the securities issued or issuable in connection with the agreement by May 31,
2000. The registration statement was filed with the Commission on May 26, 2000
and declared effective on June 7, 2000.
On September 18, 2000 we entered into a private equity line of credit
agreement where we have the right to put shares of our common stock to an
investor from time to time to raise up to $20,000,000, subject to the conditions
and restrictions included in "Equity Line of Credit Agreement" described on page
38 of this prospectus.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999,
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
23
<PAGE> 28
ability to continue as a going concern. Further, the accountant's report does
not include any adjustments that might result from the outcome of this
uncertainty. Although we may not be successful in doing so, we plan to eliminate
or remedy the deficiencies in our financial condition through the issuance of
additional securities for cash.
CAPITAL RESOURCES
We have been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. On March 31, 2000, we filed
a shelf registration statement with the Commission relating to the offering of
up to 200,000,000 shares of our common stock to be used in connection with
financings and resales of the shares issued thereunder by the recipients of such
shares. All such shares remain available for issuance.
The following table summarizes sales of our securities since November
1998.
<TABLE>
<CAPTION>
Gross Convertible / Conversion Price / Exercise Maturity Date /
Date Issued Proceeds Security Issued Exercisable Into Price Expiration Date
----------- -------- --------------- ---------------- --------------------------- ---------------
<S> <C> <C> <C> <C> <C>
November 1998 $1,500,000 Debenture 10,130,246 shares $0.1363-$.2011 per share Fully converted
Warrants 375,000 shares $0.20 per share October 31, 2008
375,000 shares $0.24 per share
January 1999 $802,500 Common Stock 4,917,276 shares 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 Common Stock 1,851,852 shares 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 14,348,847 shares $0.1396-$.1438 per share Fully converted
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
December 1999 $2,000,000 Debentures 13,884,841 shares $0.1363-.3564 per share Fully converted
and January 2000
Warrants 210,000 shares $0.19916667 per share December 31, 2002
February 2000 $3,000,000 Common Stock 13,636,957 shares n/a n/a
Warrants 2,727,272 shares $0.275 per share February 28, 2005
2,727,272 shares $0.33 per share
September 2000 (1) Warrants 10,000,000 shares $1.00 per share September 18, 2005
</TABLE>
(1) Represents warrants issued to May Davis Group, Inc. as consideration
for its services as placement agent in connection with the equity line
of credit.
SECURITIES ISSUED IN 1997
RBB BANK, A.G.: 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
24
<PAGE> 29
offshore transactions pursuant to Regulation S under the Securities Act. Accrued
interest under the 1997 debentures was payable semiannually, computed at the
rate of 7% per annum on the unpaid principal balance from the date of issuance
until the date of interest payment. The 1997 debentures were convertible, at the
option of the holder, into shares of common stock pursuant to specified
formulas. On April 22, 1997, June 6, 1997, July 3, 1997 and August 20, 1997,
pursuant to notice by the holder, RBB, to us under the February 1997 debenture,
$330,000, $134,000, $270,000 and $266,000, respectively, of the principal amount
of the February 1997 debenture was converted into 1,648,352, 894,526, 2,323,580
and 1,809,524 shares of the common stock, respectively. As of August 20, 1997
the February 1997 debenture was fully converted. On December 9, 1997, January 7,
1998, January 14, 1998, February 19, 1998, February 23, 1998, March 31, 1998,
May 4, 1998 and May 5, 1998, pursuant to notice by the holder, RBB, to us,
$120,000, $133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October 1997 debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869, 1,491,485, and
3,299,979 shares of common stock, respectively. As of May 5, 1998, the October
1997 debenture was fully converted.
In connection with the issuance of the 1997 debentures, we issued to
RBB six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from August
30, 1997 through August 30, 2007, 600,000 shares of the common stock. The
exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and
$0.27 per warrant share, respectively. Each such warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under such warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
prospectus, none of the warrants have been exercised.
SECURITIES ISSUED IN 1998
RBB BANK, A.G.: In November 1998 we sold $1,500,000 principal amount of
our ten-year 7% convertible debenture due October 31, 2008 to RBB, as agent for
the accounts of certain persons, in an offshore transaction pursuant to
Regulation S under the Securities Act. Accrued interest under the convertible
debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The convertible debenture is convertible, at the option of the holder,
into shares of common stock pursuant to a specified formula. The actual number
of shares of common stock issued or issuable upon conversion of the convertible
debenture is subject to adjustment and could be materially less or more than the
above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion
25
<PAGE> 30
can occur immediately upon issuance of the convertible debenture, this amount
was recognized as interest expense in 1998.
On January 19 and March 7, 2000, pursuant to notice by RBB, $1,122,500
and $377,500 principal amount of the November 1998 debenture was converted into
8,252,746 and 1,877,500 shares of common stock, respectively. As of March 7,
2000, the November 1998 debenture was fully converted.
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock , each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this prospectus, none of
these 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-Scholes
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 amortized in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
HARBOR VIEW GROUP, INC., ET AL.: In December 1998 pursuant to a
securities purchase agreement, we sold to Harbor View Group, Inc. and various
other purchasers 4,917,276 shares of common stock, and warrants to purchase an
aggregate of 2,366,788 shares of common stock, including (x) warrants to
purchase an aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harbor View 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 the $802,500 purchase price, $600,000 was received on December 31, 1998, and
$202,500 was received in January 1999. The warrants entitle the holders to
purchase an aggregate of 1,183,394 shares of common stock at an exercise price
of $0.2040 per share, and 1,183,394 shares at an exercise price of $0.2448 per
share. The warrants are exercisable at any time and from time to time until
December 31, 2003. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this prospectus, warrants to
purchase 294,118 shares of common stock had been exercised.
26
<PAGE> 31
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-Scholes 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. This amount
is amortized to interest expense in the accompanying consolidated financial
statements.
SECURITIES ISSUED IN 1999
BERMAN, ET AL.: In July 1999 pursuant to a securities purchase
agreement, we sold 1,851,852 shares of common stock, and warrants to purchase an
aggregate of 925,926 shares of common stock to Michael Berman, Pak-Lin Law and
Kwong Wai Au in a private offering transaction pursuant to Section 4(2) of the
Securities Act, for an aggregate purchase price of $500,000, received in July
1999. The warrants entitle the holders to purchase 463,264 and 463,264 shares of
common stock at exercise prices of $0.324 and $0.378 per share, respectively.
The warrants are exercisable at any time and from time to time until June 28,
2004. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of the date of this prospectus, none of the
warrants had been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Scholes 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. This amount is amortized to
interest expense in the accompanying consolidated financial statements.
FOCUS INVESTORS LLC: Pursuant to a securities purchase agreement dated
August 3,1999 in a private offering transaction under Section 4(2) of the
Securities Act, we sold to Focus Investors LLC an aggregate of 20 units for an
aggregate gross purchase price of $2 million, each unit consisting of $100,000
principal amount of our ten-year 7% convertible debentures due August 3, 2009,
and series W warrants to purchase 50,000 shares of our common stock exercisable
until August 3, 2004. Accrued interest under the convertible debentures 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 debentures are 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
debentures is subject to adjustment and could be materially less or more than
the above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock. On January 19, February 17, and March 3, 2000, pursuant to notice by
Focus Investors, $300,000, $900,000, and $800,000 principal amount of the Focus
debentures was converted into 2,178,155, 6,440,725 and
27
<PAGE> 32
5,729,967 shares of common stock, respectively. As of March 3, 2000, the
debenture was fully converted.
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 March 17, 2000, all of the warrants
had been exercised.
The fair value of the warrants issued as of August 3, 1999 in
connection with the securities purchase agreement was estimated to be $52,953
($0.0526 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes 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. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
ENDEAVOUR CAPITAL FUND S.A.: Pursuant to a securities purchase
agreement dated December 28, 1999 in a private offering transaction under
Section 4(2) of the Securities Act, we issued the first $1,000,000 tranche of
$2,000,000 in aggregate principal amount of our 7% convertible debentures due
December 31, 2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction").
In connection with the sale of the first tranche of debentures, we issued
warrants to purchase 100,000 shares of our common stock to Endeavour, and two
warrants to purchase 5,000 shares of common stock to Endeavour's legal counsel.
Accrued interest under the convertible debentures was computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment and was payable on conversion of the debenture or on
maturity in common stock using the same conversion formula. The convertible
debentures were convertible, at the option of the holder, into shares of common
stock pursuant to a specified formula.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per 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 warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date of this prospectus, none
of these warrants had been exercised.
The fair value of the warrants issued as of December 28, 1999 in
connection with the securities purchase agreement was estimated to be $4,285
($0.0429 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On January 27, February 22 and 23, 2000 pursuant to notice by Endeavour
Capital Fund, $150,000, $135,000, and $715,000 principal amount of the first
tranche of the Endeavour debentures was converted into 1,105,435, 988,913, and
5,149,035 shares of common stock,
28
<PAGE> 33
respectively. As of February 23, 2000, the first tranche of the debentures was
fully converted. The second tranche of the debentures issued to Endeavour in
2000, as more fully described below, were fully converted as of September 13,
2000.
SECURITIES ISSUED IN 2000
ENDEAVOUR CAPITAL FUND S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with warrants to purchase 100,000 shares of our common stock to
Endeavour Capital Fund, S.A. The terms of the second tranche of debentures and
warrants are the identical to the terms of the debentures and warrants issued in
first tranche of the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On February 24 and 29, and September 13, 2000 pursuant to notice by
Endeavour Capital Fund,$785,000, $200,000 and $15,000 principal amount of the
second tranche of the Endeavour debentures was converted into 5,622,696,
1,036,674 and 42,088 shares of common stock, respectively. As of September 13,
2000, the second tranche of the debentures were fully converted.
HARBOR VIEW GROUP, INC. On February 7, 2000 pursuant to a consulting
agreement with Harbor View Group, we issued to Harbor View warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share, and warrants to
purchase 1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to be
provided to us. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
prospectus, none of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($.057 per
warrant) based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected volatility
of 90%; a risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). We have determined that $89,045
of the fair value relates to past services and, accordingly, we have expensed
this portion in the three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and is amortized over the remaining term of the
agreement.
HARBOR VIEW GROUP, INC., ET AL. In February 2000 pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,636,357 shares of common stock, and warrants to purchase an
aggregate of 5,454,544 shares of common stock in a
29
<PAGE> 34
private offering transaction pursuant to Section 4(2) of the Securities Act, for
an aggregate purchase price of $3,000,000. Half of the warrants are exercisable
at $0.275 per share, and half of the warrants are exercisable at $0.33 per
share, until February 28, 2005. Each warrant provides that the holder may elect
to receive a reduced number of shares of common stock on the basis of a cashless
exercise; that number of shares bears the same proportion to the total number
shares issuable under that warrant as the excess of the market value of shares
of common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this prospectus, none of
these warrants had been exercised.
The fair value of the warrants issued as of February 16, 2000 in
connection with the securities purchase agreement was estimated to be $1,582,734
($0.290 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
February 28, 2005 expiration date. This amount is amortized to interest expense
in the accompanying consolidated financial statements.
PROJECTED EXPENSES
During the next 12 months, we expect to spend approximately
$10,000,000, on research and development related activities, including
approximately:
o $4,000,000 for operating expenses;
o $4,000,000 for the IND's for Product R to the FDA in
connection with GloboMax's project management
services for the pre-clinical development and IND
submissions of Product R to the FDA, the development
of standard operating procedures and validation
protocol for the preparation and manufacture of
Product R, and toxicology studies of Product R;
o $1,000,000 for capital expenditures for leasehold
improvements and equipment at our Yonkers, New York
office relating to additional laboratories and
manufacturing and production facilities for Product
R; and
o $1,000,000 for additional personnel.
We anticipate that we can continue operations through November 2000
with our current liquid assets, including the proceeds from the recent sale of
the convertible debenture and other securities if no stock options or warrants
are exercised nor additional securities sold. If all of the outstanding stock
options and warrants are exercised, we will receive net proceeds of
approximately $14.0 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 Product R
receives approvals and prospects for sales increase to justify such increased
levels of operation. The recent prevailing market price for shares of common
stock has
30
<PAGE> 35
from time to time been above the exercise prices of certain of the outstanding
options and warrants. As such, recent trading levels may not be sustained nor
may any additional options or warrants be exercised. If less than 60% 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 anticipate that we will be required to sell additional securities to
obtain the funds necessary to further our research and development activities.
We are currently seeking debt financing, licensing agreements, joint ventures
and other sources of financing, but the likelihood of obtaining such financing
on favorable terms is uncertain. Management anticipates that they will have to
defer their salaries if financing is not available in order to continue
operations,. Management does not believe that, at present, debt or equity
financing will be readily obtainable on favorable terms unless and until FDA
approval for phase I clinical testing is granted. Because of the large
uncertainties involved in the FDA approval process for commercial drug use on
humans, it is possible that we may never be able to sell Product R commercially.
BUSINESS
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug with the
trade name RETICULOSE(TM). Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962, the Food and Drug Administration, or FDA, classified Reticulose
as a "new drug" requiring FDA approval prior to any sale in the United States.
Reticulose (the current formulation of which is now known as and hereinafter
referred to as PRODUCT R(TM) ) 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 Product R 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 Product R in the
United States, and engaging others to perform testing and analysis of Product R
on human patients overseas. The FDA has not approved human clinical trials for
Product R 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. We do not
know what the actual cost of such trials would be. If we need additional
financing to fund such human clinical trials, it may not be available to us,
which may force us to reduce our operations.
31
<PAGE> 36
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, 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, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or IN VITRO testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: phase I clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; phase II clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and phase III
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
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.
32
<PAGE> 37
After the FDA approves the IND, 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 all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability 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.
33
<PAGE> 38
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 Product R on human subjects with
AIDS, as well as certain other viruses. The FDA has issued four letters of
deficiency with regard to the IND. In a letter dated November 29, 1984, the FDA
indicated, among other deficiencies noted, that the publications submitted with
the IND and relating to the effectiveness of Product R on virus related diseases
will not be accepted in support of the safety of Product R unless we could
establish that the proposed formulation of Product R is the same as the
formulation of Product R 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
Product R and a description of the physical, chemical and microbiological
characteristics of Product R. On September 11, 1987, we received a further
deficiency letter from the FDA, stating that no data had been submitted
supporting IN VITRO anti-HIV activity or any criterion for a biological response
modifier.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
received a third deficiency letter from the FDA dated July 27, 1992, which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and action on our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Product R in the United States. During
the year ended December 31, 1999, GloboMax continued its project management
services for the pre- clinical development and IND submission of Product R to
the FDA, the development of standard operating procedures and validation
protocol for the preparation and manufacture of Product R. Expenses paid during
1999 relating to the GloboMax agreement were approximately $200,000. Pursuant to
the agreement with GloboMax, we are obligated to pay for services on an hourly
basis, at prescribed rates.
We currently do not have the resources necessary to complete the FDA
approval process. We may allocate certain proceeds from the exercise of
currently outstanding options and warrants for the purpose of filing a new IND
with the FDA, however, such proceeds, if any, will not be sufficient to improve
our financial condition to any great degree. It is possible that the new IND for
clinical tests of Product R on humans, if submitted, will not be approved by the
FDA for human clinical trials on AIDS or other diseases, and that any tests
previously conducted or to be conducted will not satisfy FDA requirements. It is
also possible that the results of such human clinical trials, if performed, will
not prove that Product R is safe or effective in the
34
<PAGE> 39
treatment of AIDS or other diseases, or that the FDA will not approve the sale
of Product R in the United States if we submitted a proper NDA. It is not known
at this time how extensive the phase II and phase III clinical trials will be,
if they are conducted. The data generated may not show that the drug Product R
is safe and effective, and even if the data shows that Product R 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 Product R for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. Clinical studies
conducted outside of any country may not be accepted by such country, and the
approval of any pharmaceutical or diagnostic product in one country does not
assure that such product will be approved in another country. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, we do not expect that we will be able to generate material
sales revenue. We received a grant of authority from the Bahamian Port
Authority, an authorized division of the Bahamian Government, on October 15,
1992 confirming the right of our subsidiary, Advance Viral Research, Ltd., a
Bahamian corporation, to carry on the manufacture and export sale of ethical
pharmaceutical products. See "--Marketing And Sales."
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through June 30, 2000
we expended approximately $6.6 million on testing and research and development
activities either in our laboratories or pursuant to various testing agreements
with both domestic and foreign companies.
In 1995, we retained Shalom Hirschman as our President. As President, Dr.
Hirschman established our research facility in Yonkers, New York, monitored the
testing of Product R and recently performed analyses of Product R with our
scientific personnel, which analyses we believe may be used in connection with
the FDA approval process. We currently are funding research and testing to:
(1) determine the safety of the topical use of Product R
on animals and cultured human cells;
(2) assess the effectiveness of the topical application
of Product R on HPV and certain cancer causing
proteins of HPV. Recent laboratory testing has
indicated that Product R may inhibit the expression
of a protein of HPV which causes cervical cancer;
35
<PAGE> 40
(3) study the effects of Product R in inhibiting the
mutation of the AIDS virus in humans;
(4) assess the effectiveness of the topical application
of Product R for the treatment of persons diagnosed
with herpes labialis/genital infections;
(5) compare the results of treatment of persons diagnosed
with AIDS taking a three drug cocktail and Product R
with those taking a three drug cocktail and a
placebo;
(6) determine the effectiveness of Product R for the
treatment of rheumatoid arthritis in humans;
(7) study the effects of Product R in inhibiting the
production of a key cancer-causing protein (E-7
protein) of the human papilloma virus (HPV). The E-7
protein is associated with the development of
cervical cancer in women infected with cancer causing
subtypes of HPV; and
(8) study the effects of Product R in inhibiting the
production of key cellular receptors for HIV (CCR5
and CXCR4 receptors). The CCR5 and CXCR4 receptors
are two of the cell receptors used by the AIDS virus,
HIV, to attach to its target cell and initiate
infection.
Our studies detailing the results of the above research and testing may
not positively impact the FDA's decision to approve a new IND for Product R or
approve the marketing, sales or distribution of Product R within the United
States, and as a result may not improve our chances of gaining approval for the
marketing, sales or distribution of Product R anywhere in the world.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We have currently pending 15 patent applications with the United States
Patent and Trademark Office (the "PTO") relating to Product R and 17 foreign
patent applications. In the United States, we have one patent allowed and three
have been issued by the PTO. As patent applications in the United States are
maintained in secrecy until patents issue and as publication of discoveries in
the scientific or patent literature often lag behind the actual discoveries, we
cannot be certain that we were the first to make the inventions covered by each
of our pending patent applications or that we were the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted.
36
<PAGE> 41
We cannot be sure that any additional patents will issue from any of our patent
applications or, should any patents issue, that we will be provided with
adequate protection against potentially competitive products. Furthermore, we
cannot be sure that should patents issue, they will be of commercial value to
us, or that private parties, including competitors, will not successfully
challenge our patents or circumvent our patent position in the United States or
abroad. See "Business - Legal Proceedings."
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the period of time between the
filing of the NDA and FDA approval, with a five year maximum patent extension.
We cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with Product R. Therefore, Product R and any other drug candidates may give rise
to claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant
37
<PAGE> 42
liabilities to such other parties and/or require disputed rights to be licensed
from such other parties. We cannot be sure that any license required under any
such patents or proprietary rights would be made available on terms acceptable
to us, if at all. If we do not obtain such licenses, we may encounter delays in
product market introductions, or may find that the development, manufacture or
sale of products requiring such licenses may be precluded. In addition, we could
incur substantial costs in defending ourselves in legal proceedings instituted
before the PTO or in a suit brought against it by a private party based on such
patents or proprietary rights, or in suits by us asserting our patent or
proprietary rights against another party, even if the outcome is not adverse to
us. There are extensions available under the Patent Act if the delay in
prosecution of the patent application results from a delay in the PTO's handling
of any interference or appeal involving the application. We have not conducted
any searches or made any independent investigations of the existence of any
patents or proprietary rights of other parties.
EQUITY LINE OF CREDIT AGREEMENT
On September 18, 2000, we signed a private equity line of credit
agreement with Spinneret Financial Systems, Inc. Pursuant to this equity line of
credit agreement and subject to the satisfaction of certain conditions, Advanced
Viral may sell and issue to Spinneret, from time to time, up to an aggregate of
$20,000,000 of our common stock. Beginning on the date that a registration
statement covering the resale of the shares issuable pursuant to the equity line
of credit is declared effective by the Commission, and continuing for thirty
(30) months thereafter, we may, from time to time, in our sole discretion, sell
or "put" shares of our common stock to Spinneret Financial Systems at a price
equal to the market price of the common stock. Under the equity line of credit
agreement, the market price of Advanced Viral common stock, for purposes of
determining the purchase price, is the average of the three lowest closing bid
prices, as reported by Bloomberg, L.P., of our common stock for the 25 trading
day period ending on the date we notify Spinneret of our intention to put common
stock to it, or, in other words, request an advance.
The maximum advance amount on any advance notice date is equal to the
difference between (i) the amount indicated in the Maximum Advance Amount column
opposite the range of the 25 Day Average Daily Volume Traded on such advance
notice date, as set forth in the table below and (ii) the sum of the advances
made pursuant to the agreement, in the 15 trading days immediately preceding the
advance notice date:
25-Day Average Volume Traded(1) Maximum Advance Amount
------------------------------- ----------------------
$25,000 - $50,000 $ 100,000
$50,001 - $100,000 $ 200,000
$100,001 - $200,000 $ 350,000
$200,001- $300,000 $ 500,000
$300,001 - $400,000 $ 650,000
$400,001 - $500,000 $ 900,000
$500,001 - $600,000 $1,200,000
$600,001 - $800,000 $1,500,000
$800,001 - $1,000,000 $1,750,000
$1,000,000 plus $2,000,000
--------------------
38
<PAGE> 43
(1) The 25-Day Average Volume Traded is equal to the bid price
multiplied by the volume for each of the 25 trading days
preceding the advance notice date.
Our ability to put shares of common stock to Spinneret Financial
Systems is subject to certain conditions and limitations, including, but not
limited to, the following:
o the closing bid price of the common stock on the advance
notice date shall not be less than the average of the three
lowest closing bid prices of our common stock for the 25
trading day period ending on the date we request an advance.
o the registration statement covering the resale of the shares
must have previously become effective and shall remain
effective and available for making resales of the put shares;
o our representations and warranties to Spinneret Financial
Systems contained in the equity line of credit agreement must
be accurate as of the date of each put;
o we must have performed, satisfied and complied in all respects
with all covenants, agreements and conditions required to be
performed, satisfied or complied with at or prior to the date
of each put;
o we must have obtained all permits and qualifications required
by any applicable state in accordance with the registration
rights agreement for the offer and sale of the put shares, or
shall have the availability of exemptions therefrom. The sale
and issuance of the put shares must be legally permitted by
all laws and regulations to which we are subject;
o no statute, rule, regulation, executive order, decree, ruling,
or injunction may be in effect which prohibits or directly and
adversely affects any of the transactions contemplated by the
equity line of credit agreement;
o at the time of an advance, there must not have been any
material adverse change in our business, operations,
properties, prospects, or financial condition since the date
of filing of our most recent report with the SEC;
o our common stock must not have been delisted from the Bulletin
Board or suspended from trading by the SEC or the Bulletin
Board; and we must not have received any notice threatening
the continued listing of our common stock on the Bulletin
Board;
o at least fifteen(15) trading days must have elapsed since the
last date we put shares to Spinneret Financial Systems
39
<PAGE> 44
We cannot assure you that we will satisfy all of the conditions
required under the equity line of credit agreement or that Spinneret Financial
Systems will have the ability to purchase all or any of the shares of common
stock put to it thereunder.
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Spinneret Financial Systems, which will permit
Spinneret Financial Systems to resell the common stock from time to time in the
open market or in privately-negotiated transactions. We will prepare the
registration statement and file amendments and supplements thereto as may be
necessary in order to keep it effective as long as the equity line of credit
agreement remains in effect or Spinneret Financial Systems owns any of our
common stock. We have agreed to bear certain expenses, other than broker
discounts and commissions, if any, in connection with the preparation and filing
of the registration statement and any amendments to it.
In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral has agreed that he, she or it
will not, directly or indirectly, without the prior written consent of
Spinneret, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of (whether pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended, or otherwise) any shares of common
stock, including options, rights, warrants or other securities underlying,
convertible into, exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any common stock (whether or not beneficially owned by
the undersigned), or any beneficial interest therein for a period of 10 trading
days following the receipt of an advance notice by Advanced Viral pursuant to
the agreement.
In conjunction with the equity line of credit agreement, we entered
into an agreement with May Davis Group, Inc., our placement agent, pursuant to
which May Davis will receive five percent (5%) of the proceeds from the sale of
common stock to Spinneret Financial Systems under the equity line of credit
agreement. May Davis initiated contact with Spinneret Financial Systems and
assisted Advanced Viral in negotiating the equity line of credit agreement. The
fees will be paid by Advanced Viral upon receipt of funds from Spinneret
Financial Systems. May Davis is not obligated to purchase any of our shares, but
as an additional placement fee, we have issued to May Davis a Class A Warrant to
purchase 5,000,000 shares of our common stock at an exercise price per share
equal to $1.00, exercisable in part or in whole at any time by May Davis at its
discretion until September 18, 2005, and a Class B Warrant to purchase 5,000,000
shares of our common stock at an exercise price equal to the greater of $1.00 or
110% of the bid price of the common stock on the applicable advance date under
the private equity line of credit agreement. The Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance.
We may redeem the warrants at a redemption price of $.01 per share
provided that the bid price for our common stock equals at least $4.00 per share
for a period of ten (10) consecutive trading days, as described therein. The
warrants contain provisions that adjust the purchase price
40
<PAGE> 45
and number of shares issuable to May Davis upon the occurrence of certain
events, such as a stock split, reverse stock split, stock dividend, merger, or
recapitalization. Assuming the registration statement covering the shares
underlying the warrants and the equity line of credit is effective and not
suspended, May Davis may effect a cashless exercise of the warrant commencing
with the first advance date. May Davis is also entitled to certain "piggyback"
registration rights with respect to the shares of common stock issuable upon
exercise of the warrants pursuant to a registration rights agreement.
MARKETING AND SALES
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. As of the date of this
prospectus, our efforts or the efforts of our representatives have produced no
material benefits to us regarding our ability to have Product R sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with five separate entities granting exclusive rights to distribute
Product R in the countries of China, Japan, Hong Kong, Macao, Taiwan, Mexico,
Channel Islands, Isle of Man, British West Indies, Jamaica, Haiti, Bermuda,
Belize, Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile.
Pursuant to these agreements, the distributors are obligated to cause Product R
to be approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Product R to maintain the
exclusive distribution rights. Our marketing plans for Product R are still
dependent upon registration of Product R for sale in various jurisdictions where
our distributors are seeking approvals.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Product R. The only application for registration of
Product R which has been filed as of the date hereof is an application
requesting that Product R be permitted to be sold in Argentina, which was filed
in March 1998. In this March 1998 filing, DCT, S.R.L., our distribution agent in
Argentina, received an investigational new drug identification number from the
National Administration for Drug, Food and Medical Technology in Argentina, or
ANMAT. This allowed DCT to begin pre- clinical studies on our behalf with
Product R which have since been concluded. In February 2000, DCT received
approval from the ANMAT to proceed further with Phase I clinical trials in
Argentina for Product R. We are currently evaluating the costs and time
necessary to proceed with Phase I clinical trials in Argentina. In addition, DCT
must apply for approval from the ANMAT to proceed with Phases II and III
clinical trials before Product R is approved for sale in Argentina. The costs
and time necessary to complete such trials cannot be predicted at this time.
We initially targeted our sales and marketing efforts to those
countries where Product R 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 Product R 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 Product
R for sale in these countries has been frustrated due
41
<PAGE> 46
to our inability to obtain the registration and approval to sell Product R in
the Bahamas, the country of origin, and a general lack of published data on the
effectiveness of Product R. Until Product R is registered and approved for sale
in the United States, in another developed country or in the other countries
included in the distributors' territories, we will not generate any material
sales of Product R. For the years ended December 31, 1999, 1998 and 1997, we
reported no commercial sales except limited sales for testing purposes. Product
R is not legally available for commercial sale anywhere in the world, except for
testing purposes. See "--Research, Development and Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council of
the Bahamas had refused our subsidiary's request for a "free sales certificate"
for Product R. 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, before allowing the registration of a pharmaceutical
product for use in that country, it must at least be registered and certified
for free sale in the country in which it is manufactured. However, the Bahamas
has no procedures currently in place to issue a free sales certificate for any
therapeutic drug, including Product R. 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. Currently, we intend to manufacture Product
R in Argentina, where we are seeking regulatory approval and therefore does not
need a free sale certificate for Argentina.
We are currently in the planning stages for the reconfiguration of our
New York research facilities to enable us to manufacture and produce Product R
if and when the FDA approves Product R for distribution and sale in the United
States.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. 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 Product R. Competitive products may render Product R
obsolete or noncompetitive before we can recover the expenses of developing and
commercializing Product R. Furthermore, the development of a cure or new
treatment methods for the diseases we are targeting could render Product R
noncompetitive, obsolete or uneconomical. Many of our competitors:
42
<PAGE> 47
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; and
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 Product R 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
Product R as a treatment for hepatitis B.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
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 Product R as a treatment for rheumatoid arthritis.
Three antiviral products are presently sold in the United States for
the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
Wellcome Inc.) which contains acyclovir and is administered orally, topically,
or intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals)
which contains famcyclovir and is administered orally, and Valtrex(R)
(manufactured by Glaxo Wellcome, Inc.) which contains valacyclovir and is also
administered orally. These products represent significant competition for
Product R as a treatment for genital herpes.
43
<PAGE> 48
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 Product R, we will
face competition based on the safety and effectiveness of Product R, 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 Product R, 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 27 full-time employees, consisting of our 4 executive officers,
18 employees involved in research, and 5 administrative employees. Dr.
Hirschman, our President and Chief Executive Officer and a director, Bernard
Friedland, our Chairman of the Board and a director, William Bregman, our
Secretary, Treasurer and a director, and Alan V. Gallantar, our Chief Financial
Officer, each devote all of their business time to our day-to-day business
operations. Additionally, we may hire, as and when needed, and as available,
such sales and technical support staff and consultants for specific projects on
a contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space, at 200 Corporate Boulevard South, Yonkers,
New York from an unaffiliated third party (the "Yonkers Lease"). The term of the
Yonkers Lease is five years through April 2005 and our annual rental obligation
under the Yonkers Lease is approximately $260,000.
We currently maintain corporate offices at 1250 East Hallandale Beach
Boulevard, Hallandale, Florida 33009, pursuant to a three year lease agreement,
at approximately $14,000 annually. The Bahamian manufacturing facility, which
was acquired on December 16, 1987, is located in Freeport, Bahamas and consists
of a 29,242 square foot site containing a one-story concrete building of
approximately 7,300 square feet and is equipped for all phases of the testing,
production, and packaging of Product R. The Bahamian facility is currently being
used to store and produce inventory for testing purposes.
44
<PAGE> 49
LEGAL PROCEEDINGS
In June 2000, Advanced Viral filed an action and complaint in the
Supreme Court of New York, Westchester County, against Commonwealth
Pharmaceuticals, Ltd., Immune Modulation Maximum Corp. ("IMMC") and Charles E.
Miller (collectively, the "Defendants") alleging a breach by Commonwealth of an
exclusive distribution agreement between Advanced Viral and Commonwealth,
misappropriation of trade secrets and confidential information, conversion and
conspiracy to convert Advanced Viral's property interests in Reticulose.
Advanced Viral further alleged that Defendant Miller filed and obtained a U.S.
patent entitled "Composition Containing Peptides and Nucliec Acids and Methods
of Making Same" based on a study conducted by a third party using Reticulose,
and that such patent was assigned to Defendant IMMC, a company controlled by
Defendant Miller, in violation of the exclusive distribution agreement.
In its complaint, Advanced Viral seeks relief in the form of (i)
assignment of the patent to Advanced Viral, (ii) adjudgment that Defendants
breached, misappropriated, converted and conspired to convert Advanced Viral's
property rights, (iii) damages, profits realized and interest thereon; and (iv)
attorneys' fees, costs and expenses. In response, on August 3, 2000, Defendants
filed a Motion to Dismiss the Complaint alleging lack of personal jurisdiction
or, in the alternative, that the agreement underlying Advanced Viral's claim is
legally inoperative.
In August 2000, the Defendants other than Miller, filed a suit against
Advanced Viral in the United States District Court for the Eastern District of
Michigan which alleges that IMMC, and not Advanced Viral, is the owner of the
exclusive/broad rights in Reticulose, and seeks, among other things: (i) a
declaratory judgment that Defendant IMMC is the exclusive owner of the
broad/exclusive rights to Reticulose and the subject patent; (ii) an injunction
against Advanced Viral from further attempts to use, market or assert any claims
of ownership over any broad/exclusive rights in Reticulose, or the use,
publication or disclosure of information regarding Reticulose; (iii) return of
such information to the Defendants; (iv) that Advanced Viral assign any
Reticulose-related trademarks to IMMC and (v) that Advanced Viral pay Defendants
damages, profits, costs and attorneys' fees. Advanced Viral was served with a
copy of the Complaint on August 8, 2000.
In September 2000, our case in New York was dismissed. We are
considering requesting that the New York court reinstate our claim in the New
York case. The case in the Federal Court continues. At this point, we have
answered the complaint against us in the Federal Court and have entered a number
of counterclaims which are in substance the same as our claims in the New York
case.
Advanced Viral believes that the allegations contained in the
Defendants' complaint are without merit and Advanced Viral intends to vigorously
defend itself against all allegations contained therein.
45
<PAGE> 50
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, 64 President, Chief Executive Officer, Chief
M.D. Scientific Officer, Director
Bernard Friedland 74 Chairman of the Board of Directors
William Bregman 78 Vice President, Secretary, Treasurer,
Director
Louis J. Silver 72 Director
Alan V. Gallantar 43 Chief Financial Officer
</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 30 years, until March 1, 1986, in
the Research and Development and Quality Assurance Departments in
Pharmaceuticals, Pharmacology, and Cancer antimetabolites, and has been the
President and CEO of our subsidiary, Advance Viral Research, Ltd. since 1984.
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 Treasurer of our subsidiary, Advance Viral Research, Ltd., from
August 1984 until the present.
LOUIS J. SILVER, director since May 1992, has been self-employed as a
free-lance accountant 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.
ALAN V. GALLANTAR, Chief Financial Officer since October 1999, was
treasurer and controller from March1998 to September 1999 of AMBI Inc., a
nutraceutical company, senior vice president and chief financial officer from
1992 to 1997 of Bradley Pharmaceuticals, Inc., a pharmaceutical manufacturer,
and vice president and divisional controller from 1989 to 1991 for PaineWebber
Incorporated. From 1985 to 1989, Mr. Gallantar was second vice president at The
Chase Manhattan Bank, N.A., and from 1983 to 1985, was a senior accountant at
Philip Morris,
46
<PAGE> 51
Incorporated. From 1979 to 1983, Mr. Gallantar was a senior accountant in the
audit department of Deloitte & Touche.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" as those terms as defined in the rules and regulations promulgated
under the Securities Act. Directors are elected to serve until the next annual
meeting of shareholders and until their successors have been elected and have
qualified.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the board of directors attended, which has not in fact been paid within at least
the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, our President and Chief Executive Officer,
none of our directors, officers or employees received salary and bonus exceeding
in the aggregate $100,000 in the years ended December 31, 1999, 1998 or 1997.
The following table provides certain summary information concerning compensation
paid or accrued by our company to or on behalf of the named executive officer
for the years ended December 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-------------------------------------- ------------------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary (1) Bonus Compensation (2) Options/SARs (3) Compensation (4)
------------------ ---- ---------- ----- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1999 $ 325,000 $ 0 $ 34,738 -- $ 4,316
President, Chief Executive
Officer and Chief Scientific 1998 $ 325,000 $ 0 $ 12,288 23,000,000 $ 4,316
Officer since October 1996 and
consultant from May 24, 1995 1997 $ 325,000 $ 43,000 $ 14,604 -- $ 3,956
until October 1996
Alan V. Gallantar, Chief 1999 $ 43,750 $ 0 $ 1,500 4,547,880 --
Financial Officer since 1998 -- -- -- -- --
October 1999 1997 -- -- -- -- --
</TABLE>
----------
(1) Dr. Hirschman's salary increased for the year 2000 to $361,000. Mr.
Gallantar was hired in October 1999 and therefore his salary reflects
only three months of his $175,000 annual salary.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums we paid on his behalf, and aggregate incremental cost to us of
Dr. Hirschman's automobile lease, gas, oil, repairs and maintenance.
Other Annual Compensation for Mr. Gallantar includes an automobile
allowance of $500 per month.
(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, which are currently exerciseable at $.27 per
share through February 17, 2008. In
47
<PAGE> 52
October 1999, we granted Mr. Gallantar options to acquire 4,547,880 shares of
common stock, exercisable at $0.24255 per share in one third increments on
October 1, 2000, 2001, and 2002, until October 1, 2009. No other stock options
were granted to the named executive officers during 1999. Other than Dr.
Hirschman's and Mr. Gallantar's stock options, and Louis Silver's options to
acquire 100,000 shares of common stock at $0.25 issued in May 2000, there are
options to acquire 6,982,500 shares of the common stock at exercise prices
ranging from $0.14 to $0.36 per option share outstanding, none of which are
beneficially owned by our directors or officers.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 1999 held by the named executive officers. No options were exercised during
the year ended December 31, 1999 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 N/A 16,100,000 / 23,000,000 $0 / $0 (2)(3)
Alan V. Gallantar 0 N/A 0 / 4,547,880 $0 / $0 (2)(4)
</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, 1999, $0.125, and the exercise or base price of in-the-money stock
options.
(3) As of December 31, 1999, 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 are exercisable through February 17, 2008.
(4) As of December 31, 1999, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, which are
exercisable in increments of 1,515,960 on October 1, 2000, 2001 and
2002.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf. The agreement includes an agreement
that Dr. Hirschman will be nominated as a director for the duration of Dr.
Hirschman's employment with us under the
48
<PAGE> 53
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, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
(1) 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;
(2) 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;
(3) reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses, his license fees, membership dues in professional
organizations, subscriptions to professional journals,
necessary travel, hotel and entertainment expenses incurred in
connection with overnight, out-of-town trips that contribute
to the benefit of us in the reasonable determination of Dr.
Hirschman, and all other expenses that may be pre-approved by
our board of directors; and
(4) 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 an IND number is obtained from and approved by the FDA so
that human research may be conducted using Product R; or 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.
49
<PAGE> 54
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 $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
GALLANTAR EMPLOYMENT AGREEMENT
Advanced Viral entered into an Employment Agreement dated as of October
1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is employed as
our Chief Financial Officer on a full business time basis. Under the agreement,
the term of Mr. Gallantar's employment continues until October 1, 2002. If the
agreement is terminated by us for cause, Mr. Gallantar will have no accrued
right to receive any bonus for the year in which his employment is terminated,
all unvested stock options will be cancelled, and any vested stock options will
terminate 90 days after the effective date of termination. If the agreement is
terminated by Advanced Viral not for cause, we are required to pay to Mr.
Gallantar all accrued and unpaid compensation, and all stock options granted as
of the date of the agreement shall become 100% vested. Upon such termination not
for cause, all options which became vested as a result of this provision may be
exercised by Mr. Gallantar until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement as a result of
a change in control, he will be paid his base salary for the remaining term of
the agreement, and all stock options granted on the date of the agreement will
become 100% vested and exercisable until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement for any other
reason, he will be paid all unaccrued and unpaid base salary, and he will have
the right to exercise any vested stock until 90 days after the effective date of
termination. All payments made to Mr. Gallantar in connection with the
termination of the agreement are subject to reduction to the extent they exceed
2.99 times the "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986.
50
<PAGE> 55
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of the board
of directors. As of the date of the agreement, Mr. Gallantar received options to
purchase an aggregate of 4,547,880 shares of our common stock. The options
expire on October 1, 2009, and are exercisable in three increments of 1,515,960
on the October 1, 2000, 2001 and 2002, respectively. The agreement further
provides that:
o Mr. Gallantar and his family are entitled to receive the same
benefits generally given to other senior executives of
Advanced Viral.
o Mr. Gallantar is entitled to 15 working days of vacation
during the first year and 20 days of vacation during each year
thereafter, subject to certain exceptions.
o Mr. Gallantar will receive a non-accountable automobile
allowance of $500 per month, provided however, that he is be
responsible for all costs of acquiring and maintaining the
automobile.
o We will reimburse Mr. Gallantar for certain professional
license and membership fees up to a maximum of $5,000 per year
in the aggregate, and all other expenses incurred in the
performance of his duties with the prior approval of the Chief
Executive Officer.
o If Mr. Gallantar relocates his primary residence to
Westchester County, New York, or New York City prior to the
second anniversary of the agreement, we will pay reasonable
moving, legal and brokerage fees or costs incurred by him in
connection with such relocation up to a maximum of $15,000.
The agreement provides that Mr. Gallantar is not authorized, without
the express written consent of the board of directors and other than in the
ordinary course of business, to pledge the credit of Advanced Viral, to bind us
under any note, mortgage or other monetary obligation, to release or discharge
any debt due us unless we have received payment in full, or to dispose (as
collateral or otherwise) of a substantial amount of our assets. Furthermore, Mr.
Gallantar agreed that he will assign to us all intellectual property rights
developed by him which result from the knowledge he acquired while performing
his duties under the agreement. Finally, he has agreed that he will not,
directly or indirectly, compete with us for five years after termination of his
employment or solicit our employees to leave our employ for one year after
termination.
51
<PAGE> 56
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date of this prospectus for
(i) each shareholder who is known by us to own beneficially more than 5% of our
common stock, (ii) each director and executive officer, and (iii) all of our
directors and named executive officers as a group. Except as otherwise
indicated, we believe, based on information furnished by the persons named in
this table that such persons have voting and investment power with respect to
all shares of common stock beneficially owned by them, subject to community
property laws, where applicable.
<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. 39,100,000 (2)(3) 9.8%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Bernard Friedland 39,146,730 (3)(4) 10.8%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,662,403 (3)(5) 9.9%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Louis J. Silver 100,000 (6) 0.0%
5110 S.W. 127th Place
Miami, FL 33175
Alan V. Gallantar 1,515,960 (7) 0.4%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
ALL OFFICERS & DIRECTORS (5 PERSONS) 115,525,093 (2) 31.9%
</TABLE>
--------------------------------
(1) The persons named in this table have sole voting power with respect to
all shares shown as beneficially owned by them, except as indicated in
other footnotes to this table. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60
days from the date hereof, are deemed outstanding. According to
American Stock Transfer & Trust Company, the transfer agent for the
common stock, 361,895,098 shares of the common stock were outstanding
as of the close of business as of the date hereof.
(2) Includes shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days from the date hereof.
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that
agreement, shall vote all shares of the common stock owned or voted by
them in favor of Dr. Hirschman as a director of Advanced Viral. That
agreement, however, does not restrict or otherwise limit their right to
sell their shares to third parties without restriction. The Hirschman
employment agreement also provides that Dr. Hirschman, during that
term, shall take no action which shall preclude Messrs. Friedland and
Bregman from being nominees as directors of Advanced Viral and that Dr.
Hirschman shall vote all shares of the common stock owned or voted by
him in favor of Messrs. Friedland and Bregman as directors of Advanced
Viral. See "-- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(4) Includes 1,000,000 shares of the common stock owned by Mr. Friedland
and Beth Friedland, his daughter, as joint tenants;) 20,000,000 shares
owned by Mr. Friedland and Shirley Friedland, his spouse, as joint
tenants; and 400,000 shares owned the B&SD Friedland Foundation, a
not-for-profit foundation controlled by Mr. Friedland. Does not include
15,000 shares owned by Shirley Friedland as to which Mr. Friedland
disclaims beneficial ownership.
(5) Includes 22,594,864 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 135,000 shares owned by Carol
Bregman, his daughter; 113,000 shares owned by Janet Berlin, his
daughter; 135,000 shares owned by Forest Berlin, his grandson; and
135,000 shares owned by Jessica Berlin, his granddaughter.
52
<PAGE> 57
(6) Represents options granted in May 2000 to acquire 100,000 shares of
common stock at $0.25 per share.
(7) Represents options to purchase 1,515,960 shares of common stock at
$0.24255 per share, which are currently exercisable.
SELLING SHAREHOLDERS
The table below sets forth certain information, as of the date of this
prospectus, with respect to the amount and percentage ownership of each Selling
shareholder before this offering, the number of shares covered by this
prospectus with respect to each Selling shareholder, and the amount and
percentage ownership of each Selling shareholder after this offering (assuming
the issuance of the 81,818,864 shares being registered in this prospectus with
respect to our equity line of credit and the exercise of all warrants for which
shares are being registered by this prospectus). None of the selling
shareholders has had any position, office, or other material relationship with
us within the past three years, other than as disclosed in this prospectus.
The number of shares we are registering is based in part on our good
faith estimate of the maximum number of shares we will issue to Spinneret under
the private equity line of credit agreement. Accordingly, the number of shares
we are registering for issuance under the private equity line of credit
agreement may be higher than the number we actually issue under the private
equity line of credit agreement.
SELLING SHAREHOLDER TABLE
<TABLE>
<CAPTION>
Position With or Shares Owned Shares Owned
Relationship to Before Offering(1) Shares Being After Offering(3)
Selling Shareholder Advanced Viral Number Percent Sold in Offering(2) Number Percent
------------------- -------------- ------------------ ------- -------------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Spinneret Financial Systems, Inc.(4) Investor 81,818,864 18.4% 81,818,864 0 0%
May Davis Group, Inc. (5) Investor 10,000,000 2.7% 10,000,000 0 0%
SELLING SHAREHOLDERS TOTAL SHARES 91,818,864 21.1% 91,818,864 0 0%
SHARES OUTSTANDING AFTER OFFERING (2) 453,713,239
</TABLE>
-------------------------------
(1) This number includes (solely for purposes of this prospectus) (i) up to
an aggregate of up to 81,818,864 shares of our common stock that we may
sell to the selling shareholders pursuant to the private equity line of
credit agreement, assuming a purchase price equal to the average of the
three lowest daily closing bid prices for the 25 consecutive trading
days prior to October 24, 2000 ($0.3667), multiplied by 0.67 ($0.2444);
and (ii) up to 10,000,000 shares of common stock underlying purchase
warrants issuable to May Davis as placement agent. Except for shares
issuable to May Davis upon the exercise of a Class A Warrant to
purchase 5,000,000 shares of our common stock at an exercise price per
share equal to $1.00, exercisable in part or in whole at any time until
September 18, 2005, such shares are NOT deemed to be beneficially owned
within the meaning of Sections 13(d) and 13(g) of the Exchange Act.
(2) Assumes the full use of the equity line of credit agreement and full
exercise of the warrants.
(3) Assumes that all of the shares are sold by the selling shareholders and
no additional shares of common stock are acquired.
(4) Represents (solely for purposes of this prospectus) up to an aggregate
of up to 81,818,864 shares of our common stock that we may sell to the
selling shareholders pursuant to the private equity line of credit
agreement.
(5) Represents (i) shares issuable upon the exercise of a Class A Warrant
to purchase 5,000,000 shares of our common stock at an exercise price
per share equal to $1.00, exercisable in part or in whole at any time
by May Davis at its discretion until September 18, 2005, and (ii)
shares issuable upon the exercise of a Class B Warrant to purchase
5,000,000 shares of our common stock at an exercise price equal to the
greater of $1.00 or 110% of the bid price of the common stock on the
applicable advance date under the private equity line of credit
agreement. The Class B Warrant is exercisable pro rata on or after each
advance date with respect to that number of warrant shares equal to the
product obtained by multiplying 5,000,000 by a fraction, the numerator
of which is the amount of the advance payable on the applicable advance
date and the denominator of which is $20,000,000.
53
<PAGE> 58
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
As of the date of this prospectus, our Certificate of Incorporation
authorize us to issue 1,000,000,000 shares of common stock, par value $0.00001
per share. As of October 24, 2000, there were outstanding 361,895,098 shares of
common stock, all of which 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.
American Stock Transfer & Trust Company is our transfer agent and
registrar, and is located in Brooklyn, New York.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the cash proceeds, if any, from the
exercise of any of the warrants held by the selling shareholders.
PLAN OF DISTRIBUTION
We are registering the resale of shares of common stock by Spinneret
Financial Systems, Inc., which will receive shares of common stock pursuant to
the equity line of credit agreement. In addition, we are registering the resale
of shares of common stock issuable upon the exercise of the Class A Warrant and
the Class B Warrant. Spinneret Financial Systems is an "underwriter" within the
meaning of the Securities Act in connection with the sale of the common stock
offered by it under this prospectus. Other selling shareholders and any
broker-dealers who act in connection with the resale of common stock offered by
this prospectus may also be considered underwriters.
54
<PAGE> 59
As of October 24, 2000, we had approximately 361,895,098 shares of
common stock outstanding. The following table shows the number of shares we
would issue to Spinneret and the price it would pay for those shares given the
hypothetical variable shown in the table, if
o we requested drawdowns of the maximum amount under the private
equity line of credit agreement;
o we set a minimum per share purchase price of $0.2444;
o we do not issue more shares to Spinneret under private equity
line of credit agreement than we are currently registering for
resale of the shares issued under the common stock purchase
agreement.
<TABLE>
<CAPTION>
Assumed Average Number of Shares Issuable
of 3 Lowest to Spinneret Under the Price Per Share Paid
Closing Bid Prices Equity Line of Credit Agreement by Spinneret
------------------ ------------------------------- --------------------
<S> <C> <C>
$0.2444 (1) 81,818,264 $0.2444
$0.3667 (2) 54,545,455 $0.3667
$0.5500 (3) 36,363,636 $0.5500
</TABLE>
---------------------
(1) Represents the 67% of the average of the three lowest closing bid
prices of our common stock for the period beginning 25 trading days
before October 24, 2000.
(2) Represents the average of the three lowest closing bid prices of our
common stock for the period beginning 25 trading days before October
24, 2000.
(3) Represents 150% of the average of the three lowest closing bid prices
of our common stock for the period beginning 25 trading days before
October 24, 2000.
To permit Spinneret to resell the common shares issued to it under the
private equity line of credit agreement, and to permit May Davis to resell the
common shares issued to it upon exercise of the Class A Warrant and Class B
Warrant, we agreed to register those shares and to maintain that registration.
To that end, we have agreed with each of Spinneret and May Davis that we will
prepare and file such amendments and supplements to the registration statement
and the prospectus as may be necessary in accordance with the Securities Act and
the rules and regulations promulgated thereunder, in order to keep it effective
until the earliest of any of the following dates, as applicable:
o in the case of Spinneret, (i) the date after which all of the
common shares held by Spinneret or its transferees in
connection with the equity line of credit have been sold
pursuant to a registration statement; or (ii) the date that
Spinneret or its transferees receive an opinion of counsel
that the common shares acquired under the equity line of
credit may be sold under the provisions of Rule 144
promulgated under the Securities Act.
o in the case of May Davis, (i) the date after which all of the
common shares held by May Davis or its transferees in
connection with the Class A Warrant and Class B Warrant have
been sold pursuant to a registration statement; or (ii) the
date that May Davis or its transferees receive an opinion of
counsel that the common shares
55
<PAGE> 60
acquired in connection with the exercise of the Class A
Warrant and Class B Warrant may be sold under the provisions
of Rule 144 promulgated under the Securities Act.
Sales of the shares may be made from time to time by the selling
shareholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the OTC
Bulletin Board, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions) or other
market on which our common stock may be listed at the time of sale, including
the American Stock Exchange, in privately negotiated transactions or otherwise
or in a combination of such transactions at prices and at terms then prevailing
or at prices related to the then current market price, or at privately
negotiated prices or at fixed prices that may be changed. In addition, any
shares covered by this prospectus which qualify for sale pursuant to Section
4(l) of the Securities Act or Rule 144 promulgated thereunder may be sold under
such provisions rather than pursuant to this prospectus. We will also receive
the cash proceeds, if any, from the exercise of any of the warrants held by the
selling shareholders. Without limiting the generality of the foregoing, the
shares may be sold in one or more of the following types of transactions:
o a block trade in which the broker-dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or
dealers engaged by the selling shareholders may arrange for
other brokers or dealers to participate in the resales.
Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the selling shareholder and/or the
purchasers of the shares of common stock for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation, as a
particular broker-dealer, might be in excess of customary commissions).
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
56
<PAGE> 61
may also enter into option, swaps, derivatives or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares
registered hereunder, which the broker-dealer may resell pursuant to this
prospectus. The selling shareholders may also pledge the shares registered
hereunder to a broker or dealer and upon a default, the broker or dealer may
effect sales of the pledged shares pursuant to this prospectus.
From time to time the selling shareholders may be engaged in short
sales, short sales against the box, puts and calls and other hedging
transactions in our securities, and may sell and deliver the shares in
connection with such transactions or in settlement of securities loans. These
transactions may be entered into with broker-dealers or other financial
institutions. In addition, from time to time, a selling shareholder may pledge
its shares pursuant to the margin provisions of its customer agreements with its
broker-dealer. Upon delivery of the shares or a default by a selling
shareholder, the broker-dealer or financial institution may offer and sell the
pledged shares from time to time.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
selling shareholders, or any other broker-dealer, is acting as principal or
agent for the selling shareholders, the compensation to be received by
underwriters who may be selected by the selling shareholders, or any
broker-dealer, acting as principal or agent for the selling shareholders and the
compensation to be received by other broker-dealers, if the compensation of such
other broker-dealers is in excess of usual and customary commissions, will, to
the extent required, be set forth in a supplement to this prospectus. Any dealer
or broker participating in any distribution of the shares may be required to
deliver a copy of this prospectus, including the prospectus supplement, if any,
to any person who purchases any of the shares from or through such dealer or
broker.
We have advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included in this prospectus they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any selling shareholders, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
It is anticipated that the selling shareholders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time under this prospectus, such sales, or the
possibility of such sales, may have a depressive effect on the
57
<PAGE> 62
market price of our common stock. None of the selling shareholders have entered
into any agreements regarding the sales of the shares being registered.
We have agreed to bear all expenses of registration of the shares of
common stock offered by the selling shareholders for resale, other than any
commissions, discounts, concessions or other fees, if any, payable to
broker-dealers in connection with any sale of the shares of common stock, which
will be borne by the selling shareholder selling those shares or by the
purchasers of such shares.
We have agreed to indemnify each selling shareholder or their
transferees or assignees against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments to which such
selling shareholder or its pledgees, donees, transferees or other successors in
interest may be required to make in respect thereof.
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., Bank of
America Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
shall be liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability
1. for any breach of the director's duty of loyalty to us or our
shareholders;
2. for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
3. under section 174 of the Delaware General Corporation Law; or
4. for any transaction from which the director derives improper
personal benefit.
58
<PAGE> 63
The effect of this provision is to eliminate our rights and those of
our shareholders (through shareholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our shareholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling our Company pursuant to the foregoing
provisions, we have been informed 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.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making the offer is not qualified to do so or to anyone
to whom it is unlawful to make such offer or solicitation.
59
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants........................................................F-1
Consolidated Financial Statements Years Ended 1999, 1998 and 1997
Balance Sheets, December 31, 1999 and 1998...........................................................F-2
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997 and from Inception (February 20, 1984) to December 31, 1999.............................F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 1999................................................................................F-4
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997 and from Inception (February 20, 1984) to December 31, 1999.............................F-12
Notes to Consolidated Financial Statements...........................................................F-13
Consolidated Financial Statements Three and Six Months Ended June 30, 2000
Balance Sheets, June 30, 2000 and December 31, 1999..................................................F-38
Statements of Operations for the Three and Six Months Ended June 30, 2000
and 1999 and from Inception (February 20, 1984) to June 30, 2000.................................F-39
Statements of Stockholders' Equity from Inception (February 20, 1984)
to June 30, 2000.................................................................................F-40
Statements of Cash Flows for the Six Months Ended June 30, 2000
and 1999 and from Inception (February 20, 1984) to June 30, 2000.................................F-49
Notes to Consolidated Condensed Financial Statements.................................................F-50
</TABLE>
<PAGE> 65
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the years in the three year period ended
December 31, 1999 and for the period from inception (February 20, 1984) to
December 31, 1999. 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, 1999 and 1998
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1999 and for the period from
inception (February 20, 1984) to December 31, 1999 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 also 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
January 26, 2000, except for the fourth paragraph of Note 12, as to which
the date is March 9, 2000
F-1
<PAGE> 66
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 836,876 $ 924,420
Investments -- 821,047
Inventory 19,729 19,729
Other current assets 59,734 29,818
------------ ------------
Total current assets 916,339 1,795,014
Property and Equipment 1,375,923 1,049,593
Other Assets 569,312 460,346
------------ ------------
Total assets $ 2,861,574 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities $ 728,872 $ 279,024
Current portion of capital lease obligation 50,315 38,335
Current portion of note payable 19,095 --
------------ ------------
Total current liabilities 798,282 317,359
------------ ------------
Long-Term Debt:
Convertible debenture, net 4,446,629 1,457,919
Capital lease obligation - long-term portion 152,059 167,380
Note payable - long-term portion 77,964 --
------------ ------------
Total long-term debt 4,676,652 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement -- 600,000
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000 shares of $.00001
par value authorized, 303,472,035 and 296,422,907
shares issued and outstanding 3,034 2,964
Additional paid-in capital 17,537,333 14,325,076
Deficit accumulated during the development stage (19,725,238) (13,550,976)
Deferred compensation cost -- (14,769)
Discount on warrants (428,489) --
------------ ------------
Total stockholders' equity (deficiency) (2,613,360) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 2,861,574 $ 3,304,953
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 67
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,
1999 1998 1997 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 10,953 $ 656 $ 2,278 $ 205,928
Interest and dividends 42,744 102,043 111,845 602,041
Other income -- 293 7,800 120,093
------------- ------------- ------------- -------------
53,697 102,992 121,923 928,062
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 1,745,937 1,659,456 817,603 5,329,404
General and administrative 2,244,205 1,420,427 1,681,436 9,559,452
Depreciation 230,785 110,120 26,288 546,223
Interest 2,007,032 1,470,699 1,738,325 5,218,221
------------- ------------- ------------- -------------
6,227,959 4,660,702 4,263,652 20,653,300
------------- ------------- ------------- -------------
Net Loss $ (6,174,262) $ (4,557,710) $ (4,141,729) $ (19,725,238)
============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.02) $ (0.02) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 302,361,109 294,809,073 274,534,277
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 68
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 financial statements.
F-4
<PAGE> 69
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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, year ended December 31, 1987 -- -- -- (258,663)
----------- ----------- ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
----------- ----------- ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
----------- ----------- ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ----------- ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 70
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 financial statements.
F-6
<PAGE> 71
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting
services $ .05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of
options .08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of
options .10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ------- ----------- ------ ----------- ------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
------
Issuance of common stock, exercise of
options .05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of
options .08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of
options .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting
services .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting
services .14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ------- ----------- ------ ----------- ------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------- ----------- ------ ----------- ------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 72
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock,
exercise of options .05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options .08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options .10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options .11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options .12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options .18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options .19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options .20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered .50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- (1,154,740) --
----------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----------- ----------- --------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 73
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock,
exercise of options .08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt .20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt .15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt .12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt .15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt .16 772,201 8 119,992 -- -- --
Issuance of common stock, for
services rendered .41 50,000 -- 20,500 -- -- --
Issuance of common stock, for
services rendered .24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on convertible
debenture -- -- 4,768 -- -- --
Net loss, year ended December 31,
1997 -- -- -- -- (4,141,729) --
----------- --------- ----------- --------- ----------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- --------- ----------- --------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 74
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
-------- ------------ --------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock,
exercise of options .12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options .14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options .16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options .20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options .26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt .13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt .14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt .15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt .18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt .19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt .22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt .23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered .21 100,000 1 20,999 -- -- --
Beneficial conversion feature,
November debenture -- -- 625,000 -- -- --
Warrant costs, November
debenture -- -- 48,094 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- (4,557,710) --
------------ --------- ------------ --------- ------------ ---------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
------------ --------- ------------ --------- ------------ ---------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 75
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
------ ------------ --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ --
Issuance of common stock,
securities purchase agreement .16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase agreement .27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered .22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered .25 180,000 2 44,998 -- -- --
Beneficial conversion feature,
August debenture -- -- 687,500 -- -- --
Beneficial conversion feature,
December debenture -- -- 357,143 -- -- --
Warrant costs, securities
purchase agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities
purchase agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August
debenture -- -- 52,592 -- -- --
Warrant costs, December
debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred
compensation cost -- -- -- -- 14,769 --
Compensation expense related to
modification of existing options -- -- 210,144 -- -- --
Net loss, year ended
December 31, 1999 -- -- -- (6,174,262) -- --
------------ --------- ------------ ------------ --------- ------------
Balance, December 31, 1999 303,472,035 3,034 $ 17,537,333 $(19,725,238) $ -- $ (428,489)
------------ --------- ------------ ------------ --------- ------------
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 76
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,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (6,174,262) $ (4,557,710) $ (4,141,729) $(19,725,238)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 230,785 110,120 26,288 546,133
Amortization of debt issue costs 331,250 229,978 111,957 673,185
Amortization of deferred interest cost on
beneficial conversion feature 1,044,643 835,951 1,552,842 3,433,361
Amortization of discount on warrants 148,262 290,297 -- 438,559
Amortization of deferred compensation cost 14,769 59,068 399,322 760,500
Issuance of common stock for services 67,000 21,000 44,500 1,504,500
Compensation expense related to modification of
existing options 210,144 -- -- 210,144
Other -- -- (1,607) (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (29,917) (9,608) (4,159) (59,735)
Increase in inventory -- -- -- (19,729)
Increase in other assets (440,216) (247,072) (496,126) (1,216,958)
Increase (decrease) in accounts payable and
accrued liabilities 449,848 (96,582) 328,932 735,072
------------ ------------ ------------ ------------
Total adjustments 2,026,568 1,193,152 1,961,949 7,003,425
------------ ------------ ------------ ------------
Net cash used by operating activities (4,147,694) (3,364,558) (2,179,780) (12,721,813)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- (915,047) (3,651,676) (6,292,979)
Proceeds from sale of investments 821,047 3,078,902 2,045,615 6,292,979
Acquisition of property and equipment (407,150) (451,734) (307,362) (1,550,750)
Proceeds from sale of property and equipment -- -- 1,200 1,200
------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities 413,897 1,712,121 (1,912,223) (1,549,550)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 3,000,000 1,500,000 4,000,000 8,500,000
Proceeds from deposit on securities purchase agreement -- 600,000 -- 600,000
Proceeds from sale of securities, net of issuance costs 702,500 257,400 266,666 6,081,088
Payments under capital lease (41,986) (16,602) -- (58,588)
Payments on note payable (14,261) -- -- (14,261)
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,646,253 2,340,798 4,266,666 15,108,239
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (87,544) 688,361 174,663 836,876
Cash and Cash Equivalents, Beginning 924,420 236,059 61,396 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 836,876 $ 924,420 $ 236,059 $ 836,876
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 118,870 $ 6,042 $ --
============ ============ ============
During 1999, the Company purchased equipment under a
capital lease totaling $38,645 and under an installment
note payable totaling $111,320.
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 77
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 (the current formulation of which is now known as
and hereinafter referred to as "Product R"). 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, Product R, to
commence commercial operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research,
Ltd. (LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985,
and, since that time, has been primarily involved in organizational
activities, research and development activities, and raising
capital. Planned operations, as described above, have not commenced
to any significant extent. Accordingly, the Company is considered
to be in the development stage, and the accompanying consolidated
financial statements represent those of a development stage
enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (money fund),
with original maturities of three months or less.
INVESTMENTS
At December 31, 1999, investments consist of a money fund, which is
reported at its fair value. At December 31, 1998, investments
consisted of U.S. Government discount notes classified as "held to
maturity" and are carried at amortized cost, which approximates
fair value.
F-13
<PAGE> 78
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
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.
INCOME TAXES
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES, which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
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,
1999 and 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 of
December 31, 1999 and 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, a money fund, 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.
F-14
<PAGE> 79
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
At December 31, 1998, the fair value of non-current investments,
primarily U.S. government obligations, have been estimated using
quoted market prices. 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.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At
various times during the year, the Company has cash balances in
excess of federally insured limits. The Company maintains its cash,
which consists primarily of demand deposits, with high quality
financial institutions, which the Company believes limits risk.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No.
25), and related interpretations, in accounting for its employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
APB No. 25 provides that the compensation expense relative to the
Company's employee stock options is measured based on the intrinsic
value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of
the impact of applying the fair value method of SFAS No. 123.
The Company follows SFAS No. 123 in accounting for stock options
issued to non-employees.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No.
128, EARNINGS PER SHARE, which was adopted in 1997. This standard
requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the diluted earnings per share computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year.
The Company's potentially issuable shares of common stock pursuant
to outstanding stock options are excluded from the Company's
diluted computation, as their effect would be anti-dilutive.
F-15
<PAGE> 80
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 Product R for testing and other purposes. The Company records
sales when the product is shipped to customers.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to 1999 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. On June 30, 1999,
the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133. SFAS No. 133 as amended by SFAS No. 137 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard on January 1, 2000 to affect its financial statements.
F-16
<PAGE> 81
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 Product R 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
Product R 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.
During 1999 and 1998, the Company was successful in obtaining equity
and debt financing aggregating approximately $3,700,000 and $2,400,000,
respectively. 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, or that the Company will be successful
in the efforts to obtain equity or debt financing. 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, and plans to continue to seek additional
equity and debt financing as the need arises. 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.
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
(currently referred to as Product R) worldwide, except within the
Bahamas, for $50,000. The Company also purchased inventory of Product R
from LTD for $45,000 and was obligated to pay $3 per ampule of Product
R 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.
F-17
<PAGE> 82
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated Useful
Lives (Years) 1999 1998
---------------- ---------- ----------
<S> <C> <C> <C>
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 483,865 324,083
Machinery and equipment 5 1,400,880 1,003,768
--------- ---------
1,919,295 1,362,401
Less accumulated depreciation 543,372 312,808
---------- ----------
$1,375,923 $1,049,593
========== ==========
</TABLE>
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $385,087 as of
December 31, 1999 and $370,028 as of December 31, 1998 including
$17,623 expended in 1987 to purchase a land lease expiring in 2068.
Included with machinery and equipment is $38,645 and $222,318 of
equipment purchased under capital leases during 1999 and 1998,
respectively. Depreciation expense for equipment under the capital
leases was approximately $47,040 and $12,000 in 1999 and 1998,
respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Patent development costs $517,816 $344,319
Loan costs, net of accumulated amortization of $341,395 -- 96,250
Other 51,496 19,777
-------- --------
$569,312 $460,346
======== ========
</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 6. 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
F-18
<PAGE> 83
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
balance from the date of issuance until the date of interest
payment. The Debentures were convertible, at the option of the
holder, into shares of Common Stock pursuant to specified formulas.
On April 22, 1997, June 6, 1997, July 3, 1997 and August 20, 1997,
pursuant to notice by the holder, RBB, to the Company under the
February Debenture, $330,000, $134,000, $270,000 and $266,000,
respectively, of the principal amount of the February Debenture was
converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares
of the Common Stock, respectively. As of August 20, 1997, the
February Debenture was fully converted. On December 9, 1997,
January 7, 1998, January 14, 1998, February 19, 1998, February 23,
1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant to
notice by the holder, RBB, to the Company, $120,000, $133,000,
$341,250, $750,000, $335,750, $425,000, $275,000 and $620,000,
respectively, of the October Debenture was converted into 772,201,
1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869, 1,491,485
and 3,299,979 Common Stock, respectively. As of May 5, 1998, the
October Debenture was fully converted.
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants was $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 was $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.
F-19
<PAGE> 84
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the October
Debenture, there was 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 was 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 is $.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 was an intrinsic value associated with the
beneficial conversion feature of $625,000. This amount has been
recorded as interest expense in 1998.
In August 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture (the "August Debenture") due August 3, 2009 to Focus
Investors LLC ("Focus"). Accrued interest under
F-20
<PAGE> 85
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
the August Debenture is payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the August Debenture may be made prior to the maturity date
without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common
stock.
In connection with the issuance of the August Debenture, the
Company issued to Focus one warrant (the "August Warrant") to
purchase Common Stock, such August Warrant entitling the holder to
purchase 1,000,000 shares of the Common Stock at any time and from
time to time through August 3, 2004. The exercise price of the
August Warrant is $.2461 per warrant share. The fair value of the
August Warrants was estimated to be $52,593 ($.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate
of 5.75% and an expected holding period of five years. This amount
is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August
Debenture, there was an intrinsic value associated with the
beneficial conversion feature of $687,500. This amount has been
recorded as interest expense in 1999.
In December 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to sell $2,000,000 principal amount of the Company's 7%
convertible debenture (the December Debenture) due December 28,
2009 to Endeavour Capital ("Endeavour"). Accrued interest under the
December Debenture is payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the December Debenture may be made prior to the maturity date
without the consent of the holder. The December Debenture is
convertible, at the option of the holder, into shares of common
stock.
During 1999, $1,000,000 of these debentures were sold. The
remaining $1,000,000 was not available until the shares underlying
the first $1,000,000 were registered. Such registration statement
was declared effective in January 2000 and the remaining $1,000,000
transaction was consummated. See Subsequent Event, Note 12.
F-21
<PAGE> 86
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the December Debenture, the
Company issued to Endeavour warrants (the December Warrants) to
purchase Common Stock, such December Warrant entitling the holder
to purchase 100,000 shares of the Common Stock at any time and from
time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate
of 6% and an expected holding period of three years. This amount is
being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the December
Debenture, there was an intrinsic value associated with the
beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Unpaid principal balance of August debenture 2,000,000 --
Unpaid principal balance of December debenture 1,000,000 --
---------- ----------
4,500,000 1,500,000
Less unamortized discount 53,371 42,081
---------- ----------
Convertible debentures, net $4,446,629 $1,457,919
========== ==========
</TABLE>
OTHER
In January 1999, pursuant to a securities purchase agreement dated
December 1998, 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-22
<PAGE> 87
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
Included in interest expense for the year ended December 31, 1999
is $256,000, which may be payable by the Company as additional
financing costs related to the effective date of a registration
statement covering the resale of certain securities sold by the
Company.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provides for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($.04 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five
years. This amount is being amortized to interest expense.
NOTE 7. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
property and calls for monthly installments of $2,476 at 12% per annum
for 60 months, commencing in March 1999 and expiring in February 2004.
The aggregate maturities of the installment purchase agreement for each
of the five years subsequent to December 31, 1999 are as follows:
Year ending December 31:
2000 $19,095
2001 19,517
2002 26,246
2003 27,321
2004 4,880
-------
97,059
Less current portion 19,095
-------
Note payable - long-term portion $77,964
=======
F-23
<PAGE> 88
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. 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 Product R. 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 Product R. Although the Company is
unaware of any such claims or threatened claims since Product R 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 Product R. As of the date hereof, the Company
does not have product liability insurance for Product R. There can
be no assurance that the Company will be able to secure such
insurance in adequate amounts, at reasonable premiums if it
determined to do so. Should the Company be unable to secure such
product liability insurance, the risk of loss to the Company in the
event of claims would be greatly increased and could have a
material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has three issued patents and one allowed patent for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 foreign patent
applications. 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 Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
F-24
<PAGE> 89
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
PLATA PARTNERS LIMITED PARTNERSHIP (Continued)
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 June 30, 2000
at an exercise price of $.15 and $.17, respectively. As of December
31, 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. The fair
value of these options are estimated to be $32,925 ($.0348 per
option share) based upon a financial analysis of the terms of the
options using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Through December 31, 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.
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 Product R 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 June 30, 2000 at an
exercise price of $.21 per share. The fair value of these options
are estimated to be $1,788 ($.0012 per option share) based
F-25
<PAGE> 90
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. As of December
31, 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
Product R 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 Product R 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.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Product R 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
Product R for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
F-26
<PAGE> 91
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
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 Product R 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 Product R with those taking a
three drug cocktail and a placebo. As of December 31, 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
Product R 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.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
As of December 31, 1999, the Company advanced approximately
$236,000 for expenses in connection with the drug approval process
in Argentina.
F-27
<PAGE> 92
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
BARBADOS STUDY
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of December 31, 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 Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 1999, the Company has advanced
approximately $15,000 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 Product R 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
Product R using kidney tumor model systems. In addition, NCI was to
study the effects of Product R 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 Product
R.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
F-28
<PAGE> 93
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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. As of December 31, 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 (exercisable until March 23, 2001) 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 (exercisable until March 23, 2001) 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 (exercisable
until March 23, 2001) 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, 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.
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), which are
exercisable until March 23, 2001.
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
F-29
<PAGE> 94
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 (increased
to $361,000 as of January 1, 2000), 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 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 June 30, 2000), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per
F-30
<PAGE> 95
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
share (which exercise price has been increased to $.16 per share)
(the "September 1992 Cohen Options"). The fair value of these
options are estimated to be $59,030 ($.0347 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. As of December
31, 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.
The fair value of these options was estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years
(the term of the employment agreement).
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 December 31, 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 June 30, 2000 at an option price of
$.14. The fair value of these options are estimated to be $116,101
($.0541 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; risk free
interest rate of 6%. This amount has been charged to compensation
expense at December 31, 1999 as it related to services previously
provided.
F-31
<PAGE> 96
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
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 the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. The contract was extended by
mutual consent of both parties. The Company has incurred
approximately $203,000 in services to GloboMax through December 31,
1999.
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options are estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years
(the term of the employment agreement).
Financial reporting of these options has been done pursuant to the
Company's policy of following APB No. 25, and related
interpretations, in accounting for its employee stock options.
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
<TABLE>
<CAPTION>
As
Reported
December 31, Pro forma As
1999 Adjustment Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Net loss $ (6,174,262) $ (31,344) $ (6,205,606)
============= ============= =============
Net loss per share $ (0.02) $ (0.00) $ (0.02)
============= ============= =============
</TABLE>
F-32
<PAGE> 97
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GALLANTAR AGREEMENT (Continued)
There were no other options outstanding that would require pro
forma presentation in 1997 or 1998.
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 Product R 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 Product R to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Product R to
maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
OTHER
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipates
that the total expenses associated with the build-out would be
approximately $400,000, of which $155,000 has been incurred as of
December 31, 1999.
GENERAL
CAPITAL LEASES
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. Additionally, during 1999, the Company
entered into a purchase lease agreement for equipment totaling
$38,645. The lease calls for monthly payments of $965 for 48 months
commencing in August 1999 and expiring in July 2003. Future minimum
capital lease payments and the net present value of the future
minimum lease payments at December 31, 1999 are as follows:
F-33
<PAGE> 98
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
CAPITAL LEASES (Continued)
Year ending December 31:
2000 $ 65,928
2001 65,928
2002 65,928
2003 38,458
--------
Total minimum lease payments 236,242
Less amount representing interest (33,868)
--------
Present value of net minimum lease payments 202,374
Current maturities (50,315)
--------
$152,059
========
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 three options to
renew for an additional one year per option. Management has
exercised 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 $85,000. Rent
for the additional facilities is approximately $175,000. Total
rental commitment for the laboratory facilities will be $260,000.
The Company leased an automobile in November 1999 for 36 months at
$711 per month.
Total lease expense for the years ended December 31, 1999, 1998 and
1997 amounted to $191,974, $121,477 and $76,351, respectively.
F-34
<PAGE> 99
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
OPERATING LEASES (Continued)
Future minimum lease commitments as of December 31, 1999 are as
follows:
Year ending December 31:
2000 $ 282,500
2001 268,500
2002 288,000
2003 290,000
2004 290,000
Thereafter 290,000
----------
Total $1,709,000
==========
NOTE 9. STOCKHOLDERS' EQUITY
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 conversion of debt of
16,805,333 shares for $2,880,000.
During 1999, the Company issued 7,049,128 shares of common stock for an
aggregate consideration of $1,369,500. The amounts were comprised of
the issuance of common stock for cash of 6,769,128 shares for
$1,302,500 and issuance of common stock in exchange for consulting
services of 280,000 shares for consideration of $67,000.
NOTE 10. 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, 1999 and 1998, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $14,600,000 and $9,700,000, which expire in varying
amounts to 2019.
F-35
<PAGE> 100
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. INCOME TAXES (Continued)
The Company presently has temporary differences between financial
reporting and income tax reporting relating to interest expense on the
beneficial conversion feature of the convertible debt, depreciation and
patent costs. The components of the deferred tax asset as of December
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Benefit of net operating loss carryforwards $4,850,000 $3,300,000
Less valuation allowance 4,850,000 3,300,000
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
</TABLE>
As of December 31, 1999, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $4,850,000 has been established.
NOTE 11. STOCK OPTIONS
As more fully described in Note 8 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
shorter of the service period or the life of the option. The deferred
compensation cost is reported as a component of stockholders' equity.
At December 31, 1999 and 1998, there were approximately 7,600,000
option shares outstanding with a weighted average exercise price of
$0.195 per share.
On January 3, 2000, the Company issued to employees stock options to
acquire an aggregate of 430,000 shares of common stock at an exercise
price of $0.21 per share. These options expire on January 2, 2010 and
vest in 20% increments at the end of each year for five years.
NOTE 12. SUBSEQUENT FINANCINGS
On January 19, 2000, pursuant to the August 31, 1999 convertible
debenture, the investors exercised their right to convert $300,000 of
the $2,000,000 debenture outstanding into 2,178,155 shares of common
stock.
On January 19, 2000, pursuant to the November 1998 convertible
debenture, the investors exercised their right to convert $1,122,500 of
the $1,500,000 debenture outstanding into 8,252,746 shares of common
stock.
In addition, on January 25, 2000, pursuant to the December 28, 1999
securities purchase agreement, the Company received an additional
$1,000,000 structured through the convertible debenture. Therefore, the
convertible debenture under this agreement is $2,000,000 as of January
25, 2000.
F-36
<PAGE> 101
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. SUBSEQUENT FINANCINGS (Continued)
Pursuant to a securities purchase agreement dated February 16, 2000,
the Company received on March 9, 2000, $3,000,000 in exchange for
13,636,357 shares of common stock and warrants to purchase 5,454,544
shares of common stock.
The pro forma effects of these transactions on the 1999 balance sheet,
are summarized as follows:
<TABLE>
<CAPTION>
Pro forma
Historical Adjustment Pro Forma
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current Assets $ 916,000 (b) $ 1,000,000 $ 4,916,000
(c) 3,000,000
Property and Equipment 1,376,000 -- 1,376,000
Other Assets 570,000 -- 570,000
----------- ----------- -----------
$ 2,862,000 $ 4,000,000 $ 6,862,000
=========== =========== ===========
Current Liabilities $ 798,000 -- $ 798,000
Long-Term Debt 4,677,000 (a) $(1,423,000)
(b) 1,000,000 4,254,000
Stockholders' Equity (Deficiency) (2,613,000)(a)
(b) 1,423,000
3,000,000 1,810,000
----------- -----------
$ 2,862,000 $ 4,000,000 $ 6,862,000
=========== =========== ===========
</TABLE>
(a) Assuming conversion of convertible debentures into common stock
(b) Assuming issuance of additional $1,000,000 convertible debenture
(c) Assuming issuance of new $3,000,000 securities purchase agreement
F-37
<PAGE> 102
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
Statements
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,571,008 $ 836,876
Inventory 19,729 19,729
Other current assets 119,654 59,734
------------ ------------
Total current assets 2,710,391 916,339
Property and Equipment 1,704,922 1,375,923
Other Assets 594,362 569,312
------------ ------------
Total assets $ 5,009,675 $ 2,861,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities $ 547,478 $ 728,872
Current portion of capital lease obligation 52,540 50,315
Current portion of note payable 20,070 19,095
------------ ------------
Total current liabilities 620,088 798,282
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 15,000 4,446,629
Capital lease obligation - non-current portion 125,261 152,059
Note payable - non-current portion 69,209 77,964
------------ ------------
Total long-term liabilities 209,470 4,676,652
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 360,914,200 and 303,472,035
shares issued and outstanding 3,608 3,034
Additional paid-in capital 29,145,187 17,537,333
Deficit accumulated during the development stage (23,116,086) (19,725,238)
Discount on warrants (1,852,592) (428,489)
------------ ------------
Total stockholders' equity (deficiency) 4,180,117 (2,613,360)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 5,009,675 $ 2,861,574
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE> 103
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,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,933 $ 2,191 $ 4,961 $ 4,590 $ 210,889
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 588,027 409,464 1,283,102 767,380 6,612,506
General and administrative 610,402 498,529 1,365,825 936,932 10,925,277
Depreciation 76,209 58,949 143,969 96,056 690,192
------------- ------------- ------------- ------------- -------------
1,274,638 966,942 2,792,896 1,800,368 18,227,975
------------- ------------- ------------- ------------- -------------
Net Loss from Operations (1,272,705) (964,751) (2,787,935) (1,795,778) (18,017,086)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 49,628 5,680 74,591 21,489 676,632
Other income -- -- -- -- 120,093
Interest expense (113,351) (216,965) (677,504) (311,543) (5,895,725)
------------- ------------- ------------- ------------- -------------
(63,723) (211,285) (602,913) (290,054) (5,099,000)
------------- ------------- ------------- ------------- -------------
Net Loss $ (1,336,428) $ (1,176,036) $ (3,390,848) $ (2,085,832) $ (23,116,086)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.00) $ (.00) $ (.01) $ (.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 328,713,278 298,881,545 328,713,278 298,881,545
============= ============= ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE> 104
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<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-40
<PAGE> 105
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<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-41
<PAGE> 106
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<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 0 -- -- (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-42
<PAGE> 107
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting
services $ .05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of
options .08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of
options .10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ----------- ----------- ------ ----------- ------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
------
Issuance of common stock, exercise of
options .05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of
options .08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of
options .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting
services .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting
services .14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ----------- ----------- ------ ----------- ------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ----------- ----------- ------ ----------- ------
</TABLE>
See notes to consolidated condensed financial statements.
F-43
<PAGE> 108
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
----------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 -- 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock,
exercise of options $ .05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options .08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options .10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options .11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options .12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options .18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options .19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options .20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered .50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- (1,154,740) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
F-44
<PAGE> 109
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
----------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock,
exercise of options $ .08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt .20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt .15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt .12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt .15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt .16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered .41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered .24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on
convertible debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
F-45
<PAGE> 110
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
---------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
-------- ----------- ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock,
exercise of options $ .12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options .14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options .16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options .20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options .26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt .13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt .14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt .15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt .18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt .19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt .22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt .23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered .21 100,000 1 20,999 -- -- --
Beneficial conversion feature,
November debenture 0 -- -- 625,000
Warrant costs, November
debenture 0 -- -- 48,094
Amortization of deferred
compensation cost -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- (4,557,710) --
----------- ------------ ------------ ------------- ------------- -------------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- ------------ ------------ ------------- ------------- -------------
</TABLE>
See notes to consolidated condensed financial statements.
F-46
<PAGE> 111
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
------ ------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ --
Issuance of common stock,
securities purchase agreement $.16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase agreement .27 1,851,852 18 499,982 -- -- --
Issuance of common stock, for
services rendered .22 100,000 1 21,999 -- -- --
Issuance of common stock, for
services rendered .25 180,000 2 44,998 -- -- --
Beneficial conversion feature,
August debenture -- -- 687,500 -- -- --
Beneficial conversion feature,
December debenture -- -- 357,143 -- -- --
Warrant costs, securities
purchase agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities
purchase agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August
debenture -- -- 52,592 -- -- --
Warrant costs, December
debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred compensation
cost -- -- -- -- 14,769 --
Compensation expense related to
modification of existing options -- -- 210,144 -- -- --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262) -- --
------------ ------------ ------------ ------------ ----------- ----------
Balance, December 31, 1999 303,472,035 3,034 $ 17,537,333 $(19,725,238) $ -- $ (428,489)
------------ ------------ ------------ ------------ ----------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
F-47
<PAGE> 112
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Common Stock Deficit
--------------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock,
exercise of options $ .14 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options .15 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options .16 500,000 5 79,995 -- --
Issuance of common stock,
exercise of options .21 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options .25 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options .27 103,000 1 27,809 -- --
Issuance of common stock,
exercise of options .36 60,000 1 21,599 -- --
Issuance of common stock,
exercise of warrants .20 122,549 1 24,999 -- --
Issuance of common stock,
exercise of warrants .24 122,549 1 29,999 -- --
Issuance of common stock,
conversion of debt .14 35,467,682 355 4,907,146 -- --
Issuance of common stock,
conversion of debt .19 1,036,674 10 199,990 -- --
Issuance of common stock,
conversion of debt .20 1,887,500 19 377,481 -- --
Issuance of common stock,
cashless exercise of warrants 513,354 5 305,754 -- --
Issuance of common stock,
private placement offering .22 13,636,357 136 2,999,864 -- --
Cashless exercise of warrants -- -- (305,759) -- --
Beneficial conversion feature,
January debenture -- -- 386,909 -- --
Warrant costs, consulting
agreement -- -- 200,249 -- --
Warrant costs, January
debenture -- -- 13,600 -- --
Warrant costs, private
placement -- -- 1,582,734 -- (1,582,734)
Recovery of subscription
receivable previously written
off -- -- 19,000 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 158,631
Net loss, six months ended
June 30, 2000 -- -- -- (3,390,848) --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 360,914,200 $ 3,608 $ 29,145,187 $(23,116,086) $ (1,852,592)
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-48
<PAGE> 113
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,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,390,848) $ (2,085,832) $(23,116,086)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 143,969 96,056 690,102
Amortization of debt issue costs 106,030 52,500 779,215
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 386,909 -- 3,820,270
Amortization of discount on warrants 225,602 73,460 664,161
Amortization of deferred compensation cost -- 14,769 760,500
Issuance of common stock for services -- -- 1,504,500
Compensation expense related to modification of existing options -- -- 210,144
Realization of prepaid consulting fees 156,113 -- 156,113
Other -- -- (1,607)
Changes in Operating Assets and Liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (15,788) (15,787) (75,523)
Increase in other assets (25,050) (88,724) (1,242,008)
Increase (decrease) in accounts payable and
accrued liabilities (181,394) 226,773 553,678
------------ ------------ ------------
Total adjustments 796,391 359,047 7,799,816
------------ ------------ ------------
Net cash used by operating activities (2,594,457) (1,726,785) (15,316,270)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- 821,047 6,292,979
Expenditures for property and equipment (472,968) (136,803) (2,023,718)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities (472,968) 684,244 (2,022,518)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,000,000 -- 9,500,000
Proceeds from deposit on securities purchase agreement -- -- 600,000
Proceeds from deposit on exercise of options -- 30,000 --
Proceeds from sale of securities, net of issuance costs 3,814,910 202,500 9,895,998
Payments under capital lease (24,573) (18,761) (83,161)
Payments on note payable (7,780) -- (22,041)
Recovery of subscription receivable written off 19,000 -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 4,801,557 213,739 19,909,796
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,734,132 (828,802) 2,571,008
Cash and Cash Equivalents, Beginning 836,876 924,420 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 2,571,008 $ 95,618 $ 2,571,008
============ ============ ============
</TABLE>
F-49
<PAGE> 114
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, 2000 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, 2000 and
results of operations and cash flows for the three months and the
six months ended June 30, 2000 and 1999. 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. Certain amounts in the 1999 financial
statements have been reclassified to conform to 2000 presentation.
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, 1999.
NOTE 2. COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The accompanying unaudited consolidated condensed financial
statements at June 30, 2000 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 Product R 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 Product R 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
2000 and 1999, 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 unaudited 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 the sale of Product R. The Company has not as yet
received any notice of claim from such parties.
F-50
<PAGE> 115
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 Product R. Although the Company is
unaware of any such claims or threatened claims since Product R 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 Product R. As of the date hereof, the Company
does not have product liability insurance for Product R. There can
be no assurance that the Company will be able to secure such
insurance in adequate amounts, at reasonable premiums if it
determined to do so. Should the Company be unable to secure such
product liability insurance, the risk of loss to the Company in the
event of claims would be greatly increased and could have a
material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has three issued patents and one allowed patent for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 foreign patent
applications. 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 Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R 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 were exercisable through June 30, 2000
at an exercise price of $.15 and $.17, respectively. The fair value
of these options are estimated to be $32,925 ($.0348 per option
share) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
F-51
<PAGE> 116
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
PLATA PARTNERS LIMITED PARTNERSHIP
Through June 30, 2000, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
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, Product R, 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, 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 were exercisable through June 30, 2000
at an exercise price of $.21 per share. Effective July 1, 2000,
these options were extended to December 31, 2000 at an exercise
price of $.22 per share. The fair value of these options are
estimated to be $1,788 ($.0012 per option share) based on the
following assumptions: expected volatility of 20%; risk free
interest rate of 6%. This amount has been charged to compensation
expense at December 31, 1999 as it related to services previously
provided. As of June 30, 2000, 1,266,000 shares of common stock
were issued pursuant to the exercise of these options for an
aggregate exercise price of approximately $261,425.
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
Product R in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
F-52
<PAGE> 117
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 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 Product R 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.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Product R 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
Product R 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 Product R 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 Product R with those taking a
three drug cocktail and a
F-53
<PAGE> 118
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)
placebo. As of June 30, 2000, 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
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$95,000 which has been accounted for as research and development
expense.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of June 30, 2000, the Company has advanced
approximately $70,000 for such study which has been accounted for
as research and development expense.
As of June 30, 2000, the Company advanced approximately $352,000
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
Product R 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, 2000, 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 Product R in inhibiting the mutation of the
AIDS virus. As of June 30, 2000, the Company has advanced
approximately $15,000 for such study which has been accounted for
as research and development expense.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
F-54
<PAGE> 119
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In 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 per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. As of June 30, 2000, 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 (exercisable until March 23, 2001) 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 (exercisable until March 23, 2001) 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 (exercisable
until March 23, 2001) 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, 2000, 663,000 shares of common stock were issued pursuant to
the exercise of stock options by Richard Rubin. Mr. Rubin has, from
time to time in the past, advised the Company on matters unrelated
to his consultation with Dr. Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options
and 75,000 of his $0.36 options to Elliot Bauer, an individual who
also received and exercised shares and options as a result of the
"Cohen Agreements".
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), which are
exercisable until March 23, 2001.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1988 Employment Agreement.
F-55
<PAGE> 120
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
Pursuant to this Agreement, Dr. Hirschman is employed to serve as
Chief Executive Officer and President of the Company until December
31, 2002. The Agreement further provides that Bernard Friedland and
William Bregman will vote all shares owned or voted by them in
favor of Dr. Hirschman as a member of the Board of Directors of the
Company.
The Agreement provides for Dr. Hirschman to receive an annual base
salary of $361,000 (effective January 1, 2000), use of an
automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment.
The Agreement also provides for previously issued options to
acquire 23,000,000 shares of common stock at $0.27 per option share
to be immediately vested as of the date of this agreement.
The fair value of these options are estimated to be $5,328,441
($0.2317 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 80%; a risk free
interest rate of 6% and an expected holding period of 32 months
(the term of the employment agreement).
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options are estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years
(the term of the employment agreement).
F-56
<PAGE> 121
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GALLANTAR AGREEMENT (Continued)
Financial reporting of the Hirschman and Gallantar options has been
prepared pursuant to the Company's policy of following APB No. 25,
and related interpretations, in accounting for its employee stock
options. Accordingly, the following pro forma financial information
is presented to reflect amortization of the fair value of the
options.
<TABLE>
<CAPTION>
As
Reported Pro Forma As
June 30, 2000 Adjustment Adjusted
------------- --------- -------------
<S> <C> <C> <C>
Net loss $(3,390,848) $(297,766) $ (3,688,614)
=========== ========= =============
Net loss per share $ (0.01) $ (0.00) $ (0.01)
=========== ========= =============
</TABLE>
There were no other options outstanding that would require pro
forma presentation.
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 June 30, 2000), 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"). Effective July 1,
2000, these options were extended to December 31, 2000 at an
exercise price of $.17 per share. The fair value of these options
are estimated to be $59,030 ($.0347 per option share) based upon a
financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. As of June 30,
2000, 2,800,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $386,000.
F-57
<PAGE> 122
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
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 March 31, 2000, 3,455,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $240,000. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through June 30, 2000 at an option price of
$.14. Effective July 1, 2000, these options have been extended to
December 31, 2000 at an exercise price of $.16 per share. The fair
value of these options are estimated to be $116,101 ($.0541 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
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 the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. The contract was extended
indefinitely by mutual consent of both parties. The Company has
incurred approximately $577,000 in services to GloboMax through
June 30, 2000.
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting
agreement with Harbor View Group, Inc. for past and future
consulting services related to corporate structures, financial
transactions, financial public relations and other matters through
December 31, 2000.
F-58
<PAGE> 123
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT (Continued)
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share
and warrants to purchase 1,750,000 shares at an exercise price of
$0.26 per share until February 28, 2005. The fair value of the
warrants is estimated to be $200,249 ($.057 per warrant) based upon
a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of eleven months (the term of the
consulting agreement).
The Company has determined that $89,045 of the fair value relates
to past services and, accordingly, has expensed this portion in the
three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and is being amortized over the
remaining term of the agreement.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Product R 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 Product R to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Product R to
maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
OTHER
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
facilities in Yonkers, New York (the "build-out"). The total expenses
associated with the build-out of approximately $400,000, have been
incurred as of June 30, 2000.
F-59
<PAGE> 124
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively,
principal amount of its ten-year 7% Convertible Debentures (the
"February Debenture" and the "October Debenture", collectively, the
"Debentures") due February 28, 2007 and August 30, 2007, respectively,
to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
pursuant to Regulation S under the Securities Act of 1933, as amended.
Accrued interest under the Debentures was payable semi-annually,
computed at the rate of 7% per annum on the unpaid principal balance
from the date of issuance until the date of interest payment. The
Debentures were convertible, at the option of the holder, into shares
of Common Stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000,
$134,000, $270,000 and $266,000, respectively, of the principal amount
of the February Debenture was converted into 1,648,352, 894,526,
2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997, the February Debenture was fully converted. On
December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
the October Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black-Scholes 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-Scholes 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.
F-60
<PAGE> 125
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the October
Debenture, there was an 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 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.
On January 19, 2000 and March 7, 2000 pursuant to notice by the holder,
RBB, to the Company under the November Debenture, $1,122,500 and
$377,500, respectively, of the principal amount of the November
Debenture was converted into 8,252,746 and 1,887,500 shares of the
common stock, respectively. As of March 7, 2000, the November Debenture
was fully converted.
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-Scholes 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 amortized to
interest expense in the accompanying consolidated condensed financial
statements.
Based on the terms for conversion associated with the November
Debenture, there was an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount was recorded as interest
expense in 1998.
In August 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to issue an
aggregate of 20 units, each unit consisting of $100,000 principal
amount of the Company's 7% convertible debenture (the "August
Debenture") due August 3, 2009 to Focus Investors LLC ("Focus").
Accrued interest under the August Debenture is payable semi-annually,
computed at the rate of 7% on the unpaid principal balance from the
date of issuance until the date of the interest payment. No payment of
the
F-61
<PAGE> 126
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
principal of the August Debenture may be made prior to the maturity
date without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common stock.
On January 19, 2000, February 17, 2000 and March 3, 2000 pursuant to
notice by the holder, Focus, to the Company under the August Debenture,
$300,000, $900,000 and $800,000, respectively, of the principal amount
of the August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3, 2000
the November Debenture was fully converted.
In connection with the issuance of the August Debenture, the Company
issued to Focus one warrant (the "August Warrant") to purchase Common
Stock, such August Warrant entitling the holder to purchase 1,000,000
shares of the Common Stock at any time and from time to time through
August 3, 2004. The exercise price of the August Warrant is $.2461 per
warrant share. The fair value of the August Warrants was estimated to
be $52,593 ($.0526 per warrant share) based upon a financial analysis
of the terms of the warrant using the Black-Scholes 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 has been amortized to interest expense in the accompanying
consolidated condensed financial statements.
Based on the terms for conversion associated with the August Debenture,
there was an intrinsic value associated with the beneficial conversion
feature of $687,500. This amount was recorded as interest expense in
1999.
In December 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to sell
$2,000,000 principal amount of the Company's 7% convertible debenture
(the December Debenture) due December 28, 2009 to Endeavour Capital
("Endeavour"). Accrued interest under the December Debenture is payable
semi-annually, computed at the rate of 7% on the unpaid principal
balance from the date of issuance until the date of the interest
payment. No payment of the principal of the December Debenture may be
made prior to the maturity date without the consent of the holder. The
December Debenture is convertible, at the option of the holder, into
shares of common stock.
During 1999, $1,000,000 of these debentures were sold. The remaining
$1,000,000 was not available until the shares underlying the first
$1,000,000 were registered. Such registration statement was declared
effective in January 2000 and the remaining $1,000,000 transaction was
consummated.
On January 27, 2000, February 22, 2000, February 23, 2000, February 24,
2000 and February 29, 2000 pursuant to notice by the holder, Endeavour,
to the Company under the December Debenture, $150,000, $135,000,
$715,000, $785,000 and $200,000, respectively, of the principal amount
of the December Debenture was converted into 1,105,435, 988,913,
5,149,035, 5,622,696 and 1,036,674 shares of the common stock,
respectively. As of June 30, 2000, $15,000 of the December Debenture
remained outstanding.
F-62
<PAGE> 127
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the first $1,000,000 of the December
Debenture, the Company issued to Endeavour warrants (the December
Warrants) to purchase Common Stock, such December Warrant entitling the
holder to purchase 100,000 shares of the Common Stock at any time and
from time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant share)
based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the first $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock at
any time and from time to time through December 31, 2002. The exercise
price of the December Warrant is $.20 per warrant share. The fair value
of the December Warrants was estimated to be $13,600 ($.136 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of three years. This amount has been amortized
to interest expense in the accompanying consolidated financial
statements.
Based on the terms for conversion associated with the second $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $386,909. This amount has been
recorded as interest expense in 2000.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
Unpaid principal balance of November debenture $ -- $1,500,000
Unpaid principal balance of August debenture -- 2,000,000
Unpaid principal balance of December debenture 15,000 1,000,000
---------- ----------
15,000 4,500,000
Less unamortized discount -- 53,371
---------- ----------
Convertible debentures, net $ 15,000 $4,446,629
========== ==========
</TABLE>
F-63
<PAGE> 128
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS
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-Scholes 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.
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-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements.
Pursuant to a securities purchase agreement with Harbor View Group and
other various purchasers, dated February 16, 2000, the Company received
$3,000,000 on March 9, 2000 in exchange for 13,636,357 shares of common
stock.
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%) of
the warrants are exercisable at $0.275 per share and fifty percent
(50%) of the warrants are exercisable at $0.33 per share, until
February 28, 2005. The fair value of these warrants was estimated to be
$1,582,734 ($0.295 and $0.285 per warrant share) based upon a financial
analysis of the terms of the warrant using the Black-Scholes Pricing
Model with the following assumptions; expected volatility of 90%; 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 condensed financial statements.
F-64
<PAGE> 129
================================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
Up to 91,818,141 Shares
of
Common Stock
____________, 2000
================================================================================
<PAGE> 130
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 Research Corp. (the "Registrant"). All amounts shown
are estimates, except the Commission registration fee:
Commission registration fee....................................$7,920
Printing and mailing expenses.................................$10,000
Legal fees and expenses.......................................$15,000
Accounting fees and expenses..................................$10,000
TOTAL................................................$42,920
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Ninth of our Certificate of Incorporation contains the
following provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person, who has
ceased to be director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust
II-1
<PAGE> 131
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) and (b) of
this section. Such determination shall be made , with respect to a
person
II-2
<PAGE> 132
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 information relates to our securities issued or sold
within the past three years which were not registered under the Securities Act.
No underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, all securities were issued in reliance upon
Section 4(2) and/or 3(b) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transactions did not involve a
public offering. The purchasers were sophisticated with access to the kind of
information registration would provide and such purchasers acquired such
securities without a view towards the distribution thereof.
1. In October 1997, we sold to RBB Bank, A.G. $3,000,000 principal amount
of our ten-year 7% convertible debentures in an offshore transaction.
In connection with the issuance of the debentures, we also issued to
RBB three warrants to purchase 600,000 shares each of common stock from
August 30, 1997 through August 30, 2007 at exercise prices of $0.20,
$0.23 and $0.27 per share, respectively. This transaction was exempt
from the registration requirements of the Securities Act of 1933
pursuant to Regulation S.
2. In February 1998 we granted to Dr. Shalom Z. Hirschman, our President
and Chief Executive Officer, options to acquire 23,000,000 shares of
our common stock at$0.27 per share. Such options are 100% vested as of
the date of grant and expire (to the extent not previously exercised)
on February 17, 2008. Dr. Hirschman is an "accredited investor" as
II-3
<PAGE> 133
defined in Rule 501(a) under the Securities Act.
3. In November 1998 pursuant to a securities purchase agreement, 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. In connection with the issuance of
the debenture, we also 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 at exercise prices of
$0.20 and $0.24 per warrant share, respectively. This transaction was
exempt from the registration requirements of the Securities Act of 1933
pursuant to Regulation S.
4. In December 1998, pursuant to a securities purchase agreement, we sold
to Harbor View Group, Inc. and various other purchasers 4,917,276
shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harbor View Group consisting of two warrants to purchase an
aggregate 400,000 shares of common stock, for an aggregate purchase
price of $802,500. Half of the warrants are exercisable at $0.204 per
share and half of the warrants are exercisable at $0.2448 per share,
until December 31, 2003.
5. During our fiscal year ended December 31, 1998, we issued the
16,805,333 shares in connection with the conversion of debentures;
100,000 shares for consulting services; and 1,555,000 shares issued
upon exercise of options.
6. In July 1999 pursuant to a securities purchase agreement, we sold to
Michael Berman, Pak-Lin Law and Kwong Wai Au, 1,851,852 shares of
common stock and warrants to purchase an aggregate of 925,926 shares of
common stock, for an aggregate purchase price of $500,000. 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,
and are exercisable at any time and from time to time until June 28,
2004.
7. In August 1999 pursuant to a securities purchase agreement with Focus
Investors LLC and various other purchasers, we sold $2,000,000
principal amount of our ten-year 7% convertible debentures due August
3, 2009, and series W warrants to purchase an aggregate of 1,000,000
shares of our common stock at an exercise price of $0.2461 per warrant
share until August 3, 2004.
II-4
<PAGE> 134
8. In October 1999, we granted Alan Gallantar, our Chief Financial
Officer, stock options to acquire 4,547,880 shares of common stock,
exercisable at $0.24255 per share in one third increments on October 1,
2000, 2001, and 2002, until October 1, 2009. Mr. Gallantar is an
"accredited investor" as defined in Rule 501(a) under the Securities
Act.
9. In December 1999, pursuant to a securities purchase agreement, we
issued the first $1,000,000 tranche of $2,000,000 in aggregate
principal amount of our 7% convertible debentures due December 31, 2004
to Endeavour Capital Fund, S.A. In connection with the sale of the
first tranche of debentures, we issued warrants to purchase 100,000
shares of our common stock to Endeavour, and two warrants to purchase
5,000 shares of common stock to Endeavour's legal counsel. The warrants
expire on December 31, 2002 and are exercisable at $0.19916667 per
share.
10. During our fiscal year ended December 31, 1999, we issued 280,000
shares for consulting services.
11. In January 2000, pursuant to the securities purchase agreement with
Endeavour Capital Fund, S.A. discussed above, we issued the second
$1,000,000 tranche of $2,000,000 in aggregate principal amount of our
7% convertible debentures due December 31, 2004 to Endeavour Capital
Fund, S.A.
12. In February 2000 pursuant to a consulting agreement with Harbor View
Group, we issued to Harbor View warrants to purchase 1,750,000 shares
at an exercise price of $0.21 per share, and warrants to purchase
1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to
be provided to us.
13. In February 2000 pursuant to a securities purchase agreement, we sold
to Harbor View Group and various other purchasers 13,636,357 shares of
common stock, and warrants to purchase an aggregate of 5,454,544 shares
of common stock for an aggregate purchase price of $3,000,000. Half of
the warrants are exercisable at $0.275 per share, and half of the
warrants are exercisable at $0.33 per share, until February 28, 2005.
14. In May 2000, we granted Louis Silver, a director, stock options to
acquire 100,000 shares of common stock, exercisable at $0.25 per share,
until May 31, 2000. Mr. Silver is an "accredited investor" as defined
in Rule 501(a) under the Securities Act.
II-5
<PAGE> 135
15. Pursuant to an equity line of credit agreement dated September 18, 2000
with Spinneret Financial Systems, Inc., an "accredited investor" under
Rule 501(a) of the Securities Act, subject to the satisfaction of
certain conditions, Spinneret may sell and issue, from time to time, up
to an aggregate of $20,000,000 of its common stock. In connection with
the equity line of credit, we issued the placement agent, May Davis
Group, Inc., which introduced Spinneret to us, a Class A Warrant to
purchase 5,000,000 shares of our common stock at an exercise price per
share equal to $1.00, exercisable in part or in whole at any time by
May Davis at its discretion until September 18, 2005, and a Class B
Warrant to purchase 5,000,000 shares of our common stock at an exercise
price equal to the greater of $1.00 or 110% of the bid price of the
common stock on the applicable advance date under the private equity
line of credit agreement. The Class B Warrant is exercisable pro rata
on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a
fraction, the numerator of which is the amount of the advance payable
on the applicable advance date and the denominator of which is
$20,000,000, until sixty months from the date of issuance.
16. During the Year 2000, we issued 38,391,856 shares in connection with
the conversion of debentures; 758,452 shares upon the exercise of
warrants; and 4,655,500 shares upon exercise of options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of Advanced Viral Research Corp. ("ADVR")
(2)
3.2 Bylaws of ADVR, as Amended(1)
3.3 Amendment to Articles of Incorporation of ADVR(2)
II-6
<PAGE> 136
Exhibit
Number Description
------ -----------
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement Between ADVR and American Stock Transfer and Trust
Company(1)
4.4 Forms of Common Stock Options and Agreements Granted by ADVR to TRM
Management Corp.(5)
4.5 Form of Common Stock Option and Agreement Granted by ADVR to Plata
Partners Limited Partnership(12)
4.6 Consulting Agreement, Dated September 11, 1992, and Form of Common
Stock Granted by ADVR to Leonard Cohen(6)
4.7 Addendum to Agreement Granted by ADVR to Shalom Z. Hirschman, M.D.
Dated March 24, 1996(10)
4.8 Securities Purchase Agreement Dated November 16, 1998 by and Between
ADVR 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
ADVR and Various Purchasers. (15)
4.13 Form of Warrant Dated December 22, 1998 to Purchase Shares of Common
Stock of ADVR At $0.2040 Per Share. (15)
4.14 Form of Warrant Dated December 22, 1998 to Purchase Shares of Common
Stock of ADVR At $0.2448 Per Share. (15)
4.15 Securities Purchase Agreement Dated June 23, 1999 by and Between ADVR
and Various Purchasers. (15)
4.16 Form of Warrant Dated June 23, 1999 to Purchase Shares of Common
Stock of ADVR At $0.324 Per Share. (15)
4.17 Form of Warrant Dated June 23, 1999 to Purchase Shares of Common
Stock of ADVR At $0.378 Per Share. (15)
4.18 Securities Purchase Agreement Dated August 3, 1999 by and
Between ADVR and Focus Investors, Llc. (15)
4.19 Form of 7% Convertible Debenture Dated August 3, 1999. (15)
4.20 Form of Warrant Dated August 3, 1999 to Purchase 50,000 Shares of
Common Stock At $0.2461 Per Share. (15)
4.21 Securities Purchase Agreement Dated December 28, 1999 by and Between
ADVR and Endeavour Capital Fund S.a. (16)
4.22 Form of 7% Convertible Debenture Dated December 28, 1999. (16)
4.23 Form of Warrant Dated December 28, 1999 to Purchase Shares of Common
Stock At $0.19916667 Per Share. (16)
4.24 Form of Warrant Dated February 7, 2000 to Purchase Shares of Common
Stock At $.21 Per Share. (17)
4.25 Form of Warrant Dated February 7, 2000 to Purchase Shares of Common
Stock At $.26 Per Share. (17)
4.26 Form of Warrant Dated February 16, 2000 to Purchase Shares of Common
Stock At $.275 Per Share. (17)
4.27 Form of Warrant Dated February 16, 2000 to Purchase Shares of Common
Stock At $.33 Per Share. (17)
II-7
<PAGE> 137
Exhibit
Number Description
------ -----------
4.28 Form of Class a Warrant Dated September 18, 2000 to Purchase
5,000,000 Shares of Common Stock. (19)
4.29 Form of Class B Warrant Dated September 18, 2000 to Purchase
5,000,000 Shares of Common Stock. (19)
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 ADVR Dated November 16, 1987(12)
10.2 Clinical Trials Agreement, Dated September 19, 1990, Between Clinique
Medical Actuel and ADVR. (3)
10.3 Letter, Dated March 15, 1991 to ADVR From Health Protection Branch(3)
10.4 Agreement Dated August 20, 1991 Between TRM Management Corp. and
ADVR. (11)(A)
10.5 Lease Dated December 18, 1991 Between Bayview Associates, Inc. and
ADVR. (4)
10.6 Lease Agreement, Dated February 16, 1993 Between Stortford Brickell
Inc. and ADVR. (7)
10.7 Consulting Agreement Dated February 28, 1993 Between Leonard Cohen
and ADVR. (8)
10.8 Medical Advisor Agreement, Dated as of September 14, 1993, Between
Lionel Resnick, M.D. and ADVR. (11)(B)
10.9 Agreement, Dated November 9, 1993, Between Dormer Laboratories Inc.
and ADVR. (12)
10.10 Exclusive Distribution Agreement, Dated April 25, 1994, Between
C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(C)
10.11 Exclusive Distribution Agreement, Dated as of June 1, 1994, Between
C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR. (11)(D
10.12 Exclusive Distribution Agreement Dated as of June 17, 1994 Between
DCT S.r.l. and ADVR, as Amended(11)(e)
10.13 Contract, Dated as of October 25, 1994 Between Commonwealth
Pharmaceuticals of the Channel Islands and ADVR. (11)(F)
10.14 Agreement Dated May 24, 1995 Between ADVR and Deborah Silver(9)
10.15 Agreement Dated May 29, 1995 Between ADVR and Shalom Z. Hirschman,
M.D.(9)
10.16 Exclusive Distribution Agreement, Dated as of June 2, 1995, Between
Avix International Pharmaceutical Corp. and ADVR. (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 ADVR. (11)(G)
10.19 Modification Agreement, Dated December 28, 1995, Between Avix
International Pharmaceutical Corp. and ADVR. (11)(G)
10.20 Agreement Dated April 1, 1996, Between Dct S.r.l. and ADVR. (11)(H)
10.21 Addendum, Dated as of March 24, 1996, to Consulting Agreement Between
ADVR and Shalom Z. Hirschman, M.D.(10)
10.22 Addendum to Agreement, Dated July 11, 1996, Between Avix
International Pharmaceutical Corp. and ADVR. (11)(I)
10.23 Employment Agreement, Dated October 17, 1996, Between ADVR and Shalom
Z. Hirschman, M.D.(11)(j)
10.24 Lease, Dated February 7, 1997 Between Robert Martin Company, LLC and
ADVR. (12)
II-8
<PAGE> 138
Exhibit
Number Description
------ -----------
10.25 Copy of Purchase and Sale Agreement, Dated February 21, 1997 Between
ADVR 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
ADVR and RBB Bank Ag. (11)(M)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative
Research and Development Agreement, Dated March 4, 1998, Between
National Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement Dated July 8, 1998 Between
ADVR and Shalom Z. Hirschman, M.D.(11)(n)
10.30 Agreement Between ADVR and Angelo Chinnici, M.D. Dated July 1, 1999.
(14)
10.31 Consulting Agreement Between ADVR and Globomax LLC Dated January 18,
1999. (15)
10.32 Registration Rights Agreement Dated August 3, 1999 Between ADVR
Research and Focus Investors LLC. (15)
10.33 Employment Agreement Dated October 1, 1999 Between ADVR and Alan V.
Gallantar (15)
10.34 Registration Rights Agreement Dated December 28, 1999 Between ADVR
and Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement Dated February 7, 2000 Between ADVR and Harbor
View Group, Inc.(17)
10.36 Securities Purchase Agreement Dated February 16, 2000 Between ADVR
and Harbor View Group, Inc. (17)
10.37 Letter Agreement Dated November 16, 1999 Between ADVR and Bratskeir &
Company. (18)
10.38 Amended and Restated Employment Agreement Dated May 12, 2000 Between
ADVR and Shalom Z. Hirschman, M.D. (18)
10.39 Equity Line of Credit Agreement Dated as of September 18, 2000
Between ADVR and Spinneret Financial Systems, Inc. (19)
10.40 Registration Rights Agreement Dated as of September 18, 2000 Between
ADVR and Spinneret Financial Systems, Inc. (19)
10.41 Registration Rights Agreement Dated as of September 18, 2000 Between
ADVR and May Davis Group, Inc. (19)
10.42 Placement Agent Agreement Dated September 18, 2000 Between ADVR and
May Davis Group, Inc. (19)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian
Corporation.
23.1 Consent of Rachlin Cohen & Holtz Llp, Independent Certified Public
Accountants *
23.2 Consent of the Law Firm of Berman Wolfe Rennert Vogel & Mandler, P.A.
(SEE EXHIBIT 5.1).
27.1 Financial Data Schedule of ADVR as of and for the Six Months Ended
June 30, 2000.*
-----------------------------
* Filed herewith.
** To be filed by amendment.
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.
II-9
<PAGE> 139
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
Quarterly 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
Quarterly Report On Form 10-Qsb for the Period Ended March 31, 1993.
9. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Quarterly Report On Form 10-Qsb for the Period Ended June 30, 1995.
10. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Quarterly Report On Form 10-Qsb for the Period Ended March 31, 1996.
11. Incorporated by Reference Herein to Our Current Reports On Form 8-K
and Exhibits Thereto as Follows:
(a) A Report On Form 8-K Dated January 3, 1992.
(b) A Report On Form 8-K Dated September 14, 1993.
(c) A Report On Form 8-K Dated April 25, 1994.
(d) A Report On Form 8-K Dated June 3, 1994.
(e) A Report On Form 8-K Dated June 17, 1994.
(f) A Report On Form 8-K Dated October 25, 1994.
(g) A Report On Form 8-K Dated December 28, 1995.
(h) A Report On Form 8-K Dated April 22, 1996.
(i) A Report On Form 8-K Dated July 12, 1996.
(j) A Report On Form 8-K Dated October 17, 1996.
(k) A Report On Form 8-K Dated February 21, 1997.
(l) A Report On Form 8-K Dated March 25, 1997.
(m) A Report On Form 8-K Dated September 26, 1997.
(n) A Report On Form 8-K Dated July 21, 1998.
(o) A Report On Form 8-K Dated November 24, 1998.
12. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Annual Report On Form 10-Ksb for the Fiscal Year Ended December 31,
1996.
13. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Annual Report On Form 10-Ksb for the Fiscal Year Ended December 31,
1997.
14. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Annual Report On Form 10-K for the Fiscal Year Ended December 31,
1998.
15. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Registration Statement On Form S-1, as Amended, File No. 33-70523,
Filed With the Securities and Exchange Commission On January 13,
1999, and Amendment No. 5 Thereto, Declared Effective On December 15,
1999.
16. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Registration Statement On Form S-1, as Amended, File No. 333-94529,
Filed With the Securities and Exchange Commission On January 12,
2000.
17. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Annual Report On Form 10-K for the Fiscal Year Ended December 31,
1999.
18. Documents Incorporated by Reference Herein to Certain Exhibits to Our
Registration Statement On Form S-1, as Amended, File No. 333-37974,
Filed With the Securities and Exchange Commission On June 6, 2000.
19. Documents Incorporated by Reference Herein to Certain Exhibits to
Post-effective Amendment No. 1 to Our Registration Statement On Form
S-1, as Amended, File No. 333-37974, Filed With the Securities and
Exchange Commission On September 22, 2000.
(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:
II-10
<PAGE> 140
(i) To include any prospectus required by section 10(a)(3) of
the securities act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "calculation of registration
fee" table in the effective registration statement.
(iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
securities act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the securities
act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described under item 20 or otherwise, the
registrant has been advised that in the opinion of the securities and exchange
commission such indemnification is against public policy as expressed in the
securities act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question 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-11
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Yonkers, State of New York, on October 31, 2000.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman, M.D.
--------------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Shalom Z. Hirschman, M.D President and Chief October 31, 2000
------------------------------------------ Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and October 31, 2000
------------------------------------------ director
Bernard Friedland
/s/ Alan Gallantar Chief Financial Officer October 31, 2000
------------------------------------------
Alan Gallantar
/s/ William Bregman Secretary-Treasurer, October 31, 2000
------------------------------------------- director
William Bregman
/s/ Louis J. Silver director October 31, 2000
-------------------------------------------
Louis J. Silver
</TABLE>
II-12
<PAGE> 142
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public
Accountants
27.1 Financial Data Schedule for Advanced Viral as of and for the Six
Months Ended June 30, 2000
