As filed with the Securities and Exchange Commission on January 12, 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)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
5129
----
(Primary Standard Industrial Classification Code Number)
59-2646820
----------
(I.R.S. Employer Identification No.)
200 Corporate Boulevard South, Yonkers, New York 10701
------------------------------------------------------
(914) 376-7383 (Address and telephone number of Registrant's
principal executive offices)
Shalom Z. Hirschman, M.D., President
200 Corporate Boulevard South, Yonkers, New York 10701 (914) 376-7383
---------------------------------------------------------------------
(Name, address and telephone number of agent for service)
---------------
COPIES TO:
CHARLES J. RENNERT
Berman Wolfe Rennert Vogel & Mandler, P.A.
NationsBank Tower, Suite 3500
100 Southeast Second Street
Miami, Florida 33131-2130
(305) 577-4177 Phone (305) 373-6036 Fax
---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this registration
statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________ If delivery of the prospectus is expected
to be made pursuant to Rule 434, check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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> <C> <C> <C>
Common stock par 33,104,737 (1) $0.19125 (2) $6,331,281 (3) $1,671
value $0.00001 per share
Total Fee $1,671
</TABLE>
- -----------------------
(1) Represents (x) 166.67% of (a) up to 14,619,883 shares of Registrant's
common stock issuable upon conversion of $2 million in aggregate principal
amount of the Registrant's 7% convertible debentures due December 31,
2004, at an assumed conversion price of $0.1368, plus (b) up to 5,116,959
shares of common stock issuable upon the conversion of the debentures with
respect to interest accrued thereon through the maturity date thereof,
plus (y) up to 210,000 shares of common stock issuable upon exercise of
certain warrants.
(2) Estimated solely for the purpose of calculating the registration fee on
the basis of the average of the closing bid and ask prices of the common
stock on January 5, 2000, as reported on the OTC Electronic Bulletin
Board.
(3) In accordance with Rules 416 and 457 under the Securities Act, this
registration statement also covers such indeterminate number of additional
shares of common stock as may be issuable upon conversion of the
debentures and exercise of the warrants to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
Prospectus subject to completion, dated January 12, 2000.
UP TO 33,104,737 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
The selling shareholders identified on page 42 below may offer for
resale up to 33,104,737 shares of our common stock under this prospectus. We
will not receive any part of the proceeds from this offering by the selling
shareholders; however, as described in the Prospectus Summary, we will receive
the net proceeds from the sale of an additional $1.0 million in principal amount
of our 7% convertible debentures due December 31, 2004 not later than five days
after the effective date of this prospectus, and we may receive additional
proceeds if the selling shareholders pays cash in connection with its exercise
of warrants issued or issuable by us pursuant to such purchase agreement.
Advanced Viral common stock is traded on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On
January 5, 2000 the high and low bid prices for the common stock on the Bulletin
Board were $0.195 and $0.185, respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
The date of this prospectus is _______, 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>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary .................................................................. 1
Risk Factors ........................................................................ 4
About this Prospectus ............................................................... 7
Where to Find More Information ...................................................... 7
Forward-looking Statements May Prove Inaccurate ..................................... 8
Market Price of and Dividends on the Common Stock and Related Shareholder Matters ... 8
Capitalization ...................................................................... 10
Selected Consolidated Financial Data ................................................ 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 13
Business ............................................................................ 27
Management .......................................................................... 34
Principal Shareholders .............................................................. 40
Selling Shareholders ................................................................ 42
Certain Relationships and Related Transactions ...................................... 43
Description of Common Stock ......................................................... 43
Use of Proceeds ..................................................................... 43
Plan of Distribution ................................................................ 43
Legal Matters ....................................................................... 45
Experts ............................................................................. 46
Index to Financial Statements ....................................................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
ADVANCED VIRAL RESEARCH CORPORATION
Advanced Viral is a development stage company formed to engage in the
production and marketing, promotion and sale of the pharmaceutical product
RETICULOSE(TM) for the treatment of certain viral diseases such aS:
o human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
o hepatitis B and hepatis C, both liver diseases
o human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
o rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
FDA, the FDA has not permitted Reticulose to be marketed in the United States. A
forfeiture action was instituted in 1962 by the FDA against Reticulose, and
Reticulose was withdrawn from the United States market. The injunction obtained
by the FDA prohibits, among other things, any shipment of Reticulose until a new
drug application, or NDA, for Reticulose is approved by the FDA. FDA approval of
an NDA first requires clinical testing of Reticulose in human trials, which
cannot be conducted until we first satisfy the regulatory protocols and the
substantial preapproval requirements imposed by the FDA upon the introduction of
any new or unapproved drug product pursuant to a notice of claimed
investigational exemption for a new drug, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Reticulose in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Reticulose on human patients outside the United States.
Shalom Z. Hirschman, M.D., our President, has monitored the testing of
Reticulose and has recently performed analyses of Reticulose with our laboratory
personnel, which we believe may be used in connection with the FDA approval
process. In addition, we have recently contracted with GloboMax LLC of Hanover,
Maryland to advise us in our preparation and filing of an IND with the FDA, and
to otherwise assist us through the FDA process with the objective of obtaining
full approval for the manufacture and commercial distribution of Reticulose in
the United States.
1
<PAGE>
Our offices are located at 1250 East Hallandale Beach Boulevard, Suite
501, Hallandale, Florida 33009 and 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Hallandale, Florida is (954) 458-7636 and
our telephone number in Yonkers, New York is (914) 376-7383.
THE OFFERING
Securities offered............... 33,104,737 shares of common stock. (1)
Shares outstanding............... 303,292,035 shares of common stock. (2)
Use of proceeds.................. We will not receive any proceeds
from the sale of common stock by the
selling shareholders. We will
receive the net proceeds from the
sale of an additional $1.0 million
in principal amount of our 7%
convertible debentures no later than
five days after the effective date
of this prospectus and the cash
proceeds, if any, from the exercise
of warrants held by selling
shareholders. See "Management's
Discussion and Analysis of Financial
Condition and Results of
Operations."
- ----------
(1) Represents (x) 166.67% of (a) up to 14,619,883 shares of our common stock
issuable upon conversion of $2 million in aggregate principal amount of our 7%
convertible debentures due December 31, 2004, at an assumed conversion price of
$0.1368, based on the average bid and ask price of our common stock or of
January 5, 2000, which was $0.19, plus (b) up to 5,116,959 shares of common
stock issuable upon the conversion of the debentures with respect to interest
accrued thereon through the maturity date thereof, plus (y) up to 210,000 shares
of common stock issuable upon exercise of certain warrants.
(2) As of January 5, 2000. Does not include (a) any of the shares described in
footnote (1) above, or (b) approximately 65,191,745 shares issuable upon
exercise of certain outstanding options, convertible debentures and warrants
that are not held by the selling shareholders.
We are registering the shares offered hereby in order to satisfy our
obligations to the holders of our 7% convertible debentures due December 31,
2004. Under a Securities Purchase Agreement dated December 28, 1999 and related
documents, we are obligated to register with the Commission the shares which are
issuable to the selling shareholders on conversion of $2.0 million in aggregate
principal amount of their debentures (together with accrued interest, which is
payable in common stock, through their maturity dates) and on exercise of their
warrants. At this time, the Company is obligated to register a number of shares
equal to at least 225% of the shares which would be issuable on conversion of
those debentures at an assumed conversion rate of $0.1368 per share. We are also
obligated to keep the registration statement of which this prospectus forms a
part effective until the earliest of (i) the date that is two years after the
last day of the calendar month following the month in which this registration
statement is declared effective, (ii) the date on which the selling shareholders
may sell all shares registered on their behalf under this prospectus under Rule
144 of the Securities Act of 1933, as amended, without volume or other
restrictions or limits, or (iii) the date on which the selling shareholders no
longer own any of those shares. See "Plan of Distribution."
2
<PAGE>
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $84,852 $68,483 $102,907 $121,923 102,992
Net loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710)
Net loss per common share ($0.00) ($0.00) ($0.00) ($0.02) ($0.02)
Weighted average # of shares 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073
</TABLE>
SUMMARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $452,264 $796,241 $1,716,800 $4,189,842 $3,304,953
Long-term debt - - - $2,384,793 1,625,299
Stockholders' equity per common share $0.00 $0.00 $0.01 $0.01 $0.00
Shares outstanding at year end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907
</TABLE>
3
<PAGE>
RISK FACTORS
OUR SECURITIES ARE HIGHLY SPECULATIVE. YOU SHOULDN'T PURCHASE THEM
UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CONSIDER VERY
CAREFULLY THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO PURCHASE OUR
SECURITIES.
1. BECAUSE OUR SHARES ARE `PENNY STOCKS,' YOU MAY BE UNABLE TO RESELL THEM
IN THE SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than
$5 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the purchaser,
provide them with a disclosure schedule explaining the penny stock market and
its risks, and receive the purchaser's written agreement to the transaction
prior to the sale. These requirements limit the ability of broker/dealers to
sell penny stocks. Also, because of the extra requirements, many broker/dealers
are unwilling to sell penny stocks at all. As a result, you maybe unable to
resell the stock you buy in this offering and could lose your entire investment.
2. THE EXERCISE OR CONVERSION OF OUR OUTSTANDING CONVERTIBLE SECURITIES
COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON THE MARKET PRICE OF OUR
COMMON STOCK.
As of the date of this prospectus, in addition to the 303,292,035
shares of our common stock currently outstanding, the following securities are
outstanding:
o Stock options to purchase an aggregate of 32,813,295 shares of
common stock at exercise prices ranging from $0.11 to $0.36
o Warrants to purchase an aggregate of 7,478,450 shares of
common stock at prices ranging from $0.199 to $0.864
o Convertible debentures currently estimated to be convertible
into an aggregate of approximately 34,758,421 shares based on
the average bid and ask price of our common stock on January
5, 2000, which was $0.19.
If all the options, warrants, and convertible debentures were fully
exercised and converted, as the case may be, there would be outstanding an
additional 75,160,166 shares of common stock. The sale or availability for sale
of this number of shares of common stock in the public market could depress the
market price of the common stock. Additionally, the sale or availability for
sale of this number of shares may lessen the likelihood that additional equity
financing will be available to us, on favorable or unfavorable terms.
4
<PAGE>
3. IT IS UNLIKELY THAT OUR COMPANY WILL BE ABLE TO CONTINUE AS A GOING
CONCERN WITHOUT A SIGNIFICANT IMPROVEMENT IN OUR FINANCIAL CONDITION,
WHICH HAS CONSTRAINED OUR ABILITY TO FINANCE NECESSARY RESEARCH,
DEVELOPMENT AND OTHER OPERATING EXPENSES AS NEEDED.
Our independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1998
includes an explanatory paragraph regarding our ability to continue as a going
concern. We estimate that we will require an additional $6,800,000 for
operations over the next 12 months, including $1,600,000 in order to conduct
research and development related activities,$1,300,000 for the preparation of
the IND; $225,000 for overseas research of Reticulose; and $75,000 to prepare
the manufacturing facility in the Bahamas for FDA inspection and in accordance
with good manufacturing practices and standards. We currently are unable to
calculate the amount we will require in additional funding to complete the FDA
approval process, including conducting clinical trials and filing the NDA
application. Our ability to continue operations is dependent upon our continued
sale of our securities for funds to meet our cash requirements, and as a result
our ability to continue as a going concern is doubtful.
Unless we are able to generate sufficient revenue or raise additional
funds when needed, it is likely that we will be unable to continue our planned
activities, even if we are making progress with our research and development
projects. The longer the duration of the regulatory approval process, the more
unlikely it is that we will be able to raise such funds on favorable terms or at
all, or that any funds raised will be sufficient to complete the FDA approval
process to achieve our goal of commercial distribution in the United States and
elsewhere. Furthermore, there is no guarantee that approval of Reticulose by the
FDA or any other regulatory authority, or additional financing from the sale of
our securities, will translate into any material change in our financial
condition. The extensive delays and costs of complying with the FDA regulations
makes it unlikely that we will have adequate funds to finance the necessary
clinical studies and related costs.
4. IF WE DO NOT OBTAIN THE FDA'S APPROVAL TO CONDUCT CLINICAL TESTS OF
RETICULOSE IN THE UNITED STATES, WE WILL NOT BE ABLE TO COMPLETE ITS
DEVELOPMENT AND MAY NOT BE ABLE TO SELL IT ANYWHERE.
Reticulose is the only product we are developing, We will not be able
to sell it in the United States unless we submit, and the FDA approves, a new
drug application, known as an "NDA." We must conduct clinical trials of
Reticulose in humans before we submit an NDA. However, we cannot begin clinical
trials in the United States until the FDA approves our notice of claimed
investigational exemption for a new drug, or "IND." We have not yet submitted an
IND for Reticulose and we don't know if or when we will submit one. The FDA will
not approve our IND if we haven't satisfied regulatory protocols and other
preapproval requirements required for the introduction of a new or unapproved
drug.
If we submit an IND and the FDA approves it, we won't be able to begin
clinical testing unless we are able to obtain the additional financing we need
in order to conduct the trials. It is also possible that clinical trials, if
5
<PAGE>
conducted, will not prove that Reticulose is safe or effective in treating
viruses of any kind, in which case we won't be able to submit an NDA and we
won't be able to sell Reticulose in the United States.
We haven't been able to sell Reticulose outside the United States
because we don't have a free sales certificate for Reticulose. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Reticulose. Most countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured before allowing the registration of the
product in that country. Because we are unable to obtain a certificate from the
Bahamas, we are not able to meet registration requirements in the countries
which require the certificate, and will be unable to sell Reticulose in those
countries.
5. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT REVENUE,
AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.
Although we were formed in 1985, we are still in the development stage.
From inception through September 30, 1999, we had an accumulated deficit of
$17,649,843. We expect that our deficit will continue to increase. The only
product revenues we have ever had are insignificant amounts related to our
distribution of Reticulose for testing purposes. We do not currently have any
source of product revenue. At this time we have no basis to believe that we will
ever generate operating revenues from the sale of Reticulose.
6. OUR BUSINESS COULD BE HARMED IF WE LOSE THE SERVICES OF THE KEY
PERSONNEL UPON WHOM WE DEPEND.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of our three full-time executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. The loss or unavailability to us of the services of
Bernard Friedland or Dr. Hirschman, President and Chief Executive Officer, could
have a material negative impact on our business prospects and any potential
earning capacity, and, therefore, we have obtained "key-man" insurance on the
lives of Mr. Friedland and Dr. Hirschman in the amounts of $400,000 and
$1,000,000, respectively. If our level of operations significantly increase, the
business may depend upon our abilities to attract and hire additional management
and staff employees. It is possible that we will be unable to secure such
additional management and staff when necessary.
7. THE VOTING CONTROL HELD BY PRESENT MANAGEMENT COULD SIGNIFICANTLY
IMPACT OUR BUSINESS.
As of the date of this prospectus, our current officers and directors
beneficially owned 91,653,133 shares of our common stock, or approximately 29%
of the 303,292,035 shares of common stock deemed outstanding on such date for
the purposes of the percentage calculation, including certain shares underlying
6
<PAGE>
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
- 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
7
<PAGE>
FORWARDLOOKING 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.
MARKET PRICE OF AND DIVIDENDS ON THE COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The principal United States market in which our common stock is traded
is the over-the-counter market. The following table shows the range of reported
low bid and high bid per share quotations for our common stock for each full
quarterly period during the two recent fiscal years ended December 31, 1997 and
1998, and for the first, second and third quarters of 1999, as reported on the
National Association of Securities Dealers, Inc.'s OTC Bulletin Board. The high
and low bid prices for the periods indicated reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
LOW BID HIGH BID
------- --------
<S> <C> <C>
First Quarter 1997............................................................0.26 0.47
Second Quarter 1997...........................................................0.16 0.31
Third Quarter 1997............................................................0.15 0.33
Fourth Quarter 1997...........................................................0.175 0.345
First Quarter 1998............................................................0.18 0.4375
Second Quarter 1998...........................................................0.245 0.46
Third Quarter 1998............................................................0.16 0.30
Fourth Quarter 1998...........................................................0.155 0.23
First Quarter 1999............................................................0.175 0.35
Second Quarter 1999...........................................................0.202 0.322
Third Quarter 1999............................................................0.1875 0.2344
</TABLE>
8
<PAGE>
SHAREHOLDERS
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,848 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.
9
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization derived from
our financial statements as of September 30, 1999, and an adjusted
capitalization to reflect the issuance of an additional 75,160,166 common stock
pursuant to:
o the issuance of 34,758,421 shares upon the full conversion of
the RBB debenture, the Focus debentures and the first tranche
of Endeavour debentures assuming an average closing price of
$0.19 based on the average of the high and low bid price of
our common stock on January 5, 2000.
o the issuance of 7,478,450 shares upon the full exercise of
certain warrants; and
o the issuance of 32,813,295 shares upon the full exercise of
certain stock options.
The capitalization information set forth in the table below is
qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA AS ADJUSTED
------ ---------------------
<S> <C> <C>
Long-term Debt:
Convertible debenture issued in November 1998 $1,442,273 --
Convertible debentures issued in August 1999 $2,000,000 --
Convertible debentures issued in December 1999 $1,000,000 --
Stockholders' Equity (Deficiency):
Common stock, $0.00001 par value; 1,000,000,000 shares $3,032 $3,783
authorized; 303,292,035 shares outstanding Actual;
378,452,201 shares outstanding Pro Forma As Adjusted
Additional paid-in-capital $16,920,763 $33,179,472
Deficit accumulated during the development stage ($17,649,843) ($17,649,843)
Discount on Warrants ($455,047) ($455,047)
Total Stockholders' Equity (Deficiency): ($1,181,095) $15,074,582
</TABLE>
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 and the nine months
ended September 30, 1999 have been derived from our audited financial
statements. The selected consolidated financial data set forth below should be
read along with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
SELECTED STATEMENT OF OPERATIONS DATA
- -------------------------------------
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------- NINE MONTHS ENDED
1994 1995 1996 1997 1998 SEP. 30, 1999
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales $22,402 $27,328 $24,111 $2,278 $656 $6,517
Interest 7,450 16,155 46,796 111,845 102,043 27,951
-----------
Other Income 55,000 25,000 32,000 7,800 293 --
----------- ----------- ----------- ----------- ----------- -----------
84,852 68,483 102,907 121,923 102,992 34,468
Costs and Expenses:
Research and Development 30,040 34,931 255,660 817,603 1,659,456 1,192,190
General and Administrative 478,984 420,757 983,256 1,681,436 1,420,427 1,544,592
Depreciation 16,665 14,679 18,731 26,288 110,120 419,208
Interest -- -- -- 1,738,325 1,470,699 1,247,345
----------- ----------- ----------- ----------- ----------- -----------
525,689 470,367 1,257,647 4,263,652 4,660,702 4,133,335
----------- ----------- ----------- ----------- ----------- -----------
Net Loss ($440,837) ($401,884) ($1,154,740) ($4,141,729) ($4,557,710) ($4,098,867)
=========== =========== =========== =========== =========== ===========
Net Loss Per Share of Common
Stock - Basic and Diluted $0.00 $0.00 $0.00 ($0.02) ($0.02) ($0.01)
=========== =========== =========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 238,354,491 248,002,608 257,645,815 274,534,277 294,809,073 300,598,827
=========== =========== =========== =========== =========== ===========
</TABLE>
- -----------------------
See Notes to Consolidated Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA
- ----------------------------
DECEMBER 31
------------------------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 211,203 $ 65,230 $ 61,396 $ 236,059 $ 924,420 $ 1,308,378
Investments 5,000 479,000 1,378,841 2,984,902 821,047 --
Inventory -- 18,091 19,729 19,729 19,729 19,729
Other current assets 10,163 12,967 16,081 20,240 29,818 35,839
------------- ------------ ------------ ------------ ------------ -------------
Total current assets 226,366 575,288 1,476,047 3,260,930 1,795,014 1,363,946
Property and Equipment 224,098 214,494 207,209 485,661 1,049,593 1,093,548
Other Assets 1,800 6,459 33,544 443,251 460,346 563,276
------------- ------------ ------------ ------------ ------------ -------------
Total assets $ 452,264 $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 3,020,770
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and other $ 40,244 $ 14,651 $ 54,474 $ 375,606 $ 279,024 $ 582,321
Capital lease payable-current portion -- -- -- -- 38,355 40,849
------------- ------------ ------------ ------------ ------------ -------------
Total current liabilities 40,244 14,651 54,474 375,606 317,379 623,170
------------- ------------ ------------ ------------ ------------ -------------
Long-Term Debt:
Convertible debenture, net -- -- -- 2,384,793 1,457,919 3,442,273
Capital lease payable-long
term portion -- -- -- -- 167,380 136,422
------------- ------------ ------------ ------------ ------------ -------------
Total Long-Term Debt -- -- -- 2,384,793 1,625,299 3,578,695
------------- ------------ ------------ ------------ ------------ -------------
Deposit on securities
purchase agreement -- -- -- -- 600,000 --
------------- ------------ ------------ ------------ ------------ -------------
Deposit on exercise of options -- -- -- -- -- --
------------- ------------ ------------ ------------ ------------ -------------
Stockholders' Equity:
Common stock, 1,000,000,000 shares
of par value $0.00001 authorized,
303,292,035 and 296,422,907 shares
issued and outstanding 2,416 2,512 2,671 2,779 2,964 3,032
Additional paid-in capital 3,704,517 4,475,875 7,003,351 10,512,767 14,325,076 16,920,763
Subscription receivable -- -- (19,000) (19,000) -- (17,649,843)
Deficit accumulated during the
development stage (3,294,913) (3,696,797) (4,851,537) (8,993,266) (455,047)
Deferred compensation cost -- -- (473,159) (73,837) (14,769) --
------------- ------------ ------------ ------------ ------------ -------------
Total stockholders' equity 412,020 781,590 1,662,326 1,429,443 762,295 (1,181,096)
------------- ------------ ------------ ------------ ------------ -------------
Total liabilities and
stockholders' equity (deficit) $ 452,264 $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 3,020,770
============= ============ ============ ============ ============ =============
Shares outstanding at period end 241,616,991 251,181,774 267,031,058 277,962,574 296,422,907 303,292,035
============= ============ ============ ============ ============ =============
</TABLE>
- ----------
See notes to financial statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION SHOULD BE READ ALONG WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has
been engaged primarily in research and development activities. We have not yet
generated significant operating revenues, and as of September 30, 1999 we had
incurred a cumulative net loss of $17,649,843. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Reticulose. All of our research and
development efforts have been devoted to the development of Reticulose.
In order to commence clinical trials for regulatory approval of
Reticulose in the United States, we must submit an IND with the FDA. Filings
with foreign regulatory agencies are required to continue or begin new clinical
trials outside the United States. We have recently contracted with GloboMax LLC
of Hanover, Maryland to assist us in our preparation and filing of the IND with
the FDA, and to otherwise assist us through the FDA process with the objective
of obtaining full approval for the manufacture and commercial distribution of
Reticulose in the United States. The IND will seek approval to conduct a study
testing the effectiveness of Reticulose on human subjects with AIDS and other
diseases. In the IND we intend to include, among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be
conducted on humans; and
o information assuring the identification, quality and purity of
Reticulose and a description of the physical, chemical and
microbiological characteristics of Reticulose.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Reticulose as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in considering the IND
application, if it is ever filed. FDA approval to begin human clinical trials of
Reticulose pursuant to an approved IND will require significant cash
expenditures. Furthermore, Reticulose may never be approved for commercial
distribution by any country.
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. Because our research and
13
<PAGE>
development expenses and clinical trial expenses will be charged against
earnings for financial reporting purposes, we expect that losses from operations
will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the three month periods ended September 30, 1999 and September 30,
1998, we incurred losses of $2,013,035 ($0.01 per share) and $869,070 ($0.00 per
share), respectively. For the nine month periods ended September 30, 1999 and
September 30, 1998, we incurred losses of $4,098,867 ($0.01 per share) and
$3,118,824 ($0.01 per share), respectively.
General and Administrative Expense. Our increased losses during the
three and nine months ended September 30, 1999 are principally due to increased
general and administrative expense ($605,917 and $1,544,592 for the three and
nine months ended September 30, 1999 vs. $364,554 and $1,087,707 for the three
and nine months ended September 30, 1998, respectively). Included in the general
and administrative expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting
us with the preparation and filing of the IND, of
approximately $65,000 and $175,000 for the three and nine
months ended September 30, 1999 vs. no expenses for the three
and nine months ended September 30, 1998, respectively;
o increased professional expenses resulting principally from,
among others, legal expenses related to certain financings of
$127,000 and $315,000 for the three and nine months ended
September 30, 1999 vs. $50,000 and $186,000 for the three and
nine months ended September 30, 1998, respectively; and
o increased employee benefit costs of approximately $76,000 and
$173,000 for the three and nine months ended September 30,
1999 vs. $41,000 and $106,000 for the three and nine months
ended September 30, 1998, respectively.
DEPRECIATION EXPENSE. Our increased losses during the three and nine
months ended September 30, 1999 are also due to increased depreciation expense
($53,152 and $149,208 for the three and nine months ended September 30, 1999 vs.
$28,437 and $64,777 for the three and nine months ended September 30, 1998,
respectively).
INTEREST EXPENSE. Our increased losses during the three and nine months
ended September 30, 1999 are also due to increased interest expense ($935,803
and $1,247,345 for the three and nine months ended September 30, 1999 vs. $0 and
$811,714 for the three and nine months ended September 30, 1998, respectively).
Included in the interest expense are:
14
<PAGE>
o beneficial conversion feature on certain convertible
debentures of $688,000 and $688,000 for the three and nine
months ended September 30, 1999 vs. $0 and $211,000 for the
three and nine months ended September 30, 1998, respectively;
o interest expense associated with certain convertible
debentures of approximately $50,000 and $102,000 for the three
and nine months ended September 30, 1999 vs. $0 and $96,000
for the three and nine months ended September 30, 1998,
respectively;
o amortization of discount on certain warrants of approximately
$45,000 and $113,000 for the three and nine months ended
September 30, 1999 vs. $7,299 and $285,000 for the three and
nine months ended September 30, 1998, respectively;
o amortization of loan costs of approximately $76,000 and
$128,000 for the three and nine months ended September 30,
1999 vs. $0 and $221,000 for the three and nine months ended
September 30, 1998, respectively; and
o contractually imposed finance penalties associated with not
having an effective registration statement covering certain
securities of approximately $48,000 and $168,000 for the three
and nine months ended September 30, 1999 vs. no expenses for
the three and nine months ended September 30, 1998,
respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Our research and development expenses
have been consistent during the three and nine months ended September 30, 1999,
however, there has been a shift from the use of external to internal personnel
and testing.
SALES. We had sales of $1,928 and $6,517 for the three and nine months
ended September 30, 1999, respectively, vs. $656 and $656 for the three and nine
months ended September 30, 1998, respectively. All sales during these periods
were to distributors purchasing Reticulose for testing purposes. Interest income
was $6,461 and $27,951 for the three and nine months ended September 30, 1999,
respectively, vs. $22,310 and $79,533 for the three and nine months ended
September 30, 1998, respectively. There can be no assurance that Reticulose will
ever be sold for commercial distribution anywhere in the world.
Our net loss, exclusive of costs directly related to costs of financing
and costs related to GloboMax, was approximately $985,000 and $2,574,000 for the
three and nine months ended September 30, 1999 vs.$869,000 and $2,305,000 for
the three and nine months ended September 30, 1998, respectively. This
information is not presented as an alternative to operating results or cash flow
from operations as determined by generally accepted accounting principles
(GAAP), but rather to show that the net loss is consistent with prior
corresponding periods when the variable costs of financing and the Globomax
consulting expenses are excluded. It should not be considered in isolation from
or construed as having greater importance than GAAP operating income or cash
flows from operations as a measure of our performance.
15
<PAGE>
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
During the fiscal years ended December 31, 1998 and 1997, we incurred
losses of $4,557,710 and $4,141,729, respectively, compared to $1,154,740 in
1996. Our increased losses for the fiscal years ended December 31, 1998 and 1997
as compared with the fiscal year ended December 31, 1996 were attributable
primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $983,256 in 1996 to $1,681,436 and $1,420,427 in 1997
and 1998, respectively. The increase in general and administrative expense from
1996 to 1997 resulted from the amortization of deferred compensation costs of
approximately $400,000 associated with options granted to non-employees and
recorded as compensation expense in accordance with SFAS No. 123; and
approximately $325,000 for Dr. Hirschman's salary during his first full year as
President and Chief Executive Officer. The decrease in general and
administrative expense from 1997 to 1998 resulted from the amortization of
deferred compensation costs associated with options granted to non-employees and
recorded as compensation expense ($340,000), and also from the fact that 50% of
Dr. Hirschman's salary ($162,500) was accounted for as research and development
expense in 1998. Non-employee compensation expense for the years ended 1996,
1997 and 1998 was $60,000, $420,000 and $460,000, respectively. The rental and
operating costs associated with the Yonkers laboratory for the years ended 1996,
1997 and 1998 were charged to general and administrative expense as follows: $0,
$57,000 and $315,000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $255,660 in 1996, to $817,603 in 1997, to $1,659,456 in 1998, as
a result of approximately $500,000 in expenses associated with the Argentine
testing agreements in 1997 and 1998, and the increased expenses in 1998
associated with the opening and maintenance of the Yonkers, New York laboratory
associated with the employment of additional research professionals). The costs
of personnel and laboratory supplies associated with the Yonkers laboratory for
the years ended 1996, 1997 and 1998 were charged to research and development
expense as follows: $0, $60,000 and $634,000.
DEPRECIATION EXPENSE. Depreciation expense increased from $18,731 in
1996, $26,288 in1997 to $110,000 in 1998 as a result of the acquisition of
furniture and equipment for the Yonkers office and laboratory.
INTEREST EXPENSE. Interest expense for the years ended 1996, 1997 and
1998 was approximately $0, $1,738,000 and $1,471,000, respectively. Included in
interest expense for these periods was:
o the beneficial conversion feature on certain convertible
debentures of approximately $0, $1,553,000 and $836,000 for
the years ended 1996, 1997 and 1998, respectively;
o interest expense associated with certain convertible
debentures of approximately $0, $29,000 and $95,000 for the
years ended 1996, 1997 and 1998, respectively;
16
<PAGE>
o amortization of discount on certain warrants of approximately
$0, $44,000 and $291,000 for the years ended 1996, 1997 and
1998, respectively; and
o amortization of loan costs of approximately $0, $112,000 and
$230,000 for the years ended 1996, 1997 and 1998,
respectively.
SALES. There were $656 and $2,278 in sales revenues in 1998 and 1997,
respectively, compared to $24,111 in sales revenues for 1996. All sales revenues
resulted from distributors purchasing Reticulose for testing purposes. The
decrease in sales revenue from 1996 is due to the fact that in 1996, we sold
ampules of Reticulose outside the United States to independent organizations
solely for testing purposes. In 1997 and 1998, the majority of the research and
development was conducted by our laboratory personnel, accordingly, sales to
outside entities for testing purposes were nominal. Interest income was $102,043
and $111,845 in 1998 and 1997, respectively, compared to $46,796 in 1996. In
1998 and 1997, we collected $0 from the sale of territorial rights compared to
$32,000 in 1996.
LIQUIDITY
SEPTEMBER 30, 1999 VS. DECEMBER 31, 1998
ASSETS. As of September 30, 1999 and December 31, 1998, we had current
assets of $1,363,946 and $1,795,014, respectively. We had total assets of
$3,020,770 and $3,304,953 at September 30, 1999 and December 31, 1998,
respectively. The decrease in current and total assets was primarily
attributable to the use of investment capital to fund increased operating
expenditures.
LIABILITIES. As of September 30, 1999 and December 31, 1998, we had
current liabilities of $623,170 and $317,359, respectively. The increase in
current liabilities was due to a $303,000 increase in payables primarily
resulting from our increased costs of financing of $180,000, plus increased
operating expenses. As of September 30, 1999 and December 31, 1998, we had total
long term liabilities of $3,578,695 and $1,625,299 at September 30, 1999 and
December 31, 1998, respectively. The increase in total long term liabilities was
primarily attributable to the issuance to Focus Investors, LLC of convertible
debentures.
CASH FLOW. During the nine months ended September 30, 1999, we used
cash of $2,917,982 for operating activities, vs. $2,491,726 during the nine
months ended September 30, 1998. During the nine months ended September 30,
1999, we:
o incurred non-cash expenses of approximately $1,093,000,
primarily relating to the beneficial conversion feature on
certain debentures ($688,000), depreciation ($150,000),
amortization of loan costs ($128,000) and discount on warrants
($113,000);
o expended approximately $1,100,000 for payroll and related
costs;
17
<PAGE>
o expended approximately $625,000 in professional and consulting
fees, approximately $200,000 of which are consulting fees
incurred in connection with the IND for ReticuloseJ, and
approximately $200,000 of which relate to legal fees incurred
in connection with certain financing arrangements;
o expended approximately $285,000 for research expenses incurred
by third parties in connection with the testing of ReticuloseJ
in Argentina and Barbados;
o expended approximately $143,000 in laboratory supplies; and
o expended approximately $500,000 of additional operating
expenses.
During the nine months ended September 30, 1999, cash flows provided by
investing and financing activities were primarily due to the sales of
investments which were available from the proceeds of the issuance of the
convertible debenture in 1998 and debentures, warrants and shares of common
stock in 1999 (approximately $2,703,000). In addition, we expended approximately
$193,000 for additions to machinery and equipment at our Yonkers, New York
office and the manufacturing plant in Freeport, Bahamas;
As of September 30, 1999, we had expended the following amounts for
research and development in connection with the following ongoing studies being
conducted abroad:
o $50,000 has been advanced to DCT in connection with a study
being conducted in Argentina by DCT on 65 patients to compare
the results of treatment of AIDS patients using a three-drug
cocktail and Reticulose versus AIDS patients taking a
three-drug cocktail and a placebo, pursuant to an agreement
entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a
controlled study in 30 patients to determine the effectiveness
of Reticulose for the treatment of rheumatoid arthritis in
humans, pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of
Reticulose in inhibiting the mutation of the AIDS virus on
patients in Argentina, pursuant to an agreement entered in
July 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
As of December 31, 1998, we had current assets of $1,795,014, compared
to $3,260,930 at December 31, 1997. We had total assets of $3,304,953 and
$4,189,842 at December 31, 1998 and 1997, respectively. The decrease in current
and total assets was primarily attributable to the use of investment capital to
fund increased operating expenditures.
During 1998, we used cash of $3,364,528 for operating activities, as
compared to $2,179,780 in 1997. During 1998, we:
18
<PAGE>
o incurred non-cash expenses of approximately $230,000 and $291,000,
respectively, relating to amortization of loan costs and discount
on warrants relating to convertible debentures issued in 1997 and
1998;
o incurred non-cash expenses of approximately $836,000 relating to
amortization of deferred interest associated with the beneficial
conversion feature of the 1997 and 1998 convertible debentures;
o expended approximately $406,000 in professional and consulting
fees;
o expended approximately $210,000 in laboratory supplies;
o expended approximately $1,100,000 for payroll and related costs;
During 1998, cash flows provided by investing and financing activities
was primarily due to the sales of investments which were available from the
proceeds of the issuance of the convertible debentures in 1997 and 1998
($1,300,000). In addition, we expended approximately $675,000 for leasehold
improvements and furniture and equipment at our Yonkers, New York office.
PROJECTED EXPENSES
During the next 12 months, we expect to spend approximately $1,600,000
on research and development related activities, exclusive of payroll and
operating expenses to be incurred at our Yonkers, New York laboratory,
including:
o approximately $1,300,000 in the preparation of the IND;
o approximately $225,000 in overseas research of Reticulose; and
o approximately $75,000 in preparing the manufacturing facility in
the Bahamas for FDA inspection and in accordance with good
manufacturing practices and standards.
Additionally, we expect to spend approximately $400,000 for building expansion
of our research and development facility in Yonkers, New York. We anticipate
that we will be required to sell additional securities to obtain the funds
necessary to further our research and development activities.
Under the terms of an agreement with RBB entered in November 1998
pursuant to which RBB purchased a 7% convertible debenture and related warrants,
we are required to file with the Commission a registration statement to register
shares of the common stock issuable upon conversion of the convertible debenture
and upon exercise of the related warrants to allow the investors to resell such
common stock to the public. Because the registration statement was not declared
effective by the Commission on or before April 13, 1999, the RBB agreement
19
<PAGE>
provides that we pay RBB a penalty equal to the sum of (x) $30,000 and (y)
$1,500 for each day lapsed after such date, until the registration statement is
declared effective by the Commission, provided, however, that total penalties
shall not exceed $100,000 in the aggregate. As of the date hereof, RBB has not
requested payment of the penalty, and we are negotiating with RBB to have the
penalty waived.
Under the terms of an agreement with several purchasers entered in
December 1998, pursuant to which such purchasers purchased an aggregate of
4,917,276 shares of common stock and warrants to purchase an additional
2,366,788 shares of common stock, we are required to file with the Commission a
registration statement to register the common stock issued under the purchase
agreement, and upon exercise of the warrants to allow the resale of such common
stock to the public. Because the registration statement was not declared
effective by the Commission on or before May 21, 1999, the agreement provides
that we pay a penalty of $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. As of the date hereof, the agent for the purchasers has not requested
payment of the penalty, and we are negotiating with such agent to have the
penalty waived.
Under the terms of an agreement with several purchasers entered in June
1999, pursuant to which such purchasers purchased an aggregate of 1,851,852
shares of common stock and warrants to purchase an additional 926,528 shares of
common stock, we are required to file with the Commission a registration
statement to register the common stock issued under the purchase agreement, and
upon exercise of the warrants to allow the resale of such common stock to the
public. If the registration statement is not declared effective by the
Commission prior to December 3, 1999 as provided in the agreement, 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 are required to file with the
Commission a registration statement to register shares of the common stock
issuable upon conversion of the debentures and upon exercise of the warrants to
allow the purchaser to resell such common stock to the public. The purchase
agreement provides that, if the registration statement is not declared effective
prior to December 1, 1999, or if the number of shares qualified for trading on
the OTC Bulletin Board or reserved for issuance is insufficient for issuance
upon the conversion of the debentures and the exercise of the warrants, or if a
blackout event occurs (as described in the agreement, each of these events
referred to as a "default"), we will be required to pay the purchaser a penalty
for each 30 day period during which a default shall be in effect equal to
$40,000, pro rated for the number of days during each period the defaults were
pending. To the extent the periodic amounts for all default periods exceed
$100,000 in the aggregate, the excess amount shall be paid in shares of common
stock, as set forth in the agreement. The agreement further provides that until
20
<PAGE>
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 are 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 independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that our ability
to continue operations is dependent upon the continued sale of our securities
for funds to meet our cash requirements, which raise substantial doubt about our
ability to continue as a going concern. Further, the accountant's report does
not include any adjustments that might result from the outcome of this
uncertainty. Although we may not be successful in doing so, we plan to eliminate
or remedy the deficiencies in our financial condition through the issuance of
additional securities for cash.
CAPITAL RESOURCES
We have been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. The following table
summarizes sales of our securities since February 1997.
21
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
GROSS PROCEEDS SECURITY CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
DATE ISSUED ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
---------------------------------------------------------------------------------
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
- --------------------------------------------------------------------------------------------------------------------
August 1997 $3,000,000 Debenture 17,577,354 shares $0.13-0.23 per share Fully converted
---------------------------------------------------------------------------------
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
- --------------------------------------------------------------------------------------------------------------------
November 1998 $1,500,000 Debenture 10,964,912 shares $0.1368 per share (1) October 31, 2008
------------------------------------------------------------
Warrants 375,000 shares $0.20 per share
------------------------------------------------------------
375,000 shares $0.24 per share
- --------------------------------------------------------------------------------------------------------------------
January 1999 $802,500 Shares 4,917,276 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 Shares 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 14,035,088 shares $0.1425 per share (1) August 3, 2009
---------------------------------------------------------------------------------
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
- --------------------------------------------------------------------------------------------------------------------
December 1999 $1,000,000 Debentures 9,868,421 shares $0.1368 per share (1) December 31, 2004
---------------------------------------------------------------------------------
Warrants 110,000 shares $0.19916667 per share December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) Assumes the full conversion of the debentures based upon the average of the
high and low bid price of our common stock on January 5, 2000, which was $0.19,
and an applicable conversion price of $0.1368 for the RBB debenture, $0.1425 for
the Focus debentures and $0.1368 for the first tranche of Endeavour debentures.
SECURITIES ISSUED IN 1997.
In February 1997 and October 1997, in order to finance research and
development, we sold $1,000,000 and $3,000,000, respectively, principal amount
of our ten-year 7% convertible debentures due February 28, 2007 and August 30,
2007, respectively, to RBB in offshore transactions pursuant to Regulation S
under the Securities Act. Accrued interest under the 1997 debentures was payable
semiannually, computed at the rate of 7% per annum on the unpaid principal
balance from the date of issuance until the date of interest payment. The 1997
debentures were convertible, at the option of the holder, into shares of common
stock pursuant to specified formulas. On April 22, 1997, June 6, 1997, July 3,
1997 and August 20, 1997, pursuant to notice by the holder, RBB, to us under the
February 1997 debenture, $330,000, $134,000, $270,000 and $266,000,
respectively, of the principal amount of the February 1997 debenture was
converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares of the common
stock, respectively. As of August 20, 1997 the February 1997 debenture was fully
converted. On December 9, 1997, January 7, 1998, January 14, 1998, February 19,
1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant
to notice by the holder, RBB, to us, $120,000, $133,000, $341,250, $750,000,
$335,750, $425,000, $275,000 and $620,000, respectively, of the October 1997
debenture was converted into 772,201, 1,017,011, 2,512,887, 5,114,218,
1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of common stock,
respectively. As of May 5, 1998, the October 1997 debenture was fully converted.
22
<PAGE>
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.
In November 1998 we sold $1,500,000 principal amount of our ten-year 7%
convertible debenture due October 31, 2008 to RBB, as agent for the accounts of
certain persons, in an offshore transaction pursuant to Regulation S under the
Securities Act. Accrued interest under the convertible debenture is payable
semiannually, computed at the rate of 7% per annum on the unpaid principal
balance from the date of issuance until the date of interest payment. The
convertible debenture is convertible, at the option of the holder, into shares
of common stock pursuant to a specified formula. The actual number of shares of
common stock issued or issuable upon conversion of the convertible debenture is
subject to adjustment and could be materially less or more than the above
estimated amount, depending upon the future market price of the common stock and
the potential conversion of accrued interest into shares of common stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense.
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock , each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this prospectus, none of
such warrants had been exercised.
The fair value of the warrants issued in connection with the
convertible debenture was estimated to be $48,000 ($0.064 per warrant) based
upon a financial analysis of the terms of such warrants using the Black-Sholes
pricing model with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one year. This
amount has been reflected in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
23
<PAGE>
In December 1998 pursuant to a securities purchase agreement, we sold
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) two warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harborview Group consisting of two warrants to purchase an aggregate 400,000
shares of common stock, in a private offering transaction pursuant to Section
4(2) of the Securities Act, for an aggregate purchase price of $802,500, of
which $600,000 was received on December 31, 1998, and $202,500 was received in
January 1999. Two of the warrants entitle the holders to purchase 983,394 and
983,394 shares of common stock at exercise prices of $0.2040 and $0.2448 per
share, respectively. The other two warrants entitle the holders to purchase
200,000 and 200,000 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. All four warrants are exercisable at any time
and from time to time until December 31, 2003. Each warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under that warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
prospectus, none of such warrants had been exercised.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares in connection with the securities purchase agreement,
was estimated to be $494,000 ($0.0208 per warrant) based upon a financial
analysis of the terms of such warrants using the Black-Sholes Pricing Model with
the following assumptions: expected volatility of 20%, and a risk free interest
rate of 6% through the December 31, 2003 expiration date.
SECURITIES ISSUED IN 1999.
In July 1999 pursuant to a securities purchase agreement, we sold
1,851,852 shares of common stock, and warrants to purchase an aggregate of
925,926 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act, for an aggregate purchase price of $500,000,
received in July 1999. The warrants entitle the holders to purchase 463,264 and
463,264 shares of common stock at exercise prices of $0.324 and $0.378 per
share, respectively. The warrants are exercisable at any time and from time to
time until June 28, 2004. Each warrant provides that the holder may elect to
receive a reduced number of shares of common stock on the basis of a cashless
exercise; that number of shares bears the same proportion to the total number
shares issuable under that warrant as the excess of the market value of shares
of common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this prospectus, none of the
warrants had been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%, and a risk free interest rate
of 5.75% through the June 30, 2004 expiration date.
Pursuant to a securities purchase agreement dated August 3,1999 in a
private offering transaction under Section 4(2) of the Securities Act, we sold
to Focus Investors LLC an aggregate of 20 units for an aggregate gross purchase
price of $2 million, each unit consisting of $100,000 principal amount of our
ten-year 7% convertible debentures due August 3, 2009, and series W warrants to
24
<PAGE>
purchase 50,000 shares of our common stock exercisable until August 3, 2004.
Accrued interest under the convertible debenture is payable semiannually,
computed at the rate of 7% per annum on the unpaid principal balance from the
date of issuance until the date of interest payment. The convertible debenture
is convertible, at the option of the holder, into shares of common stock
pursuant to a specified formula. The actual number of shares of common stock
issued or issuable upon conversion of the convertible debenture is subject to
adjustment and could be materially less or more than the above estimated amount,
depending upon the future market price of the common stock and the potential
conversion of accrued interest into shares of common stock.
The exercise price of the series W warrants is $0.2461 per warrant
share. The warrants provide that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; The series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of the date of this prospectus, none of
such warrants had been exercised.
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 $1,000,000 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 debentures, we issued a warrant 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. These warrants expire on December 31, 2002 and are
exercisable at $0.19916667 per share. Pursuant to the agreement, subject to
certain conditions, none of which is in Endeavour's control, Endeavour is
obligated to purchase an additional $1,000,000 in aggregate principal amount of
7% debentures and warrants to purchase an additional 100,000 shares of common
stock not later than five days after the effective date of a registration
statement relating to the common shares issued upon (and in connection with) the
conversion of debentures and exercise of the warrants. Accrued interest under
the convertible debentures is 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 is payable and is payable on conversion of the debenture or on maturity in
common stock using the same conversion formula. 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 estimated number of shares in this
prospectus, depending upon the future market price of the common stock and the
potential conversion of accrued interest into shares of common stock.
The exercise price of the warrants is $0.199916667 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 warrants contain
anti-dilution provisions which provide for the adjustment of the warrant price
and warrant shares. As of the date of this prospectus, none of such warrants had
been exercised.
If we do not obtain FDA or other approvals for Reticulose, we will have
to obtain funds from the exercise of options and warrants, potential grants
and/or additional equity. It is not likely that such funds will be available in
any significant amount, if at all.
We are currently expending approximately $425,000 per month, which
expenses include salaries, rent, professional fees, license fees and taxes,
research and development, and travel, principally between our two offices and
25
<PAGE>
our Bahamian facility, and anticipate that we can continue operations through
February 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
stock options and warrants are exercised, we will receive net proceeds of
approximately $9.1 million. Those proceeds will contribute to general and
administrative and working capital and will permit us to substantially increase
our budget for research and development and clinical trials and testing and to
operate at significantly increased levels of operation, assuming Reticulose
receives approvals and prospects for sales increase to justify such increased
levels of operation. The recent prevailing market price for shares of common
stock has from time to time been above the exercise prices of certain of the
outstanding options and warrants. As such, recent trading levels may not be
sustained nor may any additional options or warrants be exercised. If less than
25% or none of the outstanding options and warrants are exercised, and we obtain
no other additional financing, in order for us to achieve the level of
operations contemplated by management, management anticipates that we will have
to limit intentions to expand operations beyond current levels. We are currently
seeking debt financing, licensing agreements, joint ventures and other sources
of financing, but the likelihood of obtaining such financing on favorable terms,
if at all, is small. Management anticipates that they will have to defer their
salaries if financing is not available in order to continue operations,.
Management does not believe that, at present, debt or equity financing will be
readily obtainable on favorable terms unless and until FDA approval for phase I
clinical testing is granted or comparable approval is obtained from another
developed or developing country. Because of the large uncertainties involved in
the FDA approval process for commercial drug use on humans, it is possible that
me may never be able to sell Reticulose commercially.
We have three patents for the use of Reticulose as a treatment. In
addition, we have filed 34 patent applications with the United States Patent
Office, including one for Reticulose as a product. Other companies, having
greater economic resources, may be successful in developing a similar product
using processes similar to our product Reticulose. We may not obtain such a
patent or, if obtained, it may not be enforceable. We have retained patent
counsel for the purpose of pursuing additional patent protection for Reticulose.
However, if any patents are granted, such patents may not be sustained if
questioned, and, if declared valid, such patents, may not operate to protect us
from the replication of Reticulose by competitors. We have relied upon laws
protecting proprietary information and trade secrets and upon confidentiality
agreements to protect our rights to Reticulose and the processes for its
manufacture, but such efforts and procedures may prove unsuccessful and may not
protect us from any competition in the future.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue is the result of computer programs using a
two-digit format, as opposed to a four-digit format to indicate the year. Such
computer programs will be unable to recognize date information correctly when
the year changes to 2000. The Year 2000 issue poses risks for our information
technology systems.
Our information technology systems are based upon software licenses and
software maintenance agreements with third party software companies. Based upon
our internal assessments and communications with our software vendors, all of
the software we use is Year 2000 compliant software. We have used internal
personnel to test our software systems for Year 2000 compliance and such tests
yielded positive results. We will continue to monitor our Year 2000 readiness.
26
<PAGE>
Also, we do not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to us by other manufacturers.
Based on the foregoing, we believe that we will be Year 2000 compliant
on a timely basis and that future costs relating to the Year 2000 issue will not
have a material impact on our consolidated financial position, results of
operations or cash flows.
BUSINESS
OVERVIEW
Advanced Viral was formed in July 1985 to engage in the production and
marketing, promotion and sale of a pharmaceutical drug with the trade name
"Reticulose." Under the Federal Food, Drug, and Cosmetic Act, as amended in
1962, the FDA classified Reticulose as a "new drug" requiring FDA approval prior
to any sale in the United States. Reticulose has not been approved for sale or
use by the FDA or any foreign government body, and thus we have not as yet
commenced any commercial operations. We are dependent on registration and/or
approval by applicable regulatory authorities of Reticulose in order to commence
commercial operations.
Our operations over the last five years have been limited principally
to engaging in research, IN VITRO testing and analysis of Reticulose in the
United States, and engaging others to perform testing and analysis of Reticulose
on human patients overseas. The FDA has not approved human clinical trials for
Reticulose in the United States. We may be required, in the absence of grants or
other subsidies, to bear the expenses of the first phase of human clinical
trials to the extent the FDA permits human clinical trials to occur. We do not
know what the actual cost of such trials would be. If we need additional
financing to fund such human clinical trials, it may not be available to us,
which may force us to reduce our operations.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Reticulose, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an IND application must be filed
with the FDA to obtain authorization for human testing. When the clinical
testing has been completed and analyzed, final manufacturing processes and
procedures are in place, and certain other required information is available to
the manufacturer, a manufacturer may submit a new drug application, or NDA, to
the FDA. No action can be taken to market Reticulose, or any therapeutic drug
product, in the United States until an appropriate NDA has been approved by the
FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or IN VITRO testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
27
<PAGE>
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: phase I clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; phase II clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and phase III
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
The initial IND may cover only phase I.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or IN VITRO tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well documented clinical experience as a substitute for other pre-clinical work.
After the FDA approves the IND or allows it to become effective, the
investigation is permitted to proceed, during which the sponsor must keep the
FDA informed of new studies, including animal studies, make progress reports on
the study or studies covered by the IND, and also be responsible for alerting
FDA and clinical investigators immediately of unforeseen serious side effects or
injuries.
When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
28
<PAGE>
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the bioavailability of the drug products made from the substance. NDA's
contain lists of all components used in the manufacture of the drug product and
a statement of the specifications and analytical methods for each component.
Also included are studies of the toxicological actions of the drug as they
relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
On September 20, 1984, Bernard Friedland, our former President and
current Chairman of the Board, as sponsor, submitted to the FDA an IND to
conduct a study testing the effectiveness of Reticulose on human subjects with
AIDS, as well as certain other viruses. The FDA has issued four letters of
deficiency with regard to the IND. In a letter dated November 29, 1984, the FDA
indicated, among other deficiencies noted, that the publications submitted with
the IND and relating to the effectiveness of Reticulose on virus related
diseases will not be accepted in support of the safety of Reticulose unless we
could establish that the proposed formulation of Reticulose is the same as the
formulation of Reticulose referenced in those publications. In addition, the FDA
required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage form and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that the
information assure the proper identification, quality, purity and strength of
Reticulose and a description of the physical, chemical and microbiological
characteristics of Reticulose. On September 11, 1987, we received a further
deficiency letter from the FDA, stating that no data had been submitted
supporting IN VITRO anti-HIV activity or any criterion for a biological response
modifier.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
received a third deficiency letter from the FDA dated July 27, 1992, which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and action on our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Reticulose in the United States.
29
<PAGE>
Pursuant to the agreement with GloboMax LLC, we are obligated to pay for
services on an hourly basis, at prescribed rates. We currently do not have the
resources necessary to complete the FDA approval process. We may allocate
certain proceeds from the exercise of currently outstanding options and warrants
for the purpose of filing a new IND with the FDA, however, such proceeds, if
any, will not be sufficient to improve our financial condition to any great
degree. It is possible that the new IND for clinical tests of Reticulose on
humans, if submitted, will not be approved by the FDA for human clinical trials
on AIDS or other diseases, and that any tests previously conducted or to be
conducted will not satisfy FDA requirements. It is also possible that the
results of such human clinical trials, if performed, will not prove that
Reticulose is safe or effective in the treatment of AIDS or other diseases, or
that the FDA will not approve the sale of Reticulose in the United States if we
submitted a proper NDA. It is not known at this time how extensive the phase II
and phase III clinical trials will be, if they are conducted. The data generated
may not show that the drug Reticulose is safe and effective, and even if the
data shows that Reticulose is safe and effective, obtaining approval of the NDA
could take years and require financing of amounts not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Reticulose for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. Clinical studies
conducted outside of any country may not be accepted by such country, and the
approval of any pharmaceutical or diagnostic product in one country does not
assure that such product will be approved in another country. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, we do not expect that we will be able to generate material
sales revenues. We received a grant of authority from the Bahamian Port
Authority on October 15, 1992 confirming the right of our subsidiary, Advance
Viral Research, Ltd., a Bahamian corporation, to carry on the manufacture and
export sale of ethical pharmaceutical products. See "-Marketing And Sales."
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through December 31,
1998 we expended approximately $3.6 million on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. In 1995, we retained Shalom
Hirschman as our President. As President, Dr. Hirschman established our research
facility in Yonkers, New York, monitored the testing of Reticulose and recently
performed analyses of Reticulose with our laboratory personnel, which analyses
we believe may be used in connection with the FDA approval process. We currently
are funding research and testing to:
o determine the safety of the topical use of Reticulose on
animals and cultured human cells;
30
<PAGE>
o assess the effectiveness of the topical application of
Reticulose on HPV and certain cancer causing proteins of HPV.
Recent laboratory testing has indicated that Reticulose may
inhibit the expression of a protein of HPV which causes
cervical cancer.
o assess the effectiveness of Reticulose for the treatment of
persons diagnosed with HIV or AIDS and HPV;
o assess the effectiveness of the topical application of
Reticulose for the treatment of persons diagnosed with herpes
labialis/genital infections;
o compare the results of treatment of persons diagnosed with
AIDS taking a three drug cocktail and Reticulose with those
taking a three drug cocktail and a placebo;
o determine the effectiveness of Reticulose for the treatment of
rheumatoid arthritis in humans;
o study the effects of Reticulose in inhibiting the mutation of
the AIDS virus in humans; and
o study the basic molecular mechanisms of Reticulose with
respect to transcription of the gamma interferon gene, immune
responses, and anti-tumor activity.
Our studies detailing the results of the above research and testing may
not positively impact the FDA's decision to approve a new IND for Reticulose or
approve of the marketing, sales or distribution of Reticulose within the United
States, and as a result may not improve our chances of gaining approval for the
marketing, sales or distribution of Reticulose anywhere in the world.
MARKETING AND SALES
Except for limited sales (approximately $4,500 during the first nine
months of 1999) of Reticulose for testing and other purposes, Reticulose is not
sold commercially anywhere in the world. As of the date of this prospectus, our
efforts or the efforts of any of our representatives have produced no material
benefits to us regarding our ability to have Reticulose sold commercially
anywhere in the world. We have entered into exclusive distribution agreements
with five separate entities granting exclusive rights to distribute Reticulose
in the countries of China, Japan, Hong Kong, Macao, Taiwan, Mexico, Channel
Islands, Isle of Man, British West Indies, Jamaica, Haiti, Bermuda, Belize,
Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant
to these agreements, the distributors are obligated to cause Reticulose to be
approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Reticulose to maintain the
exclusive distribution rights. Our marketing plans for Reticulose are still
dependent upon registration of Reticulose for sale in the various jurisdictions
where our distributors are seeking approvals.
To date we have received no information that would lead us to believe
that we will be positioned to sell Reticulose commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Reticulose. To date, the only application for
registration of Reticulose which has been filed is an application requesting
that Reticulose be permitted to be sold in Argentina, which was filed in March
1998. The completion of this application to secure approval to sell Reticulose
31
<PAGE>
in Argentina is dependent upon the results of a test requested by the government
of Argentina which will demonstrate the effect of Reticulose on certain animals.
We initially targeted our sales and marketing efforts to those countries where
Reticulose was previously marketed by its prior owners for a number of years as
an anti-viral agent in the treatment of Asian influenza, viral pneumonia, viral
infectious hepatitis, mumps, encephalitis, herpes simplex and herpes zoster.
Those countries included Singapore, Hong Kong, Malaysia, Taiwan, the Philippines
and Malta. Registration of Reticulose will be required in such countries as well
as in the other countries comprising the distributors' territories before any
significant sales may begin. The registration of Reticulose for sale in these
countries has been frustrated due to our inability to obtain the registration
and approval to sell Reticulose in the Bahamas, the country of origin, and a
general lack of published data on the effectiveness of Reticulose. Until
Reticulose is registered and approved for sale in the United States, in another
developed country or in the other countries included in the distributors'
territories, we will not generate any material sales of Reticulose. For the
years ended December 31, 1998, 1997 and 1996, we reported no commercial sales
except limited sales for testing purposes ($656, $2,278, and $24,111,
respectively). Reticulose is not legally available for commercial sale anywhere
in the world, except for testing purposes. See "-Research, Development and
Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council of
the Bahamas had refused our subsidiary's request for a "free sales certificate"
for Reticulose. A free sales certificate is a document typically issued by a
country in which a pharmaceutical product is manufactured which certifies that
such country permits the "free sale" of such product in such country. Most
countries require that a pharmaceutical product be at least registered and
certified for free sale in the country in which it is manufactured before
allowing the registration of such product for use in that country. However, the
Bahamas has no procedures currently in place to issue a "free sales certificate"
for any therapeutic drug, including Reticulose. If we do not obtain a free sales
certificate or other equivalent document from the Bahamas or another country, or
if we do not receive FDA approval, it is possible that we will not be able to
meet registration requirements in the countries which require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Reticulose, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Reticulose. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, hepatitis and
other viruses. We anticipate that we will face intense and increasing
competition as new products enter the market and advanced technologies become
available. Our competitors' products may be more effective, or more effectively
marketed and sold, than Reticulose. Competitive products may render Reticulose
obsolete or noncompetitive before we can recover the expenses of developing and
commercializing Reticulose. Furthermore, the development of a cure or new
treatment methods for the diseases we are targeting could render Reticulose
noncompetitive, obsolete or uneconomical. Many of our competitors:
o have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products,
32
<PAGE>
o have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products,
o have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Reticulose should be added to such cocktails in order
to enhance their effectiveness. Among the companies with significant commercial
presence in the AIDS market are Glaxo Wellcome, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma. In
addition, Glaxo Wellcome, in collaboration with Biochem Pharma, is pursuing
development of Lamivudine, a nucleoside analogue to treat hepatitis B infection.
This compound was recently approved for marketing in the United States, China
and several other countries and represents significant potential competition for
Reticulose as a treatment for hepatitis B.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Reticulose, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Reticulose.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed phase III trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for Reticulose as a treatment for rheumatoid arthritis.
Three antiviral products are presently sold in the United States for
the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
Wellcome Inc.) which contains acyclovir and is administered orally, topically,
or intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals)
which contains famcyclovir and is administered orally, and Valtrex(R)
(manufactured by Glaxo Wellcome, Inc.) which contains valacyclovir and is also
administered orally. These products represent significant competition for
Reticulose as a treatment for genital herpes.
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.
33
<PAGE>
If we successfully develop and obtain approval for Reticulose, we will
face competition based on the safety and effectiveness of Reticulose, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Reticulose, we
expect to compete primarily on the basis of product performance and price with a
number of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have 25 full-time employees, consisting of our three executive
officers, 18 employees involved in research, and four administrative employees.
Dr. Hirschman, our President and Chief Executive Officer and a director, Bernard
Friedland, our Chairman of the Board and a director, William Bregman, our
Secretary, Treasurer and a director, and Alan Gallantar, our Chief Financial
Officer, each devote all of their business time to our day-to-day business
operations.
Additionally, we may hire, as and when needed, and as available, such
sales and technical support staff and consultants for specific projects on a
contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 63 President, Chief Executive Officer,
Chief Scientific Officer, Director
Bernard Friedland 73 Chairman of the Board of Directors
William Bregman 77 Vice President, Secretary, Treasurer,
Director
Alan Gallantar 41 Chief Financial Officer
Louis J. Silver 70 Director
</TABLE>
Shalom Z. Hirschman, M.D., President, Chief Executive Officer and a
director since October 1996, was Director of the Division of Infectious Diseases
and Professor of Medicine at Mount Sinai School of Medicine, New York, New York,
from May 1969 until October 1996.
Bernard Friedland, Chairman of the Board since May 1987, director since
July 1985 and President and Chief Executive Officer from September 1985 until
34
<PAGE>
October 1996, was employed by Key, Inc. for 29 years, until March 1, 1986, in
the Research and Development and Quality Assurance Departments in
Pharmaceuticals, Pharmacology, and Canceantimetabolites.
William Bregman, director since July 1985 and Secretary-Treasurer since
September 1985, was Vice President from September 1985 until May 1987 and Vice
President and Secretary of our subsidiary, Advance Viral Research, Ltd., from
August 1984 until July 1989.
Alan Gallantar, Chief Financial Officer since October 1999, was
treasurer and controller from March1998 to September 1999 of AMBI Inc., a
nutraceutical company, senior vice president and chief financial officer from
1992 to 1997 of Bradley Pharmaceuticals, Inc., a pharmaceutical manufacturer,
and vice president and divisional controller from 1989 to 1991 for PaineWebber
Incorporated. From 1985 to 1989, Mr. Gallantar was second vice president at The
Chase Manhattan Bank, N.A., and from 1983 to 1985, was a senior accountant at
Philip Morris, Incorporated. From 1979 to 1983, Mr. Gallantar was a senior
accountant in the audit department of Deloitte & Touche.
Louis J. Silver, director since May 1992, has been self-employed as a
free-lance bookkeeper and auditor since 1985. Mr. Silver previously served as a
member of the board of directors during the periods from May 1987 to July 1987.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" as those terms as defined in the rules and regulations promulgated
under the Securities Act. Directors are elected to serve until the next annual
meeting of shareholders and until their successors have been elected and have
qualified.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the board of directors attended, which has not in fact been paid within at least
the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, none of our directors, officers or employees
received salary and bonus exceeding in the aggregate $100,000 in the years ended
December 31, 1998, 1997 or 1996. The following Summary Compensation Table sets
forth the information concerning compensation for services in all capacities
awarded to, earned by or paid to the named executive officers for the years
ended December 1998, 1997 and 1996.
35
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- ---------------------------------
SECURITIES
UNDERLYING
NAME AND OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) SARS (3) COMPENSATION (4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1998 $325,000 $ 0 $12,288 23,000,000 $4,316
President, Chief Executive
Officer and Chief Scientific -------------------------------------------------------------------------------------
Officer since October 1996 1997 $325,000 $43,000 $14,604 0 $3,956
and consultant from May 24, -------------------------------------------------------------------------------------
1995 until October 1996. 1996 $ 68,750(2) $ 0 $ 4,825 15,000,000 $4,316
- --------------------------------------------------------------------------------------------------------------------
Bernard Friedland, President 1998 - - - - -
and Chief Executive Officer -------------------------------------------------------------------------------------
through October 13, 1996 1997 - - - - -
-------------------------------------------------------------------------------------
1996 $ 35,000 - $ 6,500 - -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Other Annual Compensation for Dr. Hirschman and Mr. Friedland include
medical insurance premiums paid by us on his behalf, and aggregate
incremental cost to us of Dr. Hirschman's automobile lease, gas, oil,
repairs and maintenance.
(2) Under the Hirschman employment agreement described under "-EMPLOYMENT
CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS,"
Dr. Hirschman's annual salary as President and Chief Executive Officer
(among other titles) is $325,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) The dollar value of insurance premiums paid by, or on behalf of, us with
respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, we granted Dr. Hirschman options to acquire
23,000,000 shares of common stock, the exerciseability of which is subject to
conditions precedent. In October 1999, we granted Mr. Gallantar options to
acquire 4,547,880 shares of common stock, exercisable in one third increments on
October 1, 2000, 2001, and 2002, until October 1, 2009. No other stock options
were granted to the named executive officers during 1998. Other than Dr.
Hirschman's and Mr. Gallantar's stock options, we currently have outstanding:
o Three warrants to purchase 178,378 shares of common stock at
exercise prices of $0.288, $0.576 and $0.864 per warrant
share, respectively;
o Three warrants to purchase 600,000 shares of common
stock,$0.20, $0.23 and $0.27 per warrant share, respectively;
o Two warrants to purchase 375,000 and 375,000 shares of common
stock at exercise prices of $0.20 and $0.24 per warrant share,
respectively;
o Four warrants to purchase 983,394, 983,394, 200,000 and
200,000 shares of common stock at exercise prices of $0.2040,
$0.2448, $0.2040, and $0.2448 per warrant share, respectively;
and
36
<PAGE>
o Two warrants to purchase 463,264 and 463,264 shares of common
stock at exercise prices of $0.324 and $0.378 per warrant
share, respectively; and
o Twenty warrants to purchase an aggregate of 1,000,000 shares
of common stock at an exercise price of $0.2461 per warrant
share;
o Three warrants to purchase an aggregate of 110,000 shares of
common stock at an exercise price of $0.19916667 per warrant
share; and
o Options to acquire 12,165,415 shares of the common stock, none
of which are beneficially owned by directors, officers or
employees of Advanced Viral.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 1998 held by the named executive officers. No options were exercised during
the year ended December 31, 1998 by the named executive officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
-------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 0 $0 16,100,000 / 23,000,000 $267,800 / $0 (2)(3)
Bernard Friedland 0 $0 0 / 0 $0 / $0
</TABLE>
- ----------
(1) The difference between the average of the high and low bid prices per share
of the common stock as reported by the Bulletin Board on the date of
exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per share
of the common stock as reported by the Bulletin Board on December 31, 1998,
$0.218, and the exercise or base price.
(3) As of December 31, 1998, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share, 4,000,000; shares of common
stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
share; and 4,000,000 shares of common stock at $0.36 per share, all of
which are currently exercisable. In addition, Dr. Hirschman held options to
purchase 23,000,000 shares of common stock at $0.27 per share which become
exercisable through February 2008 upon the earlier to occur of the day an
IND number is obtained from and approved by the FDA so that human research
may be conducted using Reticulose, the occurrence of a change in control,
or the execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to Advanced Viral of at
least $15 million.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
July 8, 1998 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
37
<PAGE>
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf. The agreement includes an agreement
that Dr. Hirschman will be nominated as a director for the duration of Dr.
Hirschman's employment with us under the agreement, and voting agreements
regarding the election of Messrs. Friedland, Bregman and Dr. Hirschman as
directors. See "Principal Shareholders."
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2000 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$325,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
o take such action as may be necessary to permit Dr. Hirschman
to be entitled to participate in stock option, stock bonus or
similar plans (including plans for SARs) as are established by
us;
o lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs
and maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
o reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses, his license fees, membership dues in professional
organizations, subscriptions to professional journals,
necessary travel, hotel and entertainment expenses incurred in
connection with overnight, out-of-town trips that contribute
to the benefit of us in the reasonable determination of Dr.
Hirschman, and all other expenses that may be pre-approved by
our board of directors; and
o provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
The agreement also provides for the payment of $100,000 to Dr. Hirschman on the
date we obtain an IND number from the FDA so that Reticulose may be tested on
humans, so long as such IND number is obtained while Dr. Hirschman is employed
by us.
The agreement further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of Advanced Viral or any
of our other employees, to bind us, to release or discharge any debt due us
38
<PAGE>
unless we have received payment in full, or to dispose (as collateral or
otherwise) of all or substantially all of our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at any time and from time to time through February 2008 at $0.27 per
share commencing upon:
o the day an IND number is obtained from and approved by the FDA
so that human research may be conducted using Reticulose;
o the occurrence of a change in control; or
o the execution of an agreement relating to co-marketing
pursuant to which one or more third parties commit to make
payments to us of at least $15 million.
GALLANTAR EMPLOYMENT AGREEMENT
Advanced Viral entered into an Employment Agreement dated as of October
1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is employed as
our Chief Financial Officer on a full business time basis. Under the agreement,
the term of Mr. Gallantar's employment continues until October 1, 2002. The
agreement may be terminated during the first 90 days of the Agreement in our
sole discretion, at which time Mr. Gallantar will be paid a severance of
$87,000. If the agreement is terminated by us for cause, Mr. Gallantar will have
no accrued right to receive any bonus for the year in which his employment is
terminated, all unvested stock options will be cancelled, and any vested stock
options will terminate 90 days after the effective date of termination. If the
agreement is terminated by Advanced Viral not for cause, we are required to pay
to Mr. Gallantar all accrued and unpaid compensation, and all stock options
granted as of the date of the agreement shall become 100% vested. Upon such
termination not for cause, all options which became vested as a result of this
provision may be exercised by Mr. Gallantar until 90 days after the effective
date of termination. If Mr. Gallantar elects to terminate this agreement as a
result of a change in control, he will be paid his base salary for the remaining
term of the agreement, and all stock options granted on the date of the
agreement will become 100% vested and exercisable until 90 days after the
effective date of termination. If Mr. Gallantar elects to terminate this
agreement for any other reason, he will be paid all unaccrued and unpaid base
salary, and he will have the right to exercise any vested stock until 90 days
after the effective date of termination. All payments made to Mr. Gallantar in
connection with the termination of the agreement are subject to reduction to the
extent they exceed 2.99 times the "base amount" as determined under Section 280G
of the Internal Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of the board
39
<PAGE>
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.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus
certain information regarding the beneficial ownership of the common stock by
each person who is known by us to own beneficially more than 5% of the our
outstanding voting securities, each of our directors and named executive
officers, and all our directors as a group:
40
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) PERCENT OWNED
------------------------------------ ---------------------- -------------
<S> <C> <C> <C>
Shalom Z. Hirschman, M.D. 16,100,000 (2)(3) 5.04%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Bernard Friedland 39,346,730 (3)(4) 12.98%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,705,403 (3)(5) 11.78%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Louis J. Silver 501,000 0.17%
5110 S.W. 127th Place
Miami, FL 33175
Alan Gallantar 0 0.00%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
All Officers & Directors (4 Persons) 91,653,133 (2) 28.71%
</TABLE>
- ----------
(1) The persons named in this table have sole voting power with respect to all
shares shown as beneficially owned by them, except as indicated in other
footnotes to this table. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
common stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days from the date hereof,
are deemed outstanding. According to American Stock Transfer & Trust
Company, the transfer agent for the common stock, 303,292,035 shares of the
common stock were outstanding as of the close of business as of the date
hereof.
(2) Includes shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days from the date hereof.
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that
agreement, shall vote all shares of the common stock owned or voted by them
in favor of Dr. Hirschman as a director of Advanced Viral. That agreement,
however, does not restrict or otherwise limit their right to sell their
shares to third parties without restriction. The Hirschman employment
agreement also provides that Dr. Hirschman, during that term, shall take no
action which shall preclude Messrs. Friedland and Bregman from being
nominees as directors of Advanced Viral and that Dr. Hirschman shall vote
all shares of the common stock owned or voted by him in favor of Messrs.
Friedland and Bregman as directors of Advanced Viral. See "- Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
(4) Includes 1,000,000 shares of the common stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants;) 20,000,000 shares owned by
Mr. Friedland and Shirley Friedland, his spouse, as joint tenants; and
600,000 shares owned the B&SD Friedland Foundation, a not-for-profit
foundation controlled by Mr. Friedland. Does not include 15,000 shares
owned by Shirley Friedland as to which Mr. Friedland disclaims beneficial
ownership.
(5) Includes 22,594,864 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 110,000 shares owned by Carol Bregman,
his daughter; 113,000 shares owned by Janet Berlin, his daughter; 110,000
shares owned by Forest Berlin, his grandson; and 110,000 shares owned by
Jessica Berlin, his granddaughter.
41
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus by
each of the selling shareholders assuming the full exercise of certain warrants
and stock options. Unless otherwise indicated below, to our knowledge all
persons listed below have sole voting and investment power with respect to the
shares of common stock, except to the extent authority is shared by spouses
under applicable law. The information included below is based upon information
provided by the selling shareholders. Because the selling shareholders may offer
all, some or none of their shares, no definitive estimate as to the number of
shares that will be held by the selling shareholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares offered under this prospectus will be sold.
<TABLE>
<CAPTION>
POSITION WITH OR SHARES OWNED SHARES BEING SHARES OWNED
RELATIONSHIP TO BEFORE OFFERING (1)(2) SOLD IN AFTER OFFERING (3)
SELLING SHAREHOLDER ADVANCED VIRAL NUMBER % OFFERING(2) NUMBER %
- ------------------- -------------- ------ --- ----------- ------ --
<S> <C> <C> <C> <C> <C> <C>
Endeavour Capital Fund S.A. (4) Investor 19,736,842 6.1% 19,736,842 0 0.00%
Samuel Krieger (5) Counsel to Investor 5,000 * 5,000 0 0.00%
Ronald Nussbaum (5) Counsel to Investor 5,000 * 5,000 0 0.00%
Selling Shareholders Total Shares 19,746,842 6.1% 19,746,842 0 0.00%
Total Shares Outstanding after Offering 332,038,877
===========
</TABLE>
- ----------
* LESS THAN 1%
1. Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting and investment power with respect to
securities. In accordance with Commission rules, shares which may be acquired
upon exercise of stock options which are currently exercisable or which become
exercisable within 60 days after the date of the information in the table are
deemed to be beneficially owned by the optionee. However, the terms of the
debentures and warrants of the selling shareholders specify that the shareholder
cannot convert the debentures or exercise its warrants to the extent that such
conversion or exercise would result in the selling shareholder and its
affiliates beneficially owning more than 9.99% of our then outstanding common
stock. Thus, although some of the shares listed in the table might not be
subject to purchase by the selling shareholder during that 60 day period, they
are nevertheless included in this table. Except as indicated by this footnote,
and subject to community property laws where applicable, to our knowledge, the
persons or entities named in the table above are believed to have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them.
2. Assumes the full exercise of the convertible debentures and warrants. The
percentage interest of each selling shareholder is based on the beneficial
ownership of that selling shareholder divided by the sum of the current
outstanding shares of common stock plus the additional shares, if any, which
would be issued to that selling shareholder (but not any other selling
shareholder) when converting debentures or exercising warrants or other right in
the future. For purposes of presentation in this table, the 9.99% limit referred
to in footnote 1 above has been disregarded.
3. Assumes that all of the shares are sold by the selling shareholders and no
additional shares of common stock are acquired.
4. Represents shares issuable upon conversion of $2.0 million of debentures and
accrued interest through the maturity date at an assumed conversion rate of
$0.1368 per share (based on an approximate current market price, as of January
5, 2000, of $0.19) and upon exercise of warrants to purchase 200,000 shares. We
are registering for this selling shareholder (i) 166.67% of the shares issuable
on conversion of the principal of or as interest on the debentures at that
conversion rate to take into account the fact that the actual conversion rate
will be based on a formula stated in the debentures and may be higher or lower
than the assumed rate and (ii) the 200,000 shares issuable on exercise of the
warrants. The actual number of shares of common stock issuable upon the
conversion of the debentures and exercise of the warrants is therefore subject
to adjustment and could be materially less or more than the number estimated in
the table. This variation is due to factors that cannot be predicted by us at
this time. The most significant of these factors is the future market price of
our common stock.
5. Represents 5,000 shares of common stock issuable upon exercise of certain
warrants.
42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between Advanced Viral and any of our officers or directors which involved
$60,000 or more.
DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common
stock, par value $0.00001 per share. All shares of common stock now outstanding
are fully paid for and non-assessable. The holders of common stock:
o have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
o entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
o do not have preemptive, subscription, or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
o are entitled to one noncumulative vote per share on all
matters which shareholders may vote on at all meetings of
shareholders.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the net proceeds from the sale of an
additional $1.0 million in principal amount of our 7% convertible debentures due
December 31, 2004 not later than five days after the effective date of this
prospectus. We will also receive the cash proceeds, if any, from the exercise of
any warrants held by the selling shareholders.
PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling
shareholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the OTC
Bulletin Board, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions) or other
market on which our common stock may be listed at the time of sale, including
the American Stock Exchange, in privately negotiated transactions or otherwise
or in a combination of such transactions at prices and at terms then prevailing
or at prices related to the then current market price, or at privately
negotiated prices or at fixed prices that may be changed. In addition, any
shares covered by this prospectus which qualify for sale pursuant to Section
4(l) of the Securities Act or Rule 144 promulgated thereunder may be sold under
such provisions rather than pursuant to this prospectus. 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:
43
<PAGE>
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 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
44
<PAGE>
broker-dealer, acting as principal or agent for the selling shareholders and the
compensation to be received by other broker-dealers, if the compensation of such
other broker-dealers is in excess of usual and customary commissions, will, to
the extent required, be set forth in a supplement to this prospectus. Any dealer
or broker participating in any distribution of the shares may be required to
deliver a copy of this prospectus, including the prospectus supplement, if any,
to any person who purchases any of the shares from or through such dealer or
broker.
We have advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included in this prospectus they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any selling shareholders, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
It is anticipated that the selling shareholders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time under this prospectus, such sales, or the
possibility of such sales, may have a depressive effect on the market price of
our common stock. None of the selling shareholders have entered into any
agreements regarding the sales of the shares being registered.
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.,
NationsBank Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida
33131.
45
<PAGE>
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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
46
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Certified Public Accountants.........................................................F-1
Consolidated Financial Statements Years Ended 1998, 1997 and 1996
Balance Sheets, December 31, 1998 and 1997............................................................F-2
Statements of Operations for the Years Ended December 31, 1998, 1997
and 1996 and from Inception (February 20, 1984) to December 31, 1998.............................F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 1998.................................................................................F-4
Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996 and from Inception (February 20, 1984) to December 31, 1998.............................F-11
Notes to Consolidated Financial Statements...........................................................F-12
Consolidated Financial Statements Three and Nine Months Ended September 30, 1999
Balance Sheets, September 30, 1999 and December 31, 1998.............................................F-31
Statements of Operations for the Three and Nine Months Ended September 30, 1999
and 1998 and from Inception (February 20, 1984) to September 30, 1999............................F-32
Statements of Stockholders' Equity from Inception (February 20, 1984)
to September 30, 1999............................................................................F-33
Statements of Cash Flows for the Nine Months Ended September 30, 1999
and 1998 and from Inception (February 20, 1984) to September 30, 1999............................F-41
Notes to Consolidated Condensed Financial Statements.................................................F-42
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1998 and for the period from inception (February 20, 1984) to December 31, 1998.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1998 and 1997
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 and for the period from
inception (February 20, 1984) to December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is dependent upon the continued sale of its securities or
obtaining debt financing for funds to meet its cash requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As described in Note 14 to the financial statements, the Company has restated
certain amounts in the 1998 and 1997 financial statements to record the
amortization of the beneficial conversion feature associated with the November
Debenture based on the date the debenture first became convertible, to
reclassify certain expenses initially recorded as general and administrative
expenses to research and development costs, and to reclassify amortization of
debt issuance costs as interest expense.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 11, 1999
F-1
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Restated)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 924,420 $ 236,059
Investments 821,047 2,984,902
Inventory 19,729 19,729
Other current assets 29,818 20,240
------------ ------------
Total current assets 1,795,014 3,260,930
Property and Equipment 1,049,593 485,661
Other Assets 460,346 443,251
------------ ------------
Total assets $ 3,304,953 $ 4,189,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 279,024 $ 375,606
Current portion of capital lease obligation 38,335 --
------------ ------------
Total current liabilities 317,359 375,606
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 1,457,919 2,384,793
Capital lease obligation - long-term portion 167,380 --
------------ ------------
Total long-term liabilities 1,625,299 2,384,793
------------ ------------
Deposit on Securities Purchase Agreement 600,000 --
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 296,422,907 and 277,962,574
shares issued and outstanding 2,964 2,779
Additional paid-in capital 14,325,076 10,512,767
Deficit accumulated during the development stage (13,550,976) (8,993,266)
Subscription receivable -- (19,000)
Deferred compensation cost (14,769) (73,837)
------------ ------------
Total stockholders' equity 762,295 1,429,443
------------ ------------
Total liabilities and stockholders' equity $ 3,304,953 $ 4,189,842
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Sales $ 656 $ 2,278 $ 24,111 $ 194,975
Interest 102,043 111,845 46,796 559,297
Other income 293 7,800 32,000 120,093
------------- ------------- ------------- -------------
102,992 121,923 102,907 874,365
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 1,659,456 817,603 255,660 3,583,467
General and administrative 1,420,427 1,681,436 983,256 7,315,337
Depreciation 110,120 26,288 18,731 315,348
Interest 1,470,699 1,738,325 -- 3,211,189
------------- ------------- ------------- -------------
4,660,702 4,263,652 1,257,647 14,425,341
------------- ------------- ------------- -------------
Net Loss $ (4,557,710) $ (4,141,729) $ (1,154,740) $ (13,550,976)
============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.02) $ (0.02) $ (.00)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 294,809,073 274,534,277 257,645,815
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
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>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, period ended December 31, 1987 - - - (258,663)
----------- ----- --------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ----- --------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ----- --------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 -
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 -
Issuance of common stock, exercise of "C" warrants .08 12,900 - 1,032 -
Net loss, year ended December 31, 1990 - - - (267,867)
----------- ----- --------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------ ------ ---------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
------------ ------ ---------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------ ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------ ---------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
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>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options .08 3,333,333 33 247,633 - - -
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 - - -
Issuance of common stock, conversion of debt .15 894,526 9 133,991 - - -
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 - - -
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 - - -
Issuance of common stock, conversion of debt .16 772,201 8 119,992 - - -
Issuance of common stock, for services rendered .41 50,000 - 20,500 - - -
Issuance of common stock, for services rendered .24 100,000 1 23,999 - - -
Beneficial conversion feature, February debenture - - 413,793 - - -
Beneficial conversion feature, October debenture - - 1,350,000 - - -
Warrant costs, February debenture - - 37,242 - - -
Warrant costs, October debenture - - 291,555 - - -
Amortization of deferred compensation cost - - - - - 399,322
Imputed interest on convertible debenture - - 4,768 - - -
Net loss, year ended December 31, 1997 - - - - (4,141,729) -
----------- ----- ---------- ------- --------- -------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----- ---------- ------- ---------- -------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $(19,000) $(8,993,266) $(73,837)
Issuance of common stock, exercise of options .12 295,000 3 35,397 - - -
Issuance of common stock, exercise of options .14 500,000 5 69,995 - - -
Issuance of common stock, exercise of options .16 450,000 5 71,995 - - -
Issuance of common stock, exercise of options .20 10,000 - 2,000 - - -
Issuance of common stock, exercise of options .26 300,000 3 77,997 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 - - -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Issuance of common stock, for services rendered .21 100,000 1 20,999 - - -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998, as Restated - - - - (4,557,710) -
----------- ----- ----------- ------ ------------- --------
Balance, December 31, 1998, as Restated 296,422,907 2,964 $14,325,076 $ - $(13,550,976) $(14,769)
=========== ===== =========== ====== ============= ========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1998 1997 1996 1998
---- ---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,557,710) $(4,141,729) $(1,154,740) $(13,550,976)
----------- ----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 110,120 26,288 18,731 315,348
Amortization of debt issue costs 229,978 111,957 - 341,935
Amortization of deferred interest cost on beneficial
conversion feature 835,951 1,552,842 - 2,388,718
Amortization of discount on warrants 290,297 - - 290,297
Amortization of deferred compensation cost 59,068 399,322 287,341 745,731
Loss on sale of property and equipment - 1,425 - 1,425
Issuance of common stock for services 21,000 44,500 175,000 1,437,500
Imputed interest on convertible debenture - 4,768 - 4,768
Changes in operating assets and liabilities:
Increase in other current assets (9,578) (4,159) (3,114) (29,818)
Increase in inventory - - (1,638) (19,729)
Increase in other assets (247,072) (496,126) (27,085) (776,742)
Increase (decrease) in accounts payable and
accrued liabilities (96,582) 328,932 39,823 285,224
Decrease in customer deposits - (7,800) - (7,800)
----------- ----------- ----------- ------------
Total adjustments 1,193,182 1,961,949 489,058 4,976,857
----------- ----------- ----------- ------------
Net cash used by operating activities (3,364,528) (2,179,780) (665,682) (8,574,119)
----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments (915,047) (3,651,676) (1,247,256) (6,292,979)
Proceeds from sale of investments 3,078,902 2,045,615 347,415 5,471,932
Acquisition of property and equipment (451,734) (307,362) (11,446) (1,143,600)
Proceeds from sale of property and equipment - 1,200 - 1,200
----------- ----------- ----------- ------------
Net cash provided (used) by investing activities 1,712,121 (1,912,223) (911,287) (1,963,447)
----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,500,000 4,000,000 - 5,500,000
Proceeds from deposit on securities purchase agreement 600,000 - - 600,000
Proceeds from sale of securities, net of issuance costs 257,400 266,666 1,573,135 5,378,588
Payments under capital lease (16,602) - - (16,602)
----------- ----------- ----------- ------------
Net cash provided by financing activities 2,340,798 4,266,666 1,573,135 11,461,986
----------- ----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 688,391 174,663 (3,834) 924,420
Cash and Cash Equivalents, Beginning 236,059 61,396 65,230 -
----------- ----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 924,450 $ 236,059 $ 61,396 $ 924,420
=========== =========== =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 6,042 $ - $ -
=========== =========== ===========
Options granted accounted for as deferred compensation cost $ - $ - $ 760,500
=========== =========== ===========
</TABLE>
During 1998, the Company purchased equipment under a capital lease totaling
$222,317.
See notes to consolidated financial statements.
F-11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the
purpose of manufacturing and marketing a pharmaceutical product
named RETICULOSE. While the Company has had limited sales of this
product, primarily for research purposes, the success of the
Company will be dependent upon obtaining certain regulatory
approval for its pharmaceutical product, RETICULOSE, to commence
commercial operations. The Company was in the development stage at
December 31, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research
(LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, with
original maturities of three months or less.
Investments
Investments consist of certificates of deposit with maturities
greater than three months, carried at cost, which is market value,
U.S. Government securities and discount notes and U.S. Treasury
Bills. The U.S. Government securities, notes and treasury bills are
classified as "held to maturity" and are carried at amortized cost,
which approximates market value.
Property and Equipment
Property and equipment are recorded at cost and depreciated using
the straight-line method, over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized
currently. Maintenance and repairs are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
Research and Development
Research and development costs are expensed as incurred by the
Company.
Deferred Compensation Cost
Deferred compensation costs are recognized based on the fair value
for non-employee stock options. Compensation cost is amortized over
the life of the option period, which is either shorter than or
essentially equivalent to the period for which the services are to
be provided. Compensation expense is classified as general and
administrative.
F-12
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The limited sales generated by the Company have consisted of sales
of RETICULOSE for testing and other purposes. Sales are recorded by
the Company when the product is shipped to customers.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to 1998 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ
from actual results.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplate the continuance of the Company as a going concern. The
Company has suffered losses from operations during its history. The
Company is dependent upon registration of RETICULOSE for sale before it
can begin commercial operations. The Company's cash position may be
inadequate to pay all the costs associated with the full range of
testing and clinical trials required by the FDA. Management does not
anticipate registration or other approval of RETICULOSE in the near
future in the United States. Unless and until RETICULOSE is approved
for sale in the United States or another industrially developed
country, the Company may be dependent upon the continued sale of its
securities for funds to meet its cash requirements. Management intends
to continue to sell the Company's securities in an attempt to mitigate
the effects of its cash position; however, no assurance can be given
that such equity financing, if and when required, will be available. In
the event that such equity financing is not available, in order to
continue operations, management anticipates that they will have to
defer their salaries. During 1998 and 1997, the Company obtained debt
financing and may seek additional debt financing if the need arises. No
assurance can be given that the Company will be able to sustain its
operations until FDA approval is granted or that any approval will ever
be granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to apply
for approval with the FDA by May 15, 1999. The consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
F-13
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition is a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market RETICULOSE
worldwide, except within the Bahamas, for $50,000. The Company also
purchased inventory of RETICULOSE from LTD for $45,000 and was
obligated to pay $3 per ampule of RETICULOSE for the initial 100,000
ampules purchased and $2 per ampule for purchases exceeding 100,000
ampules. On December 16, 1987, the Company acquired the controlling
beneficial interest in 99.6% of the common stock of LTD through an
appropriate trust agreement to satisfy the rules of the Bahamian
Government, from two of the principal stockholders of the Company. Both
stockholders concurrently canceled $86,565 of indebtedness due them
from LTD.
NOTE 4. INVESTMENTS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Held to maturity:
U.S. Government securities $821,047 $2,226,902
Certificates of deposit - 758,000
-------- ----------
$821,047 $2,984,902
======== ==========
NOTE 5. PROPERTY AND EQUIPMENT
<CAPTION>
Estimated Useful
Lives (Years) 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 324,083 299,550
Machinery and equipment 5 1,003,768 354,250
---------- -----------
1,362,401 688,350
Less accumulated depreciation 312,808 202,689
---------- ----------
$1,049,593 $ 485,661
========== ===========
</TABLE>
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $370,028 as of
December 31, 1998 and 1997 including $17,623 expended in 1987 to
purchase a land lease expiring in 2068. Included with machinery and
equipment is $222,318 of equipment purchased under a capital lease
during 1998. Depreciation expense for equipment under capital lease was
approximately $12,000 in 1998. These amounts are included above.
F-14
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Patent costs $344,319 $202,247
Loan costs, net of accumulated amortization of $341,935
and $111,957 96,250 221,227
Other 19,777 19,777
-------- --------
$460,346 $443,251
======== ========
</TABLE>
Patent development costs are capitalized as incurred. Loan costs relate
to fees paid in connection with the issuance of convertible debentures
(Note 8) and are amortized over the life of the debenture or until
conversion.
NOTE 7. SECURITIES PURCHASE AGREEMENT
On December 22, 1998, the Company entered into a Securities Purchase
Agreement whereby the Company agreed to issue to certain purchasers
4,917,276 shares of common stock for an aggregate purchase price of
$802,500. The agreement also provides for the issuance of four warrants
to purchase a total of 2,366,788 shares of common stock at prices
ranging from $.204 to $.2448 per share at any time until December 31,
2003. The Fair value of these warrants is estimated to be $494,138
($.209 per warrant) based upon a financial analysis of the terms of the
warrants using the Black Sholes Pricing Model with the following
assumptions: expected volatility of 20%, a risk free interest rate of
6% and an expected holding period of five years.
As of December 31, 1998, the Company received $600,000 towards the
total purchase price.
As of January 7, 1999, the remaining $202,500 was received and the
appropriate shares were issued to the purchasers.
NOTE 8. CONVERTIBLE DEBENTURES
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "February Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB"). Accrued interest under the February
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from February 21, 1997 until the
date of interest payment. The February Debenture may be prepaid by the
Company before maturity, in whole or in part, without premium or
penalty, if the Company gives the holder of the Debenture notice not
less than 30 days before the date fixed for prepayment in that notice.
The February Debenture is convertible, at the option of the holder,
into shares of common stock.
F-15
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
The assured incremental yield on the February Debenture was measured
based on the date of issuance of the security and amortized to interest
expense over the conversion period which ended on May 29, 1997 which
was the first date full conversion could occur. The interest expense
relating to this measurement was $4,768.
During 1997, RBB exercised its right to convert the principal amount of
the February Debenture into 6,675,982 shares of the Company's common
stock at conversion prices ranging from $.1162 to $.2002 per share.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February warrants") to purchase
common stock, each such February warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected holding period of ten years (RBB exercised its right
to convert within one year). This amount has been reflected in the
accompanying consolidated financial statements as interest expense
related to the convertible debenture.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $413,793. This amount was fully amortized to
interest expense in 1997 with a corresponding credit to additional
paid-in capital.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7%
Convertible Debenture (the "October Debenture") due August 30, 2007, to
RBB. Accrued interest under the October Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the October
Debenture until the date of interest payment. The October Debenture may
be prepaid by the Company before maturity, in whole or in part, without
premium or penalty, if the Company gives the holder of the Debenture
notice not less than 30 days before the date fixed for prepayment in
that notice. The October Debenture is convertible, at the option of the
holder, into shares of common stock.
During 1997, RBB exercised its right to convert $120,000 of the
principal amount of the October Debenture into 772,201 shares of the
Company's common stock at a conversion price of $.1554 per share.
During 1998, RBB exercised its right to convert the remaining
$2,880,000 of the principal amount of the October Debenture into
16,805,333 shares of the Company's common stock at conversion prices
ranging from $.13 to $.23 per share.
F-16
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October warrants") to purchase
Common Stock, each such October warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free interest
rate of 6% and an expected holding period of ten years (RBB exercised
its right to convert within one year). This amount has been reflected
in the accompanying consolidated financial statements as a discount on
the convertible debenture, with a corresponding credit to additional
paid-in capital, and was fully amortized to interest expense over the
actual conversion period.
Based on the terms for conversion associated with the October
Debenture, there was intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount was treated as deferred
interest expense and recorded as a reduction of the convertible
debenture liability with a corresponding credit to additional paid-in
capital and was amortized to interest expense over the period from
October 8, 1997 (date of debenture) to February 24, 1998 (date the
debenture is fully convertible). The interest expense relative to this
item was $210,951 for 1998 and $1,139,049 for 1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture is convertible, at
the option of the holder, into shares of common stock.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of one year. This amount has been reflected in
the accompanying consolidated financial statements as interest expense
related to the convertible debenture.
F-17
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $625,000. Since conversion can occur immediately
upon issuance of the debenture, this amount has been recognized as
interest expense.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $ -
Unpaid principal balance of October debenture - 2,880,000
Less unamortized discount 42,081 495,207
---------- ----------
Convertible debenture, net $1,457,919 $2,384,793
========== ==========
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
GENERAL
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE in an amount equal to 5% of net
sales in the United States and 4% of net sales in foreign
countries. The Company has not as yet received any notice of claim
from such parties.
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is
unaware of any such claims or threatened claims since RETICULOSE
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of RETICULOSE. As of the date
hereof, the Company does not have product liability insurance for
RETICULOSE. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
materially adversely affect the Company.
Lack of Patent Protection
The Company does not presently have a patent for RETICULOSE but the
Company has two patents for the use of RETICULOSE as a treatment.
The Company currently has 32 patent applications pending with the
U.S. Patent Office. The Company can give no assurance that other
companies, having greater economic resources, will not be
successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
F-18
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Capital Lease
During 1998 the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments
of $4,529 for 60 months commencing on September 1998 and expiring
on July 2003. Future minimum capital lease payments and the net
present value of the future minimum lease payments at December 31,
1998 are as follows:
Year ending December 31:
1999 $ 54,348
2000 54,348
2001 54,348
2002 54,348
2003 31,703
--------
Total minimum lease payments 249,095
Less amount representing interest (43,380)
--------
Present value of net minimum lease payments 205,715
Current maturities (38,335)
--------
$167,380
========
Operating Leases
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $14,000 annually. The Company has the option to renew
for an additional three years. Management intends to exercise its
option for the year 2000.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective
May 1, 1999. The new lease adds 10,550 square feet (for a total of
16,650 square feet) and extends its term until April 2005.
Annual rent on the original lease is approximately $85,500. Rent
for the additional facilities is approximately $175,000. Total
rental commitment for the laboratory facilities will be $260,500.
The Company leased an auto on October 26, 1996 for 36 months at
$450 per month.
Lease expense for the years ended December 31, 1998, 1997 and 1996
totaled $121,477, $76,351 and $13,315, respectively.
F-19
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Operating Leases
Future minimum lease payments are as follows:
Year ending December 31:
1999 $ 177,000
2000 274,000
2001 260,000
2002 280,000
2003 290,000
Thereafter 580,000
----------
Total $1,861,000
==========
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through April 30, 1999
at an exercise price of $.14 and $.16, respectively. As of December
31, 1998, there are outstanding Plata Options to acquire 683,300
shares at $.14 per share and Additional Plata Options to acquire
108,100 shares at an exercise price of $.16 per share. Through
December 31, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
F-20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS
Argentine Agreement
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug RETICULOSE on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50. The Clinical
Trials did not include a placebo control group or references to any
other antiviral drug.
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, the Written Report was delivered by
Dr. Flichman to the Company. Upon delivery of the Written Report to
the Company, the Company delivered to the principals of DCT options
to acquire 2,000,000 shares of the Company's common stock for a
period of one year from the date of the delivery of the Written
Report, at a purchase price of $.20 per share. Pursuant to several
amendments, the DCT options are exercisable through April 30, 1999
at an exercise price of $.21 per share. As of December 31, 1998,
473,500 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of RETICULOSE for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $665,000, which is accounted for as a research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
F-21
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
RETICULOSE for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,800, respectively. Such expenses are
accounted for as research and development expenses. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts respectively
expended in connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and RETICULOSE with those taking
a three drug cocktail and a placebo. As of December 31, 1998, the
Company has advanced approximately $50,000 for such study, which
has been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
RETICULOSE for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$75,000, which has been accounted for as research and development
expenses.
F-22
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of December 31, 1998, the Company has
expended approximately $385,000 to cover the costs of the Barbados
Study. In December 1996, the Company received from the coordinators
of the Barbados Study, a written summary of results of the Barbados
Study (the "Written Summary").
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of December 31, 1998, the Company has advanced
approximately $5,000 for such study, which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which RETICULOSE affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one year term
through March 3, 1999 to investigate the anti-tumor activity of
RETICULOSE using kidney tumor model systems. In addition, NCI will
study the effects of RETICULOSE on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
RETICULOSE.
F-23
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases and now president of AVRC, whereby
Dr. Hirschman was to provide consulting services to the Company
through May 1997. The consulting services included the development
and location of pharmacological and biotechnology companies and
assisting the Company in seeking joint ventures with and financing
of companies in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of December 31, 1998, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 1999 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 1999 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 1999 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of December 31, 1998, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
F-24
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27 and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
does not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement, which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
F-25
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through April 30, 1999), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.15 per
share) (the "September 1992 Cohen Options"). As of December 31,
1998, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). The Company has been informed that
Messrs. Cohen, Bauer and Rizzuto are principals of a firm, which
has been granted certain distribution rights, which were terminated
on May 31, 1995. Through December 31, 1997, 2,855,000 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
of his shares and all shares underlying his options. Pursuant to
several amendments, the remaining Bauer options are exercisable
through April 30, 1999 at an option price of $.13. The Company
agreed to issue to Cohen an additional 300,000 shares in 1995 at a
time when the shares were valued at $.14 per share, in
consideration for expenditures incurred by Mr. Cohen in connection
with securing for the benefit of the Company and the affiliated
distributor, the continued services of a doctor.
F-26
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
Shares have been accounted for as an administrative expense in the
amount of the Company's valuation of such shares as of the issuance
date. During the year ended December 31, 1996, Mr. Cohen was issued
300,000 shares for services rendered. These shares were accounted
for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date.
Chinnici Agreement
In July 1998, the Company entered into a consulting agreement with
Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
Such agreement calls for Dr. Chinnici to provide assistance in
connection with research, development, production, marketing and
sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
the FDA in connection with an application for approval of
RETICULOSE and will provide detailed clinical reports regarding
patients observed by him. Dr. Chinnici will receive options to
purchase 300,000 shares at an exercise price of $.30 per share. The
options will be exercisable in equal installments on January 1,
1999 and 2000 and December 15, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. No sales have been made by the
Company under the distribution agreements other than for testing
purposes.
Additionally, pursuant to one of the distributions agreements, the
Company granted the distributor the right to acquire 3,000,000 shares
of the Company's common stock at a purchase price of $.25 (which has
been increased to $.26) upon the completion of certain tests and the
publication of a paper with respect to such tests. During May 1998,
300,000 shares of common stock were issued pursuant to exercise of
these options for an aggregate exercise price of $78,000.
F-27
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. STOCKHOLDERS' EQUITY
During 1997, the Company issued 10,931,516 shares of common stock for
an aggregate consideration of $1,412,166. These amounts were comprised
of the issuance of common stock pursuant to the exercise of stock
options of 3,333,333 shares for $247,666 and the issuance of common
stock in exchange for consulting services of 150,000 shares for
consideration of $44,500 and the issuance of common stock upon
conversion of debt of 7,448,183 shares for $1,120,000.
During 1998, the Company issued 18,460,333 shares of common stock for
an aggregate consideration of $3,158,400. The amounts were comprised of
the issuance of common stock pursuant to the exercise of stock options
of 1,555,000 shares for $257,400 and the issuance of common stock in
exchange for consulting services of 100,000 shares for consideration of
$21,000 and the issuance of common stock upon commission of debt of
16,805,333 shares for $2,880,000.
NOTE 11. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.
As of December 31, 1998 and 1997, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $9,700,000 and $6,300,000, which expire in varying
amounts to 2018.
The Company presently has one significant temporary difference between
financial reporting and income tax reporting relating to interest
expense on the beneficial conversion feature of the convertible debt.
The components of the deferred tax asset as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit of net operating loss carryforwards $3,300,000 $2,100,000
Less valuation allowance 3,300,000 2,100,000
--------- ---------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
As of December 31, 1998, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $3,300,000 has been established.
F-28
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 1998. Since the reported
fair values of financial instruments are based upon a variety of
factors, they may not represent actual values that could have been
realized as December 31, 1998 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, U.S. government obligations, accounts payable and the
convertible debentures. Fair values were assumed to approximate
carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values
or they are receivable or payable on demand.
The fair value of non-current investments, primarily U.S. government
obligations, has been estimated using quoted market prices. At December
31, 1998, the differences between the estimated fair value and the
carrying value of non-current and current debt instruments were
considered immaterial in relation to the Company's financial position.
NOTE 13. DEFERRED COMPENSATION COST
As more fully described in Note 9 to these consolidated financial
statements, the Company granted stock options in exchange for testing
and consulting services. In accordance with SFAS 123, Accounting for
Stock-Based Compensation (effective for options granted after December
15, 1995), the Company recognized compensation cost based on the fair
value at the grant dates. The compensation cost is amortized over the
life of the option period. The fair value of the stock options used to
compute deferred compensation cost is the estimated present value at
grant date using the Black-Sholes option pricing model with the
following assumptions: Expected volatility of 20%; a risk-free interest
rate of 6% and an expected holding period ranging from 1-3 years. The
deferred compensation cost is reported as a component of stockholders'
equity. At December 31, 1998 and 1997, there were approximately
5,500,000 and 7,000,000 option shares outstanding with a weighted
average exercise price of $0.195 per share.
NOTE 14. RESTATEMENT
The accompanying financial statements for 1998 have been restated to
record as interest expense, the amortization of the beneficial
conversion feature associated with the November Debenture (Note 8)
based on the date the debenture first became convertible. The effect of
the restatement was to increase net loss for year ended December 31,
1998 by $572,917 ($.00 per share). The net effect of the restatement
represents a non-cash interest charge to operations.
F-29
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. RESTATEMENT (Continued)
Additionally, $950,000 of expenses related to facilities and laboratory
technician costs associated with the New York facility was reclassified
from general and administrative to research and development expense.
This reclassification had no effect upon net loss for 1998.
The accompanying financial statements for 1998 and 1997 have been
restated to reclassify $229,978 and $111,957 of amortization of debt
issue costs from depreciation and amortization to interest expense.
This reclassification had no effect upon net loss for 1998 and 1997.
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
As
Previously As
Reported Restatement Restated
-------- ----------- --------
<S> <C> <C> <C>
Convertible Debenture, net $ 885,002 $ 572,917 $ 1,457,919
============ ========= ============
Deficit accumulated during the development
stage $(12,978,059) $(572,917) $(13,550,976)
============ ========= ===========
Research and development $ 709,456 $ 950,000 $ 1,659,456
============ ========= ============
General and administrative $ 2,370,427 $(950,000) $ 1,420,427
============ ========= ============
Depreciation and Amortization $ 340,098 $(229,978) $ 110,120
============ ========= ============
Interest expense $ 667,804 $ 572,917 $ 1,470,699
============ ========= ============
Net loss $ (3,984,793) $(572,917) $ (4,557,710)
============ ========= ============
Net loss per share of common stock - basic
and diluted ($.01) ($.01) ($.02)
December 31, 1997
-----------------
Interest expense $1,626,368 $ 111,957 $1,738,325
========== ========= ==========
Depreciation and amortization $ 138,245 $(111,957) $ 26,288
========== ========= ==========
</TABLE>
F-30
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
September 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,308,378 $ 924,420
Investments - 821,047
Inventory 19,729 19,729
Other current assets 35,839 29,818
------------ ------------
Total current assets 1,363,946 1,795,014
Property and Equipment 1,093,548 1,049,593
Other Assets 563,276 460,346
------------ ------------
Total assets $ 3,020,770 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $ 582,321 $ 279,024
Current portion of capital lease obligation 40,849 38,335
------------ ------------
Total current liabilities 623,170 317,359
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 3,442,273 1,457,919
Capital lease obligation - long-term portion 136,422 167,380
------------ ------------
Total long-term liabilities 3,578,695 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement - 600,000
------------ ------------
Commitments and Contingencies - -
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 303,292,035 and 296,422,907
shares issued and outstanding 3,032 2,964
Additional paid-in capital 16,920,763 14,325,076
Deficit accumulated during the development stage (17,649,843) (13,550,976)
Discount on warrants (455,047) -
Deferred compensation cost - (14,769)
------------ ------------
Total stockholders' equity (deficit) (1,181,095) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 3,020,770 $ 3,304,953
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-31
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Three Months Ended Nine Months Ended (February 20,
September 30, September 30, 1984) to
------------- ------------- September 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,928 $ 656 $ 6,517 $ 656 $ 201,493
Interest 6,461 22,310 27,951 79,533 587,247
Other income - - - 100 120,093
------------ ----------- ----------- ----------- -----------
8,389 22,966 34,468 80,289 908,833
------------ ----------- ----------- ----------- -----------
Costs and Expenses:
Research and development 426,552 499,045 1,192,190 1,234,915 4,777,399
General and administrative 605,917 364,554 1,544,592 1,087,707 8,858,186
Depreciation 53,152 28,437 149,208 64,777 464,556
Interest 935,803 - 1,247,345 811,714 4,458,535
------------ ----------- ----------- ----------- -----------
2,021,424 892,036 4,133,335 3,199,113 18,558,676
------------ ----------- ----------- ----------- -----------
Net Loss $ (2,013,035) $ (869,070) $ (4,098,867) $ (3,118,824) $(17,649,843)
============ =========== ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $(0.01) $(0.00) $(0.01) $(0.01)
====== ====== ====== ======
Weighted Average Number of
Common Shares Outstanding 300,598,827 290,194,958 300,598,827 290,194,958
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-32
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
----------- ------ -------- --------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ------ -------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ------ -------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- ------ -------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ------ -------- --------
</TABLE>
See notes to consolidated condensed financial statements.
F-33
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, period ended December 31, 1987 - - - (258,663)
----------- ------ --------- ----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ------ --------- ----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ------ --------- ----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 -
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 -
Issuance of common stock, exercise of "C" warrants .08 12,900 - 1,032 -
Net loss, year ended December 31, 1990 - - - (267,867)
----------- ------ --------- ----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------ --------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
F-34
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
----------- ------ ---------- ----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
----------- ------ ---------- ----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
----------- ------ ---------- ----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
F-35
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ - (2,854,076) $ -
Issuance of common stock, for consulting services $.05 4,750,000 47 237,453 - - -
Issuance of common stock, exercise of options .08 400,000 4 31,996 - - -
Issuance of common stock, exercise of options .10 190,000 2 18,998 - - -
Net loss, year ended December 31, 1994 - - - - (440,837) -
----------- ----- ---------- -- --------- --
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock, for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
----------- ----- ---------- -- --------- --
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
----------- ----- ---------- -- --------- --
</TABLE>
See notes to consolidated condensed financial statements.
F-36
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 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-37
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 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-38
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $(19,000) $(8,993,266) $(73,837)
Issuance of common stock, exercise of options .12 295,000 3 35,397 - - -
Issuance of common stock, exercise of options .14 500,000 5 69,995 - - -
Issuance of common stock, exercise of options .16 450,000 5 71,995 - - -
Issuance of common stock, exercise of options .20 10,000 - 2,000 - - -
Issuance of common stock, exercise of options .26 300,000 3 77,997 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 - - -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Issuance of common stock, for services rendered .21 100,000 1 20,999 - - -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998 - - - - (4,557,710) -
----------- ------ ----------- ------ ----------- -------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 - (13,550,976) (14,769)
----------- ------ ----------- ------ ----------- -------
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ------ ------ ------- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $14,325,076 $(13,550,976) $(14,769) $ -
Issuance of common stock, securities purchase .16 4,917,276 49 802,451 - - -
agreement
Issuance of common stock, securities purchase .27 1,851,852 18 499,982 - - -
agreement
Issuance of common stock, for services rendered .22 100,000 1 21,999 - - -
Beneficial conversion feature, August debenture - - 687,500 - - -
Warrant costs, securities purchase agreement - - 494,138 - - (494,138)
Warrant costs, securities purchase agreement - - 37,025 - - (37,025)
Warrant costs, August debenture - - 52,592 - - -
Amortization of warrant costs, securities purchase
agreement - - - - - 76,116
Amortization of deferred compensation cost - - - - 14,769 -
Net loss, nine months ended September 30, 1999 - - - (4,098,867) - -
------------ ------- ----------- ------------ -------- ---------
Balance, September 30, 1999 303,292,035 $ 3,032 $16,920,763 $(17,649,843) $ - $(455,047)
============ ======= =========== ============ ======== =========
</TABLE>
See notes to consolidated condensed financial statements.
F-40
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Inception
September 30, (February 20,
------------- 1984) to
September 30,
1999 1998 1999
---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,098,867) $(3,118,824) $(17,649,843)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 149,208 64,777 464,556
Amortization of debt issue costs 128,750 221,227 470,685
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 687,500 210,951 3,076,218
Amortization of discount on warrants 113,062 284,256 403,359
Amortization of deferred compensation cost 14,769 44,301 760,500
Issuance of common stock for services 22,000 21,000 1,459,500
Other - - (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (6,021) (3,597) (35,839)
Increase in inventory - - (19,729)
Increase in other assets (231,680) (106,658) (1,008,422)
Increase (decrease) in accounts payable and
accrued liabilities 303,297 (109,159) 558,521
----------- ----------- ------------
Total adjustments 1,180,885 627,098 6,127,742
----------- ----------- ------------
Net cash used by operating activities (2,917,982) (2,491,726) (11,522,101)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments - (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,890,902 6,292,979
Expenditures for property and equipment (193,163) (313,594) (1,336,763)
Proceeds from sale of property and equipment - - 1,200
----------- ----------- ------------
Net cash provided (used) by investing activities 627,884 2,483,308 (1,335,563)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 - 7,500,000
Proceeds from sale of securities, net of issuance costs 702,500 257,400 6,681,088
Payments under capital lease (28,444) - (45,046)
----------- ----------- ------------
Net cash provided by financing activities 2,674,056 257,400 14,136,042
----------- ----------- ------------
Net Increase in Cash and Cash Equivalents 383,958 248,982 1,278,378
Cash and Cash Equivalents, Beginning 924,420 236,059 -
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 1,308,378 $ 485,041 $ 1,278,378
=========== =========== ============
</TABLE>
See notes to consolidated condensed financial statements.
F-41
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at September 30, 1999 have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of September 30, 1999
and results of operations for the three months and the nine months
ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. Certain amounts in the
1998 financial statements have been reclassified to conform to 1999
presentation. All such adjustments are of a normal recurring
nature. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full
year. The statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at September 30, 1999 have been prepared in conformity
with generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company is dependent upon registration of Reticulose for sale
before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA.
Unless and until Reticulose is approved for sale in the United
States or another industrially developed country, the Company may
be dependent upon the continued sale of its securities and debt
financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt
to mitigate the effects of its cash position; however, no assurance
can be given that equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
1999 and 1998, the Company obtained equity and debt financing and
may seek additional financing as the need arises. No assurance can
be given that the Company will be able to sustain its operations
until FDA approval is granted or that any approval will ever be
granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to
submit an application for approval with the FDA in the near future.
The consolidated condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of Reticulose. The Company has not as yet
received any notice of claim from such parties.
F-42
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of Reticulose. Although the Company is
unaware of any such claims or threatened claims since Reticulose
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of Reticulose. As of the date
hereof, the Company does not have product liability insurance for
Reticulose. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
have a material adverse effect on the Company.
Lack of Patent Protection
The Company has three patents for the use of Reticulose as a
treatment. The Company currently has 34 patent applications pending
with the U.S. Patent Office. The Company can give no assurance that
other companies, having greater economic resources, will not be
successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Reticulose incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through December 31,
1999 at an exercise price of $.15 and $.17, respectively. As of
September 30, 1999, there are outstanding Plata Options to acquire
683,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through September 30, 1999, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
F-43
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug Reticulose on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50.
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, Dr. Flichman delivered the Written
Report to the Company. Upon delivery of the Written Report to the
Company, the Company delivered to the principals of DCT options to
acquire 2,000,000 shares of the Company's common stock for a period
of one year from the date of the delivery of the Written Report, at
a purchase price of $.20 per share. Pursuant to several amendments,
the DCT options are exercisable through December 31, 1999 at an
exercise price of $.21 per share. As of September 30, 1999, 473,500
shares of common stock were issued pursuant to the exercise of
these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Reticulose in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Reticulose for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company advanced
approximately $665,000, which is accounted for as research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
F-44
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Reticulose being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
Reticulose for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,000, respectively. Such expenses are
accounted for as research and development expense. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with Reticulose being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and Reticulose with those taking
a three drug cocktail and a placebo. As of September 30, 1999, the
Company has advanced approximately $50,000 for such study, which
has been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Reticulose for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$85,000, which has been accounted for as research and development
expense.
F-45
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Reticulose in inhibiting the mutation of
the AIDS virus. As of September 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
As of September 30, 1999, the Company advanced $97,750 for expenses
in connection with the drug approval process in Argentina.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Reticulose in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of September 30, 1999, the Company has
expended approximately $390,000 to cover the costs of the Barbados
Study.
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of Reticulose in inhibiting the mutation of
the AIDS virus. As of September 30, 1999, the Company has advanced
approximately $20,000 for such study, which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which Reticulose affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one-year term
through March 3, 1999 to investigate the anti-tumor activity of
Reticulose using kidney tumor model systems. In addition, NCI was
to study the effects of Reticulose on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
Reticulose.
F-46
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of September 30, 1999, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 2009 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 2009 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 2009 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of September 30, 1999, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
F-47
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27, and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
does not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement, which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992
F-48
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Cohen Agreements (Continued)
Cohen Agreement and the remaining 500,000 shares of which were
issuable upon Mr. Cohen completing 50 hours of consulting service
to the Company. The Company issued the first 500,000 shares to Mr.
Cohen in October 1992 and the remaining 500,000 shares to Mr. Cohen
in February 1993. Further pursuant to the September 1992 Cohen
Agreement, the Company granted to Mr. Cohen the option to acquire,
at any time and from time to time through September 10, 1993 (which
date has been extended through December 31, 1999), the option to
acquire 3,000,000 shares of common stock of the Company at an
exercise price of $.09 per share (which exercise price has been
increased to $.16 per share) (the "September 1992 Cohen Options").
As of September 30, 1999, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). Through September 30, 1999, 2,855,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through December 31, 1999 at an option
price of $.14.
Globomax Agreement
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to AVRC's Ind submission and to perform
all work that is necessary to obtain FDA's approval. The contract
expires on December 31, 1999 but may be extended by mutual written
agreement of both parties. The Company has incurred approximately
$175,000 in services to Globomax through September 30, 1999.
F-49
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Galantar Agreement
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Reticulose in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Reticulose to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Reticulose
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
Other
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipated
that the total expenses associated with the build-out will be
approximately $400,000, of which none has been incurred as of September
30, 1999.
F-50
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS
Convertible Debentures
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000,
respectively, principal amount of its ten-year 7% Convertible
Debentures (the "February Debenture" and the "October Debenture",
collectively, the "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date
of interest payment. The Debentures were convertible, at the option
of the holder, into shares of Common Stock pursuant to specified
formulas. On April 22, 1997, June 6, 1997, July 3, 1997 and August
20, 1997, pursuant to notice by the holder, RBB, to the Company
under the February Debenture, $330,000, $134,000, $270,000 and
$266,000, respectively, of the principal amount of the February
Debenture was converted into 1,648,352, 894,526, 2,323,580 and
1,809,524 shares of the Common Stock, respectively. As of August
20, 1997, the February Debenture was fully converted. On December
9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5,
1998, the October Debenture was fully converted.
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants are $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants was
estimated to be $37,000 ($.021 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes
Pricing Model. This amount has been reflected in the accompanying
financial statements as interest expense related to the convertible
February Debenture. Based on the terms for conversion associated
with the February Debenture, there was an intrinsic value
associated with the beneficial conversion feature of $413,793. This
amount has been fully amortized to interest expense with a
corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the Company issued to
RBB three warrants (the "October Warrants") to purchase Common Stock, each such
October Warrant entitling the holder to purchase, from the date of grant through
August 30, 2007, 600,000 shares of the Common Stock. The exercise price of the
three October Warrants are $0.20, $0.23 and $0.27 per warrant share,
respectively. The fair value of the three October Warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472 ($.146 per
warrant), respectively, based upon a financial analysis of the terms of the
warrants
F-51
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
using the Black-Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as a discount on
the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the
expected term of the notes which at December 31, 1997 was 120
months. In May 1998, the remaining unamortized discount of $276,957
was amortized upon full conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $1,350,000. This amount has been
treated as deferred interest expense and recorded as a reduction of
the convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest
expense over the period from October 8, 1997 (date of debenture) to
February 24, 1998 (date the debenture is fully convertible). The
interest expense relative to this item was $210,951 for 1998 and
$1,139,049 for 1997.
In November 1998, in order to finance further research and
development, the Company sold 1,500,000 principal amount of its ten
year 7% Convertible Debenture (the "November Debenture") due
October 31, 2008, to RBB. Accrued interest under the November
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from the date of the issuance
of the November Debenture until the date of interest payment. The
November Debenture may be prepaid by the Company before maturity,
in whole or in part, without premium or penalty, if the Company
gives the holder of the Debenture notice not less than 30 days
before the date fixed for prepayment in that notice. The November
Debenture is convertible, at the option of the holder, into shares
of common stock.
In connection with the issuance of the November Debenture, the
Company issued to RBB two warrants (the "November Warrants") to
purchase Common Stock, each such November Warrant entitling the
holder to purchase 375,000 shares of the Common Stock at any time
and from time to time through October 31, 2008. The exercise price
of the two November Warrants are $.20 and $.24 per warrant share,
respectively. The fair value of the November warrants was estimated
to be $48,000 ($.064 per warrant) based upon a financial analysis
of the terms of the warrants using the Black-Sholes Pricing Model
with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one
year. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $625,000. This amount has been
recorded as interest expense in 1998.
F-52
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In August 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture (the "August Debenture") due August 3, 2009 to Focus
Investors LLC ("Focus"). Accrued interest under the August
Debenture is payable semi-annually, computed at the rate of 7% on
the unpaid principal balance from the date of issuance until the
date of the interest payment. No payment of the principal of the
August Debenture may be made prior to the maturity date without the
consent of the holder. The August Debenture is convertible, at the
option of the holder into shares of common stock.
In connection with the issuance of the August Debenture, the
Company issued to Focus one warrant (the "August Warrant") to
purchase Common Stock, such August Warrant entitling the holder to
purchase 1,000,000 shares of the Common Stock at any time and from
time to time through August 3, 2004. The exercise price of the
August Warrant is $.2461 per warrant share. The fair value of the
August Warrant was estimated to be $52,593 ($.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate
of 5.75% and an expected holding period of five years. This amount
is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $687,500. This amount has been
recorded as interest expense in the three months ended September
30, 1999.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Unpaid principal balance of August debenture 2,000,000 -
Less unamortized discount 57,727 42,081
---------- ----------
Convertible debenture, net $3,442,273 $1,457,919
========== ==========
</TABLE>
F-53
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an
aggregate purchase price of $802,500. Such agreement also provided
for the issuance of four warrants to purchase a total of 2,366,788
shares of common stock at prices ranging from $.204 to $.2448 per
share at any time until December 31, 2003. The fair value of these
warrants was estimated to be $494,138 ($.209 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to
interest expense in the accompanying consolidated financial
statements.
Under the terms of certain of the aforementioned securities
purchase agreements, the Company is required to file with the SEC a
registration statement(s) to register shares of the common stock
issuable upon conversion or exercise of the securities sold
pursuant to such agreements to allow the investors to resell such
common stock to the public. Because a registration statement was
not declared effective by the SEC on or before a certain date, we
may be obligated to pay additional financing costs based on the
date the registration statement covering such securities is
declared effective. Included in interest expense for the nine
month period ended September 30, 1999 is $168,000 which may be
payable by the Company as additional financing costs related to the
effective date of a registration statement covering the resale of
these securities. Additional amounts, up to a maximum of $200,000
may be accrued based on the effective date of the registration
statement.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provides for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($.04 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five
years. This amount is being amortized to interest expense.
NOTE 4. RESTATEMENT
The accompanying financial statements for the three and nine months
ended September 30, 1999 have been restated to reclassify $76,250 and
$128,750, respectively, of amortization of debt issue costs from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
For the nine months ended September 30, 1998, the financial statements
have been restated to reclassify $221,227 of amortization of debt issue
costs and $7,299 of amortization of discount on warrants from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the nine months
ended September 30, 1998.
The financial statements for the three and nine months ended September
30, 1999 have been restated to reclassify $78,000 and $198,000,
respectively, from general and administrative to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
F-54
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. RESTATEMENT (Continued)
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
As
Previously As
Reported Restatement Restated
-------- ----------- --------
Three Months Ended September 30, 1999
-------------------------------------
<S> <C> <C> <C>
General and administrative $ 683,917 $ (78,000) $ 605,917
=========== ========= ==========
Depreciation and amortization $ 129,402 $ (76,250) $ 53,152
=========== ========= ==========
Interest expense $ 781,553 $ 154,250 $ 935,803
=========== ========= ==========
Nine Months Ended September 30, 1999
------------------------------------
General and administrative $ 1,742,592 $(198,000) $1,544,592
= ========= ========= ==========
Depreciation and amortization $ 277,958 $(128,750) $ 149,208
=========== ========= ==========
Interest expense $ 920,595 $ 326,750 $1,247,345
=========== ========= ==========
Nine Months Ended September 30, 1998
------------------------------------
Depreciation and amortization $ 293,303 $(228,526) $ 64,777
=========== ========= ==========
Interest expense $ 583,188 $ 228,526 $ 811,714
=========== = ======= ==========
</TABLE>
F-55
<PAGE>
================================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
Up to 33,104,737 Shares
of
Common Stock
_________, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by Advanced Viral. All amounts shown are estimates, except the Commission
registration fee:
Commission registration fee.....................................$ 1,671
Printing and mailing expenses...................................$ 7,500
Legal fees and expenses.........................................$12,500
Accounting fees and expenses....................................$ 5,000
-------
TOTAL..................................................$26,671
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,
II-1
<PAGE>
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection
with such action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
II-2
<PAGE>
this section. Such determination shall be made , with respect to a
person who is a director or officer at the time of such determination,
(1) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such
directors, even though less than a quorum, or (3) if there are no such
directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
II-3
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth our sales of unregistered securities for
past three years. All transactions listed below involved the issuance of common
stock and options to acquire shares of common stock prior to commencement of the
offering described in the foregoing prospectus. No underwriters were employed
with respect to the sale of any of the securities listed below. All shares were
issued in reliance upon Section 4(2) and/or 3(b) of the Securities Act.
<TABLE>
<CAPTION>
SECURITIES ISSUED PURCHASER DATE ACQUIRED CONSIDERATION
- ----------------- --------- ------------- -------------
5,000,000 options exercisable at Shalom Z. Hirschman, M.D. 4-1-96 Services (Consulting) (1)
each of $0.18, $0.19, $0.27 and
$0.36 per share
500,000 options exercisable at $0.18 Deborah Silver 4-1-96 Services (Consulting) (1)
per share
1,000,000 options exercisable at Freddie Velez 4-1-96 Services (Consulting) (1)
$0.20 per share
500,000 options at $0.20 per share Gary Hussian 4-1-96 Services (Consulting) (1)
500,000 options at $0.20 per share Cesar Blumtritt, M.D. 4-1-96 Services (Consulting) (1)
50,000 shares Malcolm Santer 9-4-96 Services (Consulting) (2)
50,000 shares Malcolm Santer 2-26-97 Services (Consulting) (2)
750,000 shares David Sass 3-21-97 .08 per share
375,000 shares Norman Schwartz 3-21-97 .08 per share
375,000 shares Mel Mendelson 3-21-97 .08 per share
1,833,333 shares Matthew Cohen 3-21-97 .08 per share
1,648,352 shares RBB Bank 4-22-97 .20 per share (3)
894,526 shares RBB Bank 6-6-97 .15 per share (3)
2,323,580 shares RBB Bank 7-3-97 .12 per share (3)
1,809,524 shares RBB Bank 8-20-97 .15 per share (3)
100,000 shares Malcolm Santer 9-8-97 Services (Consulting) (4)
722,701 shares RBB Bank 12-9-97 .16 per share (5)
1,017,011 shares RBB Bank 1-7-98 .13 per share (5)
2,512,887 shares RBB Bank 1-14-98 .14 per share (5)
23,000,000 options at $0.27 per share Shalom Z. Hirschman, M.D. 2-18-98 (6)
5,114,218 shares RBB Bank 2-23-98 .15 per share (5)
190,000 shares Plata 3-5-98 .12 per share
II-4
<PAGE>
1,498,884 shares RBB Bank 3-19-98 .22 per share (5)
105,000 shares Plata 3-27-98 .12 per share
1,870,869 shares RBB Bank 3-31-98 .23 per share (5)
10,000 shares Freddie Velez 4-3-98 .20 per share
200,000 shares Charles Miller 4-3-98 .14 per share
1,491,485 shares RBB Bank 5-4-98 .18 per share (5)
3,299,979 shares RBB Bank 5-5-98 .19 per share (5)
50,000 shares Charles Miller 5-13-98 .16 per share
200,000 shares Duffy 5-13-98 .14 per share
100,000 shares Charles Miller 5-13-98 .14 per share
100,000 shares Charles Miller 5-18-98 .16 per share
200,000 shares Commonwealth 5-18-98 .26 per share
100,000 shares Commonwealth 5-22-98 .26 per share
100,000 shares Charles Miller 6-22-98 .16 per share
85,000 shares Charles Miller 7-15-98 .16 per share
15,000 shares Charles Miller 7-17-98 .16 per share
25,000 shares Charles Miller 7-22-98 .16 per share
75,000 shares Charles Miller 7-24-98 .16 per share
100,000 shares Malcolm Santer 8-12-98 Services (Consulting)(7)
7% Convertible Debenture RBB Bank 11-16-98 $1,500,000
375,000 warrants RBB Bank 11-16-98 .20 per share
375,000 warrants RBB Bank 11-16-98 .24 per share
2,450,980 shares Harborview Group, Inc. 12/22/98 .16 per share
1,380,392 warrants Harborview Group, Inc. 12/22/98 .2440 and .2448 per share
122,549 Jennifer Brandenburg Smith 12/22/98 .16 per share
49,020 warrants Jennifer Brandenburg Smith 12/22/98 .2440 and .2448 per share
122,549 Jo Sherrin Smith 12/22/98 .16 per share
49,020 warrants Jo Sherrin Smith 12/22/98 ..2440 and .2448 per share
612,745 Joe Feshbach 12/22/98 .16 per share
245,098 warrants Joe Feshbach 12/22/98 .2440 and .2448 per share
382,965 John Zimmerman 12/22/98 .16 per share
153,186 warrants John Zimmerman 12/22/98 .2440 and .2448 per share
61,274 Matt Zimmerman 12/22/98 .16 per share
24,508 warrants Matt Zimmerman 12/22/98 .2440 and .2448 per share
306,372 Myron Weiner 12/22/98 .16 per share
122,508 warrants Myron Weiner 12/22/98 .2440 and .2448 per share
122,549 Robert Franklin Smith, Sr. 12/22/98 .16 per share
II-5
<PAGE>
49,020 warrants Robert Franklin Smith, Sr. 12/22/98 .2440 and .2448 per share
306,372 Russell Kuhn 12/22/98 .16 per share
122,508 warrants Russell Kuhn 12/22/98 .2440 and .2448 per share
122,549 Shelly Marion Smith 12/22/98 .16 per share
49,020 warrants Shelly Marion Smith 12/22/98 .2440 and .2448 per share
306,372 Victor Sherman 12/22/98 .16 per share
122,508 warrants Victor Sherman 12/22/98 .2440 and .2448 per share
370,370 shares Kwong Wai Au 6-30-99 .27 per share
277,778 warrants Kwong Wai Au 6-30-99 .324 and .378 per share
925,926 shares Michael Berman 6-30-99 .27 per share
463,564 warrants Michael Berman 6-30-99 .324 and .378 per share
555,556 shares Pak-Lin Law 6-30-99 .27 per share
185,186 warrants Pak-Lin Law 6-30-99 .324 and .378 per share
7% Convertible Debentures Focus Investors LLC 8-3-99 $2,000,000 (aggregate)
1,000,000 warrants Focus Investors LLC 8-3-99 .2461 per share
100,000 Malcolm Santer 9-14-99 Services (Consulting) (8)
4,547,880 shares Alan Gallantar 10-1-99 .24255 per share (9)
7% Convertible Debentures Endeavour Capital Fund S.A. 12-28-99 $1,000,000 (first tranche)
110,000 warrants Endeavour Capital Fund S.A. 12-28-99 .19916667 per share
- ----------
(1) The 1,700,000 shares issued for consulting services on 5-24-95 and 6-23-95
have been valued at $0.11 per share.
(2) The 50,000 shares issued for consulting services on 9-4-96 and 2-26-97 have
been valued at $0.50 per share and $0.41 per share, respectively.
(3) The conversions were made pursuant to the February 21, 1997 issuance of
convertible debentures.
(4) The 100,000 shares issued for consulting services on 9-8-97 have been
valued at $0.24 per share.
(5) The conversions were made pursuant to the October 1997 issuance of
convertible debentures.
(6) Granted pursuant to the Hirshman employment agreement.
(7) The 100,000 shares issued for consulting services on 8-12-98 have been
valued at $0.21 per share.
(8) The 100,000 shares issued for consulting services on 9-14-99 have been
valued at $0.23 per share.
(9) Granted pursuant to the Gallantar employment agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
II-6
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of Advanced Viral Research Corp.(2)
3.2 Bylaws of Advanced Viral Research Corp., as amended(1)
3.3 Amendment to Articles of Incorporation of Advanced Viral Research
Corp.(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between Advanced Viral and American Stock Transfer
and Trust Company(1)
4.4 Forms of Common Stock Options and Agreements granted by Advanced Viral
to TRM Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by Advanced Viral to
Plata Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common
Stock granted by Advanced Viral to Leonard Cohen(6)
4.7 Addendum to Agreement granted by Advanced Viral to Shalom Z. Hirschman,
M.D. dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between
Advanced Viral and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between
Advanced Viral and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of Advanced Viral at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of Advanced Viral at $0.2448 per share. (15)
II-7
<PAGE>
Exhibit
Number Description
- ------ -----------
4.15 Securities Purchase Agreement dated June 23, 1999 by and between
Advanced Viral and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock
of Advanced Viral at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock
of Advanced Viral at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between
Advanced Viral and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated December 28, 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
Advanced Viral and Endeavour Capital Fund S.A. *
4.22 Form of 7% Convertible Debenture dated December 28, 1999. *
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common
stock at $0.19916667 per share. *
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel &
Mandler, P.A. *
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor
of Advanced Viral dated November 16, 1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique
Medical Actuel and Advanced Viral(3)
10.3 Letter, dated March 15, 1991 to Advanced Viral from Health Protection
Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and
Advanced Viral(11)(a)
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and
Advanced Viral(4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell
Inc. and Advanced Viral(7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and
Advanced Viral(8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between
Lionel Resnick, M.D. and Advanced Viral(11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and
Advanced Viral(12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between
C.U.R.E. Pharmaceutical Corp. and Advanced Viral(11)(c)
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between
C.U.R.E. Pharmaceutica Central Americas Ltd. and Advanced Viral(11)(d
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT
S.R.L. and Advanced Viral, as amended(11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and Advanced Viral(11)(f)
10.14 Agreement dated May 24, 1995 between Advanced Viral and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between Advanced Viral and Shalom Z.
Hirschman, M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between
AVIX International Pharmaceutical Corp. and Advanced Viral(12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995
with Commonwealth Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December
28, 1995, between AVIX International Pharmaceutical Corp., Beijing
Unistone Pharmaceutical Co., Ltd. and Advanced Viral(11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and Advanced Viral(11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and Advanced
Viral(11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between
Advanced Viral and Shalom Z. Hirschman, M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International
Pharmaceutical Corp. and Advanced Viral(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between Advanced Viral
and Shalom Z. Hirschman, M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and
Advanced Viral(12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between
Advanced Viral and Interfi Capital Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development
Agreement, dated March 13, 1997, between National Institute of Health,
Food and Drug Administration and the Centers for Disease Control and
Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between
Advanced Viral and RBB Bank AG. (11)(m)
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research
and Development Agreement, dated March 4, 1998, between National
Institute of Health, Food and Drug Administration and the Centers for
Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between
Advanced Viral and Shalom Z. Hirschman, M.D.(11)(n)
10.30 Agreement between Advanced Viral and Angelo Chinnici, M.D. dated July
1, 1999. (14)
10.31 Consulting Agreement between Advanced Viral and GloboMax LLC dated
January 18, 1999. (14)
10.32 Registration Rights Agreement dated August 3, 1999 between Advanced
Viral and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between Advanced Viral and
Alan V. Gallantar (15)
10.34 Registration Rights Agreement dated December 28, 1999 between Advanced
Viral and Endeavour Capital Fund S.A.*
21.1 Subsidiaries of Registrant: Advance Viral Research Limited, a Bahamian
corporation, and Peptigen Biopharmaceuticals, Inc., a Delaware
corporation.*
23.1 Consent of Rachlin Cohen & Holtz, LLP, Independent Certified Public
Accountants *
23.2 Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A.
(See Exhibit 5.1).
27.1 Financial Data Schedule of Advanced Viral as of and for the Nine Months
ended September 30, 1999.*
- ----------
* Filed herewith.
1. Documents incorporated by reference herein to certain exhibits our
registration statement on Form S-1, as amended, File No. 33-33895, filed
with the Securities and Exchange Commission on March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-18, File No. 33-2262-A, filed with the
Securities and Exchange Commission on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
report on Form 10-QSB for the period ended March 31, 1996.
II-10
<PAGE>
11. Incorporated by reference herein to our Reports on Form 8-K and Exhibits
thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
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 our
registration statement on Form S-1, as amended, File No. 33-70523, filed
with the Securities and Exchange Commission on January 13, 1999.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
II-11
<PAGE>
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-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Advanced Viral 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 January 12, 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.
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Shalom Z. Hirschman, M.D President and Chief January 12, 2000
- ---------------------------- Executive Officer and director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board and January 12, 2000
- ---------------------------- director
Bernard Friedland
/s/ Alan Gallantar Chief Financial Officer January 12, 2000
- ----------------------------
Alan Gallantar
/s/ William Bregman Secretary-Treasurer, January 12, 2000
- ---------------------------- director
William Bregman
/s/ Louis J. Silver Director January 12, 2000
- ----------------------------
Louis J. Silver
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
4.21 Securities Purchase Agreement dated December 28,
1999 by and between Advanced Viral and Endeavour Capital Fund, S.A.
4.22 Form of 7% Convertible Debenture dated December 28, 1999.
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common stock of Advanced
Viral at $0.19916667 per share.
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A.
10.34 Registration Rights Agreement dated December 28, 1999 between Advanced Viral and Endeavour
Capital Fund S.A.
23.1 Consent of Rachlin Cohen & Holtz, LLP, Independent Certified Public Accountants
27.1 Financial Data Schedule for Advanced Viral as of and for the Nine Months Ended
September 30, 1999
</TABLE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between ADVANCED VIRAL
RESEARCH CORPORATION., a Delaware corporation, with headquarters located at 200
Corporate Boulevard South, Yonkers, NY 10701 (the "Company"), and each entity
named on a signature page hereto (each, a "Buyer") (each agreement with a Buyer
being deemed a separate and independent agreement between the Company and such
Buyer, except that each Buyer acknowledges and consents to the rights granted to
each other Buyer under such agreement and the Transaction Agreements, as defined
below, referred to therein).
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded, inter alia, by Rule 506 under Regulation
D ("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, 7% Convertible Debentures of the
Company which will be convertible into shares of Common Stock, $.00001 par value
per share of the Company (the "Common Stock"), upon the terms and subject to the
conditions of such Convertible Debentures, together with the Warrants (as
defined below) exercisable for the purchase of shares of Common Stock (the
"Warrant Shares"), and subject to acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions.
(i) The undersigned hereby agrees to purchase from the Company
7% Convertible Debentures in the principal amount set forth on the Buyer's
signature page of this Agreement (the "Debentures," which term includes the
Initial Debentures and the Additional Debentures defined below), out of a total
offering of $2,000,000 of such Convertible Debentures, and having the terms and
conditions and being in the form attached hereto as Annex I.
1
<PAGE>
(ii) Subject to the terms and conditions of this Agreement and
the other Transaction Agreements, the Buyer will purchase (x) fifty percent
(50%) of the Debentures (the "Initial Debentures") on the Initial Closing Date
(as defined below) and (y) the balance of the Debentures (the "Additional
Debentures") on the Additional Closing Date (as defined below).
(iii) The purchase price to be paid by the Purchaser shall be
equal to the face amount of the Initial Debentures or the Additional Debentures,
as the case may be, and shall be payable in United States Dollars.
b. Certain Definitions. As used herein, each of the following
terms has the meaning set forth below, unless the context otherwise requires:
(i) "Securities" means the Debentures, the Warrants and the
Common Stock issuable upon conversion of the Debentures or the exercise of the
Warrants.
(ii) "Purchase Price" means the purchase price for the Initial
Debentures or the Additional Debentures, as the case may be.
(iii) "Initial Closing Date" means the date of the closing of
the purchase and sale of the Initial Debentures, as provided herein.
(iv) "Additional Closing Date" means the date of the closing
of the purchase and sale of the relevant Additional Debentures, as provided
herein.
(v) "Closing Date" means the Initial Closing Date or the
Additional Closing Date, as the case may be.
(vi) "Buyer's Allocable Share" means the fraction of which the
numerator is the Buyer's Debentures and the denominator is $2,000,000.
(vii) "Effective Date" means the effective date of the
Registration Statement covering the Registrable Securities (as those terms are
defined in the Registration Rights Agreement defined below).
(viii) "Converted Shares" means the shares of Common Stock
issuable upon conversion of the Debentures.
(ix) "Warrant Shares" means the shares of Common Stock
issuable upon exercise of the Warrants.
(x) "Shares" means the shares of Common Stock representing any
or all of the Converted Shares and the Warrant Shares.
2
<PAGE>
(xi) As used herein, the term "Market Price of the Common
Stock" means the average closing bid price of the Common Stock for the three (3)
trading days (which need not be consecutive) during the period of the ten (10)
trading days ending on the trading day immediately before the date indicated in
the relevant provision hereof (unless a different relevant period is specified
in the relevant provision) for which the closing bid price of the Common Stock
(as reported by Bloomberg, LP or, if not so reported, as reported on the
over-the-counter market) were the lowest.
c. Form of Payment; Delivery of Certificates.
(i) The Buyer shall pay the Purchase Price for the relevant
Debentures by delivering immediately available good funds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as Annex II (the "Joint Escrow Instructions") on
the date prior to the relevant Closing Date.
(ii) No later than the relevant Closing Date, but in any event
promptly following payment by the Buyer to the Escrow Agent of the relevant
Purchase Price, the Company shall deliver the relevant Debentures and the
Warrants, each duly executed on behalf of the Company and issued in the name of
the Buyer (collectively, the "Certificates") to the Escrow Agent.
(iii) By signing this Agreement, each of the Buyer and the
Company, subject to acceptance by the Escrow Agent, agrees to all of the terms
and conditions of, and becomes a party to, the Joint Escrow Instructions, all of
the provisions of which are incorporated herein by this reference as if set
forth in full.
d. Method of Payment. Payment into escrow of the Purchase
Price shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager LLP, Esqs.
Account No.: [To be provided to the Buyer by Krieger & Prager LLP]
Re: Advanced Viral Research Transaction
Not later than 5:00 p.m., New York time, on the date which is three (3) New York
Stock Exchange ("NYSE") trading days after the Company shall have accepted this
Agreement and returned a signed counterpart of this Agreement to the Escrow
Agent by facsimile, the Buyer shall deposit with the Escrow Agent the Purchase
Price for the Initial Debentures in immediately available funds. Time is of the
essence with respect to such payment, and failure by the Buyer to make such
payment, shall allow the Company to cancel this Agreement.
3
<PAGE>
e. Escrow Property. The Purchase Price and the Certificates
delivered to the Escrow Agent as contemplated by Sections 1(c) and (d) hereof
are referred to as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement, the Buyer is purchasing the Debentures
and the Warrants and will be acquiring the Shares for its own account for
investment only and not with a view towards the public sale or distribution
thereof and not with a view to or for sale in connection with any distribution
thereof.
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities.
c. All subsequent offers and sales of the Debentures and the
Shares by the Buyer shall be made pursuant to registration of the Shares under
the 1933 Act or pursuant to an exemption from registration.
d. The Buyer understands that the Debentures are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Debentures.
e. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Debentures and the
offer of the Shares which have been requested by the Buyer, including those set
forth on Annex V hereto. The Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has also had the opportunity to obtain and to review
the Company's (1) Annual Report on Form 10-K for the fiscal year ended December
31, 1998, (2) Quarterly Reports on Form 10-Q
4
<PAGE>
for the fiscal quarters ended March 31, June 30, 1999, and September 30, 1999,
respectively, and (3) Registration Statement on Form S-1/A filed on December 13,
1999 (collectively, the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities
involves a high degree of risk.
g. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities.
h. The Buyer has the requisite corporate power and authority
to enter into this Agreement and the other Transaction Agreements. This
Agreement and the other Transaction Agreements to which the Buyer is a party
have been duly and validly authorized, executed and delivered on behalf of the
Buyer and are valid and binding agreements of the Buyer enforceable in
accordance with their respective terms, subject as to enforceability to general
principles of equity and to bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, ETC. The Company represents and
warrants to the Buyer as of the date hereof and as of each Closing Date that,
except as otherwise provided in the relevant Section or paragraph reference in
Annex V hereto (corresponding to the Section or paragraph references below):
a. Concerning the Debentures and the Shares. There are no
preemptive rights of any stockholder of the Company, as such, to acquire the
Debentures, the Warrants or the Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or financial condition or results of operation of the Company and its
subsidiaries taken as a whole.. The Company is obligated to file reports
pursuant to Section 15(d) of the 1934 Act. The Common Stock is listed and traded
on The NASDAQ/Bulletin Board Market. The Company has received no notice, either
oral or written, with respect to the continued eligibility of the Common Stock
for such listing, and the Company has maintained all requirements for the
continuation of such listing.
c. Authorized Shares. The authorized capital stock of the
Company consists of 1 billion shares of Common Stock, $.00001 par value per
share, of which
5
<PAGE>
approximately 303,292,035 shares had been issued as of the date hereof. All
issued and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable. The Company has sufficient
authorized and unissued shares of Common Stock as may be necessary to effect the
issuance of the Shares. The Shares have been duly authorized and, when issued
upon conversion of, or as interest on, the Debentures or upon exercise of the
Warrants, each in accordance with its respective terms, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights
Agreement and Stock. This Agreement and the Registration Rights Agreement, the
form of which is attached hereto as Annex IV (the "Registration Rights
Agreement"), and the transactions contemplated thereby, have been duly and
validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Debentures, the Warrants
and the Registration Rights Agreement, when executed and delivered by the
Company, will be, valid and binding agreements of the Company enforceable in
accordance with their respective terms, subject as to enforceability to general
principles of equity and to bankruptcy, insolvency, moratorium, and other
similar laws affecting the enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under (i)
the articles of incorporation or by-laws of the Company, each as currently in
effect, (ii) any indenture, mortgage, deed of trust, or other material agreement
or instrument to which the Company is a party or by which it or any of its
properties or assets are bound, including any listing agreement for the Common
Stock except as herein set forth, (iii) to its knowledge, any existing
applicable law, rule, or regulation or any applicable decree, judgment, or order
of any court, United States federal or state regulatory body, administrative
agency, or other governmental body having jurisdiction over the Company or any
of its properties or assets, or (iv) the Company's listing agreement for its
Common Stock, except such conflict, breach or default which would not have a
material adverse effect on the business, operations, condition (financial or
otherwise), or results of operations of the Company and its subsidiaries, taken
as a whole, or on the transactions contemplated herein.
f. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required to be
obtained by the Company for the issuance and sale of the Securities to the Buyer
as contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC Filings. None of the Company's SEC Documents contained,
at the time they were filed, any untrue statement of a material fact or omitted
to state any material fact
6
<PAGE>
required to be stated therein or necessary to make the statements made therein
in light of the circumstances under which they were made, not misleading. The
Company has since November 1, 1998 timely filed all requisite forms, reports and
exhibits thereto with the SEC.
h. Absence of Certain Changes. Since December 31, 1998, there
has been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), or results
of operations of the Company, except as disclosed in the Company's SEC
Documents. Since December 31, 1998, except as provided in the Company's SEC
Documents, the Company has not (i) incurred or become subject to any material
liabilities (absolute or contingent) except liabilities incurred in the ordinary
course of business consistent with past practices; (ii) discharged or satisfied
any material lien or encumbrance or paid any material obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary
course of business consistent with past practices; (iii) declared or made any
payment or distribution of cash or other property to stockholders with respect
to its capital stock, or purchased or redeemed, or made any agreements to
purchase or redeem, any shares of its capital stock; (iv) sold, assigned or
transferred any other tangible assets, or canceled any debts or claims, except
in the ordinary course of business consistent with past practices; (v) suffered
any substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount of
existing business; (vi) made any changes in employee compensation, except in the
ordinary course of business consistent with past practices; or (vii) experienced
any material problems with labor or management in connection with the terms and
conditions of their employment.
i. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally or as
disclosed in the Company's SEC Documents) that has not been disclosed in writing
to the Buyer that (i) would reasonably be expected to have a material adverse
effect on the business, operations, condition (financial or otherwise), or
results of operations of the Company and its subsidiaries, taken as a whole ,
(ii) would reasonably be expected to materially and adversely affect the ability
of the Company to perform its obligations pursuant to this Agreement or any of
the agreements contemplated hereby (collectively, including this Agreement, the
"Transaction Agreements"), or (iii) would reasonably be expected to materially
and adversely affect the value of the rights granted to the Buyer in the
Transaction Agreements.
j. Absence of Litigation. Except as set forth in the Company's
SEC Documents, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business, operations, condition (financial or otherwise), or results
of operation of the Company and its subsidiaries taken as a whole or the
transactions contemplated by any of the Transaction Agreements or which would
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, any of the Transaction
Agreements.
7
<PAGE>
k. Absence of Events of Default. Except as set forth in
Section 3(e) hereof, no Event of Default (or its equivalent term), as defined in
the respective agreement to which the Company is a party, and no event which,
with the giving of notice or the passage of time or both, would become an Event
of Default (or its equivalent term) (as so defined in such agreement), has
occurred and is continuing, which would have a material adverse effect on the
business, operations, condition (financial or otherwise), or results of
operations of the Company and its subsidiaries, taken as a whole.
l. Prior Issues. During the twelve (12) months preceding the
date hereof, the Company has not issued any convertible securities. The
presently outstanding unconverted principal amount of each such issuance as at
the date hereof are set forth in Annex V.
m. No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Company's SEC
Documents or those incurred in the ordinary course of the Company's business
since December 31, 1998, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business,
operations, condition (financial or otherwise), or results of operations of the
Company and its subsidiaries, taken as a whole. No event or circumstances has
occurred or exists with respect to the Company or its properties, business,
operations, condition (financial or otherwise), or results of operations, which,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed. There are no proposals currently under
consideration or currently anticipated to be under consideration by the Board of
Directors or the executive officers of the Company which proposal would (x)
change the certificate of incorporation or other charter document or by-laws of
the Company, each as currently in effect, with or without shareholder approval,
which change would reduce or otherwise adversely affect the rights and powers of
the shareholders of the Common Stock or (y) materially or substantially change
the business, assets or capital of the Company, including its interests in
subsidiaries.
n. No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any material indenture, mortgage, deed of trust or other
material instrument or agreement to which it is a party or by which it or its
property is bound.
o. No Integrated Offering. Neither the Company nor any of its
affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time since November 1, 1998, made any offer or sales of any
security or solicited any offers to buy any security under circumstances that
would eliminate the availability of the exemption from registration under Rule
506 of Regulation D in connection with the offer and sale of the Securities as
contemplated hereby.
p. Dilution. The number of Shares issuable upon conversion of
the Debentures and the exercise of the Warrants may increase substantially in
certain circumstances, including, but not necessarily limited to, the
circumstance wherein the trading price of the
8
<PAGE>
Common Stock declines prior to the conversion of the Debentures. The Company's
executive officers and directors have studied and fully understand the nature of
the Securities being sold hereby and recognize that they have a potential
dilutive effect. The board of directors of the Company has concluded, in its
good faith business judgment, that such issuance is in the best interests of the
Company. The Company specifically acknowledges that its obligation to issue the
Shares upon conversion of the Debentures and upon exercise of the Warrants is
binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company, and the Company will honor every Notice of Conversion (as defined in
the Debentures) relating to the conversion of the Debentures and every Notice of
Exercise Form (as contemplated by the Warrants) relating to the exercise of the
Warrants unless the Company is subject to an injunction (which injunction was
not sought by the Company) prohibiting the Company from doing so.
r. Brokers, Finders. Except for payment of fees to First
Atlanta Securities LLC (the "Placement Agent"), payment of which is the sole
responsibility of the Company, the Company has taken no action which would give
rise to any claim by any person for brokerage commission, finder's fees or
similar payments by Buyer relating to this Agreement or the transactions
contemplated hereby. Buyer shall have no obligation with respect to such fees or
with respect to any claims made by or on behalf of other Persons for fees of a
type contemplated in this Section 3(r) that may be due in connection with the
transactions contemplated hereby. The Company shall indemnify and hold harmless
each of Buyer, its employees, officers, directors, agents, and partners, and
their respective affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses suffered
in respect of any such claimed or existing fees, as and when incurred.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Debentures have not been and are not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
9
<PAGE>
b. Restrictive Legend. The Buyer acknowledges and agrees that
the Debentures and the Warrants, and, until such time as the Common Stock has
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement and sold in accordance with an effective Registration Statement,
certificates and other instruments representing any of the Securities shall bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of any such Securities):
THESE SECURITIES INCLUDING ANY UNDERLYING SECURITIES (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE
AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to
enter into the Registration Rights Agreement on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Securities to the Buyer
under any United States laws and regulations applicable to the Company, or by
any domestic securities exchange or trading market, and to provide a copy
thereof to the Buyer promptly after such filing.
e. Reporting Status. So long as the Buyer beneficially owns
any of the Securities, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination. The Company will take all reasonable action under its
control to obtain and to continue the listing and trading of its Common Stock
(including, without limitation, all Registrable Securities) on The
NASDAQ/Bulletin Board Market and will comply in all material respects with the
Company's reporting, filing and other obligations under the by-laws or rules of
the National Association of Securities Dealers, Inc. ("NASD") or The
NASDAQ/Bulletin Board Market.
f. Use of Proceeds. The Company will use the proceeds from the
sale of the Debentures (excluding amounts paid by the Company for legal fees,
finder's fees and escrow fees in connection with the sale of the Debentures) for
internal working capital purposes, and, unless specifically consented to in
advance in each instance by the Buyer, the Company shall not, directly or
indirectly, use such proceeds for any loan to or investment in any other
corporation, partnership enterprise or other person or for the repayment of any
outstanding loan by the Company to any other party.
10
<PAGE>
g. Certain Agreements. (i) Except to the extent specifically
provided below, but in each such event subject to compliance with all of the
other provisions of this Agreement, the Company covenants and agrees that it
will not, without the prior written consent of the Buyer, enter into any
subsequent or further offer or sale of Common Stock or securities convertible
into Common Stock (collectively, "New Common Stock") with any third party
pursuant to a transaction which in any manner permits the registration of the
Common Stock included in or underlying the New Common Stock to become effective
on any date which is earlier than one hundred twenty (120) days after the
Effective Date.
(ii) The provisions of subparagraph (g)(i) will not apply to
the sale of New Common Stock for not more than $3 million pursuant to a single
transaction in which the Company sells Common Stock at a price per share equal
to or above the then Market Price of the Common Stock and/or issues warrants
exercisable at a price equal to or above the Market Price of the Common Stock as
of the date of such transaction; provided, however, that any action contemplated
under this subparagraph (g)(ii) is subject to the condition that registration
rights, if any, in connection with such action shall not require the filing of a
Registration Statement in respect of such stock prior to sixty (60) days after
the Effective Date.
(iii) The foregoing provisions shall not restrict the Company
from issuing shares of Common Stock upon the exercise of certain warrants and
options for the purchase of up to approximately 40,192,000 shares outstanding as
of the date hereof.
(iv) In the event the Company breaches the provisions of this
Section 4(g), the Conversion Rate (as defined in the Debentures) shall be
amended to be equal to (x) 90% of (y) the amount determined in accordance with
the provisions of the Debenture without regard to this provision, and the
Purchaser may require the Company to immediately redeem all outstanding
Debentures in accordance with Section 4(j)(y) hereof.
(v) In the event the Company consummates a new transaction (a
"New Transaction") for the sale of New Common Stock or the issuance of warrants
or other rights to purchase New Common Stock with a third party at any time
prior to the expiration of one hundred twenty (120) days after the Effective
Date on terms providing for (x) either a sale price equal to or computed based
on, or a determination of a conversion price based on, a lower percentage of the
then current market price (howsoever defined or computed) than provided in the
Debenture for determining the Conversion Rate or a lower Fixed Price (as defined
in the Debenture, but howsoever defined or computed in the New Transaction
documents) and/or (y) the issuance of warrants at an exercise price lower than
that provided in the Warrants and/or for a greater number of shares per dollar
paid or invested by such third party to or in the Company, the terms of the
Debenture and the Warrants (whether previously issued and/or converted or not)
shall be modified to (i) reduce the relevant Conversion Rate, Fixed Price or
Warrant exercise price and/or (ii) increase the number of shares covered by the
Warrants to be equal to that provided in the New Transaction as so consummated
(provided, however, that such increased Warrants shall have the same exercise
price formula as the New Transaction warrants).
11
<PAGE>
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield the aggregate of (i) two hundred percent (200%)
of the number of shares of Common Stock issuable at conversion as may be
required to satisfy the conversion rights of the Buyer pursuant to the terms and
conditions of the Debentures and (ii) the number of shares issuable upon
exercise as may be required to satisfy the exercise rights of the Buyer pursuant
to the terms and conditions of the Warrants.
i. Warrants. The Company agrees to issue to the Buyer on each
Closing Date transferable, divisible warrants with cashless exercise rights (the
"Warrants") for the purchase of one hundred thousand (100,000) shares of Common
Stock for each one million dollars ($1,000,000) of Purchase Price for the
Debentures issued on that date. The Warrants attributable to each such
conversion shall bear an exercise price per share equal to the Market Price of
the Common Stock on the Initial Closing Date (subject to adjustment as provided
in the Warrant). The Warrants will expire on the last day of the calendar month
in which the third anniversary of the relevant Closing Date occurs. The Warrants
shall be in the form annexed hereto as Annex VI, together with (x) registration
rights as provided in the Registration Rights Agreement and (y) piggy-back
registration rights after the effectiveness of the Registration Statement
expires, as contemplated by the Registration Rights Agreement.
j. Limitation on Issuance of Shares. If applicable to the
Company, the Company may be limited in the number of shares of Common Stock it
may issue by virtue of (i) the number of authorized shares or (ii) the
applicable rules and regulations of the principal securities market on which the
Common Stock is listed or traded, including, but not necessarily limited to,
NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable
(collectively, the "Cap Regulations"). Without limiting the other provisions
thereof, the Debentures shall provide that (i) the Company will take all steps
reasonably necessary to be in a position to issue shares of Common Stock on
conversion of the Debentures without violating the Cap Regulations and (ii) if,
despite taking such steps, the Company still can not issue such shares of Common
Stock without violating the Cap Regulations, the holder of a Debenture which can
not be converted as result of the Cap Regulations (each such Debenture, an
"Unconverted Debenture") shall have the option, exercisable in such holder's
sole and absolute discretion, to elect either of the following remedies:
(x) if permitted by the Cap Regulations, require the Company
to issue shares of Common Stock in accordance with such holder's notice
of conversion at a conversion purchase price equal to the average of
the closing price per share of Common Stock for any five (5)
consecutive trading days (subject to certain equitable adjustments for
certain events occurring during such period) during the sixty (60)
trading days immediately preceding the date of notice of conversion; or
(y) require the Company to redeem each Unconverted Debenture
for an amount (the "Cap Redemption Amount"), payable in cash, equal to
(i) one hundred forty percent (140.0%) of the principal of the
Unconverted Debenture,
12
<PAGE>
plus (ii) all accrued but unpaid interest on the Debenture through the
date of redemption (the "Cap Redemption Date") specified in the notice
from the holder electing this remedy.
A holder of an Unconverted Debenture may elect one of the above remedies with
respect to a portion of such Unconverted Debenture and the other remedy with
respect to other portions of the Unconverted Debenture. The Debentures shall
contain provisions substantially consistent with the above terms, with such
additional provisions as may be consented to by the Buyer. The provisions of
this paragraph are not intended to limit the scope of the provisions otherwise
included in the Debentures.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company warrants that, with respect to the Securities,
other than the stop transfer instructions to give effect to Section 4(a) hereof,
it will give its transfer agent no instructions inconsistent with instructions
to issue Common Stock from time to time upon conversion of the Debentures in
such amounts as specified from time to time by the Company to the transfer
agent, bearing the restrictive legend specified in Section 4(b) of this
Agreement prior to registration of the Shares under the 1933 Act, registered in
the name of the Buyer or its nominee and in such denominations to be specified
by the Buyer in connection with each conversion of the Debentures. Except as so
provided, the Shares shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement, the
Registration Rights Agreement, and applicable law. Nothing in this Section shall
affect in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities. If the Buyer provides
the Company with an opinion of counsel reasonably satisfactory to the Company
that registration of a resale by the Buyer of any of the Securities in
accordance with clause (1)(B) of Section 4(a) of this Agreement is not required
under the 1933 Act, the Company shall (except as provided in clause (2) of
Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Converted Shares or the Warrant Shares, as the case may be,
promptly instruct the Company's transfer agent to issue one or more certificates
for Common Stock without legend in such name and in such denominations as
specified by the Buyer.
b. Subject to the provisions of this Agreement, the Company
will permit the Buyer to exercise its right to convert the Debentures in the
manner contemplated by the Debentures.
c. The Company understands that a delay in the issuance of the
Shares of Common Stock beyond the Delivery Date (as defined in the Debentures)
could result in economic loss to the Buyer. As compensation to the Buyer for
such loss, the Company agrees to pay late payments to the Buyer for late
issuance of Shares upon conversion in accordance with the following schedule
(applicable to each conversion independently): such amount shall be $1,000 if
the delivery is made on the third day after the Delivery Date and such amount
shall double from the preceding day for each day thereafter until the
certificates are so delivered. For example, if the certificates are delivered on
the sixth day after the Delivery Date, the amount
13
<PAGE>
would be $4,000; provided, however, that payment of such amount shall not
relieve the Company from its continuing obligations to issue the Shares upon
conversion of the Debentures or exercise of the Warrants pursuant to the terms
hereof or of any of the other Transaction Agreements. For purposes of this
Section 5(c), in connection with a Mandatory Conversion (as defined in the
Debenture), the term "Delivery Date" shall refer to the earlier of (i) the
Delivery Date determined in relation to a Notice of Conversion actually
submitted by the Buyer to the Company or (ii) the third or fifth business date,
as the case may be, after written notice from the Buyer that the delivery of
shares to the Buyer in connection with the Mandatory Conversion has not been
accomplished. The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the Buyer's
right to pursue actual damages for the Company's failure to issue and deliver
the Common Stock to the Buyer. Furthermore, in addition to any other remedies
which may be available to the Buyer, in the event that the Company fails for any
reason to effect delivery of such shares of Common Stock within two (2) business
days after the Delivery Date, the Buyer will be entitled to revoke the relevant
Notice of Conversion by delivering a notice to such effect to the Company
whereupon the Company and the Buyer shall each be restored to their respective
positions immediately prior to delivery of such Notice of Conversion.
d. If, by the relevant Delivery Date, the Company fails for
any reason to deliver the Shares to be issued upon conversion of a Debenture and
after such Delivery Date, the holder of the Debentures being converted (a
"Converting Holder") purchases, in an arm's-length open market transaction or
otherwise, shares of Common Stock (the "Covering Shares") in order to make
delivery in satisfaction of a sale of Common Stock by the Converting Holder (the
"Sold Shares"), which delivery such Converting Holder anticipated to make using
the Shares to be issued upon such conversion (a "Buy-In"), the Converting Holder
shall the right, to require the Company to pay to the Converting Holder, in lieu
and instead of the amounts due under Section 5(c) hereof (but in addition to all
other amounts contemplated in other provisions of the Transaction Agreements,
and not in lieu of any such other amounts), the Buy-In Adjustment Amount (as
defined below). The "Buy-In Adjustment Amount" is the amount equal to the
excess, if any, of (x) the Converting Holder's total purchase price (including
brokerage commissions, if any) for the Covering Shares over (y) the net proceeds
(after brokerage commissions, if any) received by the Converting Holder from the
sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to
the Company in immediately available funds immediately upon demand by the
Converting Holder. By way of illustration and not in limitation of the
foregoing, if the Converting Holder purchases shares of Common Stock having a
total purchase price (including brokerage commissions) of $11,000 to cover a
Buy-In with respect to shares of Common Stock it sold for net proceeds of
$10,000, the Buy-In Adjustment Amount which Company will be required to pay to
the Converting Holder will be $1,000.
e. In lieu of delivering physical certificates representing
the Common Stock issuable upon conversion, provided the Company's transfer agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Buyer and its compliance with
the provisions contained in this paragraph, so long as the certificates therefor
do not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the
14
<PAGE>
Buyer by crediting the account of Buyer's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission system.
f. The Company will authorize its transfer agent to give
information relating to the Company directly to the Buyer or the Buyer's
representatives upon the request of the Buyer or any such representative, to the
extent such information relates to (i) the status of shares of Common Stock
issued or claimed to be issued to the Buyer in connection with a Notice of
Conversion, or (ii) the number of outstanding shares of Common Stock of all
stockholders as of a current or other specified date. The Company will provide
the Buyer with a copy of the authorization so given to the transfer agent. While
the Company will use its best efforts to effectuate the transfer agent's
compliance with such authorization, the Company will not be responsible for the
transfer agent's failure to do so.
6. CLOSING DATES.
a. The Initial Closing Date shall occur on the date which is
the first NYSE trading day after each of the conditions contemplated by Sections
7 and 8 hereof shall have either been satisfied or been waived by the party in
whose favor such conditions run.
b. (i) The Additional Closing Date shall be the date specified
in the Additional Closing Date Notice (as defined below) .
(ii) Subject to the other provisions of this Section 6(b),
the term "Additional Closing Date Notice" means a written notice given by the
Company to the Buyer and to the Escrow Agent by fax transmission or hand
delivery no later than one (1) business day after the Company submits the
Effectiveness Request (as defined below; a copy of the Effectiveness Request
shall be attached to the Additional Closing Date Notice) in which the Company
specifies that the fifth business day after the actual Effective Date, which
date shall be the Additional Closing Date. The Company shall also notify the
Buyer and the Escrow Agent both (x) by fax transmission or hand delivery and (y)
by telephone communication of the actual Effective Date declared by the SEC no
later than noon on the business day after such Effective Date.
(iii) The term "Effectiveness Request" means the Company's
written request to the SEC that the SEC declare the Registration Statement
effective on a specified date which is more than (5) business days prior to the
Additional Closing Date specified in the Additional Closing Date Notice;
provided, however, that the Effectiveness Request shall be given only after the
SEC has advised the Company informally, in writing or otherwise that it will
respond favorably to such request.
(iv) The closing for the Additional Debentures shall be
conducted upon the same terms and conditions as those applicable to the Initial
Debentures.
15
<PAGE>
c. Each closing of the purchase and issuance of Debentures
shall occur on the relevant Closing Date at the offices of the Escrow Agent and
shall take place no later than 3:00 P.M., New York time, on such day or such
other time as is mutually agreed upon by the Company and the Buyer.
d. Notwithstanding anything to the contrary contained herein,
the Escrow Agent will be authorized to release the Escrow Funds to the Company
and to others and to release the other Escrow Property on the relevant Closing
Date upon satisfaction of the conditions set forth in Sections 7 and 8 hereof
and as provided in the Joint Escrow Instructions.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell
the relevant Debentures to the Buyer pursuant to this Agreement on the relevant
Closing Date is conditioned upon:
a. The execution and delivery of this Agreement by the
Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the Purchase Price for the relevant
Debentures in accordance with this Agreement;
c. The accuracy on such Closing Date of the representations
and warranties of the Buyer contained in this Agreement, each as if made on such
date, and the performance by the Buyer on or before such date of all covenants
and agreements of the Buyer required to be performed on or before such date;
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained; and
e. From and after the date hereof to and including such
Closing Date, the trading of the Common Stock shall not have been suspended by
the SEC or the NASD and trading in securities generally on the NYSE or The
NASDAQ/Bulletin Board Market shall not have been suspended or limited, nor shall
minimum prices been established for securities traded on The NASDAQ/Bulletin
Board Market, nor shall there be any outbreak or escalation of hostilities
involving the United States or any material adverse change in any financial
market that in either case in the reasonable judgment of the Company makes it
impracticable or inadvisable to sell the Debentures.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to
purchase the Debentures on the relevant Closing Date is conditioned upon:
16
<PAGE>
a. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Company;
b. Delivery by the Company to the Escrow Agent of the relevant
Certificates in accordance with this Agreement;
c. The accuracy in all material respects on such Closing Date
of the representations and warranties of the Company contained in this
Agreement, each as if made on such date, and the performance by the Company on
or before such date of all covenants and agreements of the Company required to
be performed on or before such date;
d. On such Closing Date, the Registration Rights Agreement
shall be in full force and effect and the Company shall not be in default
thereunder;
e. On such Closing Date, the Buyer shall have received an
opinion of counsel for the Company, dated such Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer, substantially to the effect set
forth in Annex III attached hereto;
f. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained;
g. From and after the date hereof to and including such
Closing Date, the trading of the Common Stock shall not have been suspended by
the SEC or the NASD and trading in securities generally on the NYSE or The
NASDAQ/Bulletin Board Market shall not have been suspended or limited, nor shall
minimum prices been established for securities traded on The NASDAQ/Bulletin
Board Market, nor shall there be any outbreak or escalation of hostilities
involving the United States or any material adverse change in any financial
market that in either case in the reasonable judgment of the Buyer makes it
impracticable or inadvisable to purchase the Debentures; and
h. With respect to the Additional Closing Date,
(i) an Additional Closing Date Notice shall have been duly
given;
(ii) the Registration Statement shall have been declared
effective by the SEC to cover all Registrable Securities for all the Debentures
(and all the related Warrants), as contemplated by the Registration Rights
Agreement, prior to such Additional Closing Date;
(iii) the representations and warranties of the Company
contained in Section 3 hereof shall be true and correct in all material respects
(and the Company's issuance of the relevant Additional Debentures shall
constitute the Company's making each such representation and warranty as of such
date) and there shall have been no material adverse changes (financial or
otherwise) in the business or conditions of the Company from the Initial Closing
Date through
17
<PAGE>
and including the Additional Closing Date (and the Company's issuance of the
relevant Additional Debentures shall constitute the Company's making such
representation and warranty as of such date), (iv) the Company shall have timely
issued all shares issuable upon conversion of the Debentures prior to the date
of such Additional Closing Date;
(iv) the Company shall have available and shall reserve for
issuance to Buyer at least one hundred fifty percent (150%) of the number of
Shares which would be issued on conversion of all unconverted Initial Debentures
and all Additional Debentures and exercise of all unexercised Warrants and all
Warrants which would be issued in connection with the conversion of any
unconverted Debentures (including all Additional Debentures); and
(v) if the Cap Regulations are applicable to the Company,
either the aggregate of the Common Stock issuable upon conversion of the
Additional Debentures as a group or together with the Common Stock issuable upon
conversion of the then previously issued Debentures will not result in the
issuance of shares in excess of the Cap Regulations or the Company shall have
obtained the consent of its shareholders, as contemplated by the Cap
Regulations, to such issuance.
9. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the City of New York
or the state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Buyer for any reasonable legal fees and disbursements incurred by
the Buyer in enforcement of or protection of any of its rights under any of the
Transaction Agreements.
b. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
c. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto.
d. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
e. A facsimile transmission of this signed Agreement shall be
legal and binding on all parties hereto.
18
<PAGE>
f. This Agreement may be signed in one or more counterparts,
each of which shall be deemed an original.
g. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
h. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
i. This Agreement may be amended only by an instrument in
writing signed by the party to be charged with enforcement thereof.
j. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
10. NOTICES. Any notice required or permitted hereunder shall
be given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(a) the date delivered, if delivered by personal delivery as
against written receipt therefor or by confirmed facsimile
transmission,
(b) the seventh business day after deposit, postage prepaid,
in the United States Postal Service by registered or certified
mail, or
(c) the third business day after mailing by domestic or
international express courier, with delivery costs and fees
prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days' advance written notice similarly given to each of the other
parties hereto):
COMPANY: Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, NY 10701
Attn: Dr. Shalom Hirschman
Telephone No.: (914) 376-7383
Telecopier No.: (914) 376-7368
with a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
250 Park Avenue
New York, NY 10177
19
<PAGE>
Attn: Robert Fisher, Esq.
Telephone No.: (212) 883-4901
Telecopier No.: (212) 986-0604
BUYER: At the address set forth on the signature page of
this Agreement.
with a copy to:
Krieger & Prager LLP, Esqs.
39 Broadway
Suite 1440
New York, NY 10006
Attn: Samuel Krieger, Esq.
Telephone No.: (212) 363-2900
Telecopier No. (212) 363-2999
ESCROW AGENT: Krieger & Prager LLP, Esqs.
39 Broadway
Suite 1440
New York, NY 10006
Attn: Samuel Krieger, Esq.
New York, New York 10016
Telephone No.: (212) 363-2900
Telecopier No. (212) 363-2999
11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
Company's and the Buyer's representations and warranties herein shall survive
the execution and delivery of this Agreement and the delivery of the
Certificates and the Warrants and the payment of the Purchase Price, and shall
inure to the benefit of the Buyer and the Company and their respective
successors and assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
20
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
by one of its officers thereunto duly authorized as of the date set forth below.
AMOUNT AND PURCHASE PRICE OF DEBENTURES: $2,000,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this 28th day of December, 1999.
Address: ENDEAVOUR CAPITAL FUND S.A. (Buyer)
c/o Endeavour Management, Inc.
14/14 Divrei Chaim St. By: /s/ Shamuli Margulies
Jerusalem, 94479, Israel ----------------------------------
Shamuli Margulies, Director
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its behalf.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman
-----------------------
Shalom Z. Hirschman
Title: President and Chief Executive Officer
Date: December 28,1999
21
<PAGE>
ANNEX I FORM OF DEBENTURE
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
ANNEX VI FORM OF WARRANT
ANNEX I
TO SECURITIES PURCHASE AGREEMENT
FORM OF DEBENTURE
THESE SECURITIES INCLUDING ANY UNDERLYING SECURITIES (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
No. 99- US $
---------- -----------
ADVANCED VIRAL RESEARCH CORP.
7% CONVERTIBLE DEBENTURE DUE December 31, 2004
THIS DEBENTURE is one of a duly authorized issue of up to $2,000,000 in
Debentures of ADVANCED VIRAL RESEARCH CORP., a corporation organized and
existing under the laws of the State of Delaware (the "Company") designated as
its 7% Convertible Debentures. Such Debentures may be issued in series, each of
which may have a different maturity date, but which otherwise have substantially
similar terms.
FOR VALUE RECEIVED, the Company promises to pay to ENDEAVOUR CAPITAL
FUND S.A., the registered holder hereof (the "Holder"), the principal sum of and
00/100 Dollars (US $ ) on December 31, 2004 (the "Maturity Date") and to pay
interest on the principal sum outstanding from time to time in arrears (i) prior
to the Maturity Date, upon conversion as provided herein or (ii) on the Maturity
Date, at the rate of 7% per annum accruing from December 28, 1999, the date of
initial issuance of this Debenture. Accrual of interest shall commence on the
first such business day to occur after the date hereof and shall continue to
accrue on a daily basis until payment in full of the principal sum has been made
or duly provided for.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
(US$10,000) and integral multiples thereof. The Debentures are exchangeable for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be made for such registration or transfer or exchange.
<PAGE>
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws and the terms of the Securities
Purchase Agreement (defined below). In the event of any proposed transfer of
this Debenture, the Company may require, prior to issuance of a new Debenture in
the name of such other person, that it receive reasonable transfer documentation
including legal opinions from counsel reasonably acceptable to the Company in
form and substance reasonably acceptable to the Company that the issuance of the
Debenture in such other name does not and will not cause a violation of the Act
or any applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. A. The Holder of this Debenture is entitled, at its option, subject
to the following provisions of this Section 4, to convert this Debenture at any
time into shares of Common Stock of the Company at a conversion price for each
share of Common Stock ("Conversion Rate") equal to the lower of (i) seventy-two
percent (72.0%) of the Market Price (as defined below) on the Conversion Date
(as defined below) or (ii) forty-three and three quarters cents ($0.4375; the
"Fixed Price," which amount is subject to adjustment as provided herein).
B. Conversion shall be effectuated by faxing a Notice of
Conversion (as defined below) to the Company as provided in this paragraph. The
Notice of Conversion shall be executed by the Holder of this Debenture and shall
evidence such Holder's intention to convert this Debenture or a specified
portion hereof in the form annexed hereto as Exhibit A. Interest accrued or
accruing from the date of issuance to the date of conversion or to the Maturity
Date, as the case may be, shall be paid in Common Stock at the Conversion Rate
then applicable as of the Conversion Date or the Maturity Date, as the case may
be. No fractional shares of Common Stock or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded to the nearest whole share. The date on which notice of conversion is
given (the "Conversion Date") shall be deemed to be the date on which the Holder
faxes or otherwise delivers the conversion notice ("Notice of Conversion") to
the Company so that it is received by the Company on or before such specified
date, provided that, if such conversion would convert the entire remaining
principal of this Debenture, the Holder shall deliver to the Company the
original Debentures being converted no later than five (5) business days
thereafter. Facsimile delivery of the Notice of Conversion shall be accepted by
the Company at facsimile number (914) 376-7368; Attn: President. Certificates
representing Common Stock upon conversion will be delivered to the Holder at the
address specified in the Notice of Conversion (which may be the Buyer's address
for notices as contemplated by the Securities Purchase Agreement or a different
address), via express courier, by electronic transfer or otherwise, within three
(3) business days if the address for delivery is in the United States and within
five (5) business days if the address for delivery is outside the United States
(such third business day
2
<PAGE>
or fifth business day, as the case may be, the "Delivery Date") after the date
on which the Notice of Conversion is delivered to the Company as contemplated in
this paragraph B or the Maturity Date.
C. For purposes of this Debenture, the term "Market Price"
means the average closing bid price of the Common Stock for the three (3)
trading days (which need not be consecutive) during the period of the ten (10)
trading days ending on the trading day immediately before the date indicated in
the relevant provision hereof (unless a different relevant period is specified
in the relevant provision) for which the closing bid price of the Common Stock
(as reported by Bloomberg, LP or, if not so reported, as reported on the
over-the-counter market) were the lowest.
D. Any principal amount of this Debenture not previously
converted or redeemed as of the Maturity Date, shall be deemed to be
automatically converted, without further action of any kind (including, but not
necessarily limited to, the giving of a Notice of Conversion) by the Holder, as
of the Maturity Date at the Conversion Rate applicable on the Maturity Date
("Mandatory Conversion").
E. Notwithstanding any other provision hereof, of the Warrants
or of any of the other Transaction Agreements (as those terms are defined in the
Securities Purchase Agreement), in no event (except (i) with respect to an
automatic conversion, if any, of a Debenture as provided in the Debentures or a
conversion pursuant to a Redemption Notice Conversion [as defined below], (ii)
as specifically provided in this Debenture as an exception to this provision, or
(iii) while there is outstanding a tender offer for any or all of the shares of
the Company's Common Stock) shall the Holder be entitled to convert any
Debenture, or shall the Company have the obligation to convert all or any
portion of this Debenture (and the Company shall not have the right to pay
interest on this Debenture in stock), to the extent that, after such conversion
or issuance of stock in payment of interest, the sum of (1) the number of shares
of Common Stock beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Debentures or unexercised portion of
the Warrants), and (2) the number of shares of Common Stock issuable upon the
conversion of the Debentures with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder and
its affiliates of more than 9.99% of the outstanding shares of Common Stock
(after taking into account the shares to be issued to the Holder upon such
conversion). For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), except as
otherwise provided in clause (1) of such sentence. The Holder, by its acceptance
of this Debenture, further agrees that if the Holder transfers or assigns any of
the Debentures to a party who or which would not be considered such an
affiliate, such assignment shall be made subject to the transferee's or
assignee's specific agreement to be bound by the provisions of this Section 4(E)
as if such transferee or assignee were the original Holder hereof. Nothing
herein shall preclude the Holder from disposing of a sufficient number of other
shares of Common Stock beneficially owned by the Holder so as to thereafter
permit the continued conversion of this Debenture.
F. Anything herein to the contrary notwithstanding, in the
event the Company breaches the provisions of Section 4(g) of the Securities
Purchase Agreement, the Conversion Rate shall be amended to be equal to (i)
ninety percent (90%) of (ii) the Conversion Rate determined in
3
<PAGE>
accordance with the other provisions of this Debenture without regard to this
Section 4(F), and the Holder may require the Company to immediately redeem all
or any part of the outstanding portion of this Debenture for an amount equal to
the Redemption Amount (defined below).
5. A. Notwithstanding any other provision hereof to the contrary, at
any time prior to the Conversion Date, the Company shall have the right to
redeem all or any portion of the then outstanding principal amount of the
Debentures then held by the Holder in cash for an amount (the "Redemption
Amount") equal to the sum of (a) one hundred forty percent (140%) of the
outstanding principal of such Debentures plus (b) all accrued but unpaid
interest thereon through the date the Redemption Amount is paid to the Holder
(the "Redemption Payment Date").
B. The Company shall give at least ten (10) business days' written
notice of such redemption to the Holder (the "Notice of Redemption"). The date
so specified in such Notice of Redemption shall be the Redemption Payment Date.
Anything in the preceding provisions of this Section 5 to the contrary
notwithstanding, the Redemption Amount shall, unless otherwise agreed to in
writing by the Holder after receiving the Notice of Redemption, be paid to the
Holder in good funds at least five (5) but not more than ten (10) business days
from the date of the Notice of Redemption, except that, with respect to any
Debentures for which a Notice of Redemption is given, the Holder shall have the
right, exercisable by giving a Notice of Conversion is submitted to the Company
within five (5) business days of the Holder's receipt of the Company's Notice of
Redemption, to convert any or all of the Debentures sought to be redeemed (a
"Redemption Notice Conversion") and the Redemption Notice Conversion shall take
precedence over the redemption contemplated by the Notice of Redemption. Such
Debentures shall be converted in accordance with the terms hereof.
C. In the event such Redemption Amount is not timely made, any
rights of the Company to redeem outstanding Debentures shall terminate, and the
Notice of Redemption shall be null and void.
D. Any redemption contemplated by this Debenture shall be made only
in cash by the payment of immediately available good funds to the Holder.
6. The Holder recognizes that, if applicable to the Company, the
Company may be limited in the number of shares of Common Stock it may issue by
virtue of (a) the number of authorized shares, or (b) the applicable rules and
regulations of the principal securities market on which the Common Stock is
listed or traded, including, but not necessarily limited to, NASDAQ Rule
4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable (collectively, the
"Cap Regulations"). Without limiting the other provisions hereof, (w) the
Company will take all steps reasonably necessary to be in a position to issue
shares of Common Stock on conversion of the Debentures without violating the Cap
Regulations and (x) if, despite taking such steps, the Company still can not
issue such shares of Common Stock without violating the Issuance Regulations,
the Holder of this Debenture (to the extent the same can not be converted in
compliance with the Issuance Regulations (an "Unconverted Debenture"), shall
have the option, exercisable in such Holder's sole and absolute discretion, to
elect either of the following remedies:
4
<PAGE>
(i) if permitted by the Cap Regulations, require the Company to
issue shares of Common Stock in accordance with such holder's notice of
conversion at a conversion purchase price equal to the average of the
closing price per share of Common Stock for any five (5) consecutive
trading days (subject to certain equitable adjustments for certain events
occurring during such period) during the sixty (60) trading days
immediately preceding the date of notice of conversion; or
(ii) require the Company to redeem each Unconverted Debenture for an
amount equal to the Redemption Amount, based on the date of redemption (the
"Cap Redemption Date") specified in the notice from the Holder electing
this remedy.
The notice of exercise of this provision by the Holder shall specify the Cap
Redemption Date, which shall be at least five (5) business days after the dater
of such notice; provided, however, that the Company shall have the right to
accelerate the Cap Redemption Date. The Holder of an Unconverted Debenture may
elect one of the above remedies with respect to a portion of such Unconverted
Debenture and the other remedy with respect to other portions of the Unconverted
Debenture.
7. Subject to the terms of the Securities Purchase Agreement, dated
December 28, 1999 (the "Securities Purchase Agreement"), between the Company and
the Holder (or the Holder's predecessor in interest), no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture and all other Debentures now or hereafter issued of similar terms are
direct obligations of the Company.
8. A. No recourse shall be had for the payment of the principal of, or
the interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
B. All payments contemplated hereby to be made "in cash" shall be
made in immediately available good funds in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts. All payments of cash and each delivery of shares of
Common Stock issuable to the Holder as contemplated hereby shall be made to the
Holder at the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder from time to time; except that the Holder
can designate, by notice to the Company, a different delivery address for any
one or more specific payments or deliveries.
9. If, for as long as this Debenture remains outstanding, the Company
enters into a merger (other than where the Company is the surviving entity) or
consolidation with another corporation or other entity or a sale or transfer of
all or substantially all of the assets of the Company to another person
(collectively, a "Sale"), the Company will require, in the agreements reflecting
5
<PAGE>
such transaction, that the surviving entity expressly assume the obligations of
the Company hereunder. Notwithstanding the foregoing, if the Company enters into
a Sale and the holders of the Common Stock are entitled to receive stock,
securities or property in respect of or in exchange for Common Stock, then as a
condition of such Sale, the Company and any such successor, purchaser or
transferee will agree that the Debenture may thereafter be converted on the
terms and subject to the conditions set forth above into the kind and amount of
stock, securities or property receivable upon such merger, consolidation, sale
or transfer by a holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before such merger,
consolidation, sale or transfer, subject to adjustments which shall be as nearly
equivalent as may be practicable. In the event of any such proposed Sale, (i)
the Holder hereof shall have the right to convert by delivering a Notice of
Conversion to the Company within fifteen (15) days of receipt of notice of such
Sale from the Company, except that Section 4(E) shall not apply to such
conversion.
10. The Company agrees that for as long as this Debenture remains
outstanding, the Company will not, without the consent of the Holder, spin off
or otherwise divest itself of a part of its business or operations or dispose
all or of a part of its assets in a transaction (the "Spin Off") in which the
Company does not receive just compensation for such business, operations or
assets, but causes securities of another entity (the "Spin Off Securities") to
be issued to security holders of the Company. If, for any reason, prior to the
Conversion Date or the Redemption Payment Date, the Company, with the consent of
the Holder, consummates a Spin Off, then the Company shall cause (i) to be
reserved Spin Off Securities equal to the number thereof which would have been
issued to the Holder had all of the Holder's Debentures outstanding on the
record date (the "Record Date") for determining the amount and number of Spin
Off Securities to be issued to security holders of the Company (the "Outstanding
Debentures") been converted as of the close of business on the trading day
immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to
be issued to the Holder on the conversion of all or any of the Outstanding
Debentures, such amount of the Reserved Spin Off Shares equal to (x) the
Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the
numerator is the principal amount of the Outstanding Debentures then being
converted, and (II) the denominator is the principal amount of the Outstanding
Debentures.
11. If, at any time while any portion of this Debenture remains
outstanding, the Company effectuates a stock split or reverse stock split of its
Common Stock or issues a dividend on its Common Stock consisting of shares of
Common Stock, the Fixed Price shall be equitably adjusted to reflect such
action. By way of illustration, and not in limitation, of the foregoing (i) if
the Company effectuates a 2:1 split of its Common Stock, thereafter, with
respect to any conversion for which the Company issues the shares after the
record date of such split, the Fixed Price shall be deemed to be one-half of
what it had been calculated to be immediately prior to such split; (ii) if the
Company effectuates a 1:10 reverse split of its Common Stock, thereafter, with
respect to any conversion for which the Company issues the shares after the
record date of such reverse split, the Fixed Price shall be deemed to be ten
times what it had been calculated to be immediately prior to such split; and
(iii) if the Company declares a stock dividend of one share of Common Stock for
every 10 shares outstanding, thereafter, with respect to any conversion for
which the Company issues the shares after the record date of such dividend, the
Fixed Price shall be deemed to be the amount of such Fixed Price calculated
immediately prior to such record date multiplied by a fraction, of which the
numerator is the number of shares (10) for which a dividend share will be issued
and the denominator is such number of shares plus the dividend share(s) issuable
or issued thereon (11).
6
<PAGE>
12. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
13. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions. To the extent determined by such court, the
Company shall reimburse the Holder for any reasonable legal fees and
disbursements incurred by the Holder in enforcement of or protection of any of
its rights under any of this Debenture.
14. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal
or interest on this Debenture and same shall continue
for a period of five (5) business days; or
b. Any of the representations or warranties made by the
Company herein, in the Securities Purchase Agreement,
the Registration Rights Agreement (as defined in the
Securities Purchase Agreement) or in any certificate
or financial or other written statements heretofore
or hereafter furnished by the Company in connection
with the execution and delivery of this Debenture or
the Securities Purchase Agreement shall be false or
misleading in any material respect at the time made;
or
c. Subject to the terms of the Securities Purchase
Agreement, the Company fails to authorize or to cause
its Transfer Agent to issue shares of Common Stock
upon exercise by the Holder of the conversion rights
of the Holder in accordance with the terms of this
Debenture, fails to transfer or to cause its Transfer
Agent to transfer any certificate for shares of
Common Stock issued to the Holder upon conversion of
this Debenture and when required by this Debenture or
the Registration Rights Agreement, and such transfer
is otherwise lawful, or fails to remove any
restrictive legend on any certificate or fails to
cause its Transfer Agent to remove such restricted
legend, in each case where such removal is lawful, as
and when required by this Debenture, the Agreement or
the Registration Rights Agreement, and any such
failure shall continue uncured for ten (10) business
days; or
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term,
provision, condition, agreement or obligation of any
Debenture in this series and such failure shall
continue uncured for a period of thirty (30) days
after written notice from the Holder of such failure;
or
7
<PAGE>
e. The Company shall fail to perform or observe, in any
material respect, any covenant, term, provision,
condition, agreement or obligation of the Company
under the Securities Purchase Agreement or the
Registration Rights Agreement and such failure shall
continue uncured for a period of thirty (30) days
after written notice from the Holder of such failure
(other than a failure to use the Company's best
efforts to cause the Registration Statement to become
effective, as provided in the Registration Rights
Agreement, as to which the cure period shall be five
(5) days after written notice from the Holder of such
failure); or
f. The Company shall (1) admit in writing its inability
to pay its debts generally as they mature; (2) make
an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (3)
apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial
part of its property or business; or
g. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within ninety (90) days after such
appointment; or
h. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental
agency shall assume custody or control of the whole
or any substantial portion of the properties or
assets of the Company and shall not be dismissed
within ninety (90) days thereafter; or
i. Any money judgment, writ or warrant of attachment, or
similar process in excess of Two Hundred Thousand
($200,000) Dollars in the aggregate shall be entered
or filed against the Company or any of its properties
or other assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of sixty (60) days
or in any event later than five (5) days prior to the
date of any proposed sale thereunder; or
j. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be
dismissed within ninety (90) days after such
institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations
of, or default in answering a petition filed in any
such proceeding; or
k. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market
from trading for in excess of fifteen (15) trading
days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any
8
<PAGE>
subsequent default) at the option of the Holder and in the Holder's sole
discretion, the Holder may consider this Debenture immediately due and payable,
without presentment, demand, protest or notice of any kinds, all of which are
hereby expressly waived, anything herein or in any note or other instruments
contained to the contrary notwithstanding, and the Holder may immediately
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.
15. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
16. In the event for any reason, any payment by or act of the Company
or the Holder shall result in payment of interest which would exceed the limit
authorized by or be in violation of the law of the jurisdiction applicable to
this Debenture, then ipso facto the obligation of the Company to pay interest or
perform such act or requirement shall be reduced to the limit authorized under
such law, so that in no event shall the Company be obligated to pay any such
interest, perform any such act or be bound by any requirement which would result
in the payment of interest in excess of the limit so authorized. In the event
any payment by or act of the Company shall result in the extraction of a rate of
interest in excess of a sum which is lawfully collectible as interest, then such
amount (to the extent of such excess not returned to the Company) shall, without
further agreement or notice between or by the Company or the Holder, be deemed
applied to the payment of principal, if any, hereunder immediately upon receipt
of such excess funds by the Holder, with the same force and effect as though the
Company had specifically designated such sums to be so applied to principal and
the Holder had agreed to accept such sums as an interest-free prepayment of this
Debenture. If any part of such excess remains after the principal has been paid
in full, whether by the provisions of the preceding sentences of this Section 16
or otherwise, such excess shall be deemed to be an interest-free loan from the
Company to the Holder, which loan shall be payable immediately upon demand by
the Company. The provisions of this Section 16 shall control every other
provision of this Debenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: December 28, 1999
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman
-------------------------------------
Shalom Z. Hirschman
President and Chief Executive Officer
9
ANNEX VI
TO SECURITIES PURCHASE AGREEMENT
FORM OF WARRANT
THESE SECURITIES INCLUDING ANY UNDERLYING SECURITIES (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions. In consideration of good and
valuable consideration, the receipt of which is hereby acknowledged by ADVANCED
VIRAL RESEARCH CORP., a Delaware corporation (the "Company"), ENDEAVOUR CAPITAL
FUND S.A. or registered assigns (the "Holder") is hereby granted the right to
purchase at any time until 5:00 P.M., New York City time, on December 31, , 2002
(the "Expiration Date"), Thousand ( ) fully paid and nonassessable shares of the
Company's Common Stock, par value $.00001 per share (the "Common Stock") at an
initial exercise price per share (the "Exercise Price") of $0.19916667 per
share, subject to further adjustment as set forth herein. This Warrant is being
issued pursuant to the terms of that certain Securities Purchase Agreement,
dated as of December 28, 1999 (the "Securities Purchase Agreement"), to which
the Company and Holder (or Holder's predecessor in interest) are parties.
Capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Securities Purchase Agreement.
2. Exercise of Warrants.
---------------------
2.1 General. This Warrant is exercisable in whole or
in part at any time and from time to time by means of tendering this Warrant
Certificate together with a completed copy of the annexed Notice of Exercise
Form duly executed (which Notice of Exercise Form may be submitted either by
delivery to the Company or by facsimile transmission as provided in Section 8
hereof). Upon surrender of this Warrant Certificate with, together with
appropriate payment of the Exercise Price for the shares of Common Stock
purchased, the Holder shall be entitled to receive a certificate or certificates
for the shares of Common Stock so purchased. If the Notice of Exercise Form
elects a "cash" exercise, at the Exercise Price per share of Common Stock for
the shares then being exercised shall be payable in cash or by certified or
official bank check. If the Notice of Exercise Form elects a "cashless"
exercise, the Holder shall thereby be entitled to receive a number of shares of
Common Stock equal to (x) the excess of the Current Market Value (as defined
below)
<PAGE>
over the total cash exercise price of the portion of the Warrant then being
exercised, divided by (y) the Market Price of the Common Stock as of the
Conversion Date. For the purposes of this Section 2, "Current Market Value"
shall be an amount equal to the Market Price of the Common Stock as of the
Conversion Date, multiplied by the number of shares of Common Stock specified in
such Notice of Exercise Form.
2.2 Limitation on Exercise. Notwithstanding the
provisions of this Warrant, the Securities Purchase Agreement or of the other
Transaction Agreements, in no event (except (i) after the Maturity Date of the
Debentures, (ii) as specifically provided in this Warrant as an exception to
this provision, or (iii) while there is outstanding a tender offer for any or
all of the shares of the Company's Common Stock) shall the Holder be entitled to
exercise this Warrant, or shall the Company have the obligation to issue shares
upon such exercise of all or any portion of this Warrant, to the extent that,
after such exercise the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debentures or unexercised portion of the Warrants),
and (2) the number of shares of Common Stock issuable upon the exercise of the
Warrants with respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its affiliates of more
than 9.99% of the outstanding shares of Common Stock (after taking into account
the shares to be issued to the Holder upon such exercise). For purposes of the
proviso to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of
such sentence. The Holder, by its acceptance of this Warrant, further agrees
that if the Holder transfers or assigns any of the Warrants to a party who or
which would not be considered such an affiliate, such assignment shall be made
subject to the transferee's or assignee's specific agreement to be bound by the
provisions of this Section 2.2 as if such transferee or assignee were the
original Holder hereof.
3. Reservation of Shares. The Company hereby agrees that at
all times during the term of this Warrant there shall be reserved for issuance
upon exercise of this Warrant such number of shares of its Common Stock as shall
be required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
2
<PAGE>
6. Protection Against Dilution.
----------------------------
6.1 Adjustment Mechanism. If an adjustment of the
Exercise Price is required pursuant to this Section 6, the Holder shall be
entitled to purchase such number of additional shares of Common Stock as will
cause (i) the total number of shares of Common Stock Holder is entitled to
purchase pursuant to this Warrant, multiplied by (ii) the adjusted Exercise
Price per share, to equal (iii) the dollar amount of the total number of shares
of Common Stock Holder is entitled to purchase before adjustment multiplied by
the total Exercise Price before adjustment.
6.2 Capital Adjustments. In case of any stock split
or reverse stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original Exercise Price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof. A rights offering to stockholders shall be deemed a stock dividend to
the extent of the bargain purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason,
prior to the exercise of this Warrant in full, the Company spins off or
otherwise divests itself of a part of its business or operations or disposes all
or of a part of its assets in a transaction (the "Spin Off") in which the
Company does not receive compensation for such business, operations or assets,
but causes securities of another entity (the "Spin Off Securities") to be issued
to security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off
Securities equal to the number thereof which would have been issued to
the Holder had all of the Holder's unexercised Warrants outstanding on
the record date (the "Record Date") for determining the amount and
number of Spin Off Securities to be issued to security holders of the
Company (the "Outstanding Warrants") been exercised as of the close of
business on the trading day immediately before the Record Date (the
"Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the
exercise of all or any of the Outstanding Warrants, such amount of the
Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares
multiplied by (y) a fraction, of which (I) the numerator is the amount
of the Outstanding Warrants then being exercised, and (II) the
denominator is the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be
adjusted immediately after consummation of the Spin Off by multiplying
the Exercise Price by a fraction (if, but only if, such fraction is
less than 1.0), the numerator of which is the Average Market Price of
3
<PAGE>
the Common Stock (as defined below) for the five (5) trading days
immediately following the fifth trading day after the Record Date, and
the denominator of which is the Average Market Price of the Common
Stock on the five (5) trading days immediately preceding the
Record Date; and such adjusted Exercise Price shall be deemed to be the
Exercise Price with respect to the Outstanding Warrants after the
Record Date. As used herein, the term "Average Market Price of the
Common Stock" means the average closing bid price of a share of Common
Stock, as reported by Bloomberg, LP or, if not so reported, as reported
on the over-the-counter market for the relevant period.
7. Transfer to Comply with the Securities Act; Registration
Rights.
7.1 Transfer. This Warrant has not been registered
under the Securities Act of 1933, as amended, (the "Act") and has been issued to
the Holder for investment and not with a view to the distribution of either the
Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant
Shares or any other security issued or issuable upon exercise of this Warrant
may be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other security
issued or issuable upon exercise of this Warrant shall contain a legend on the
face thereof, in form and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this Section.
7.2 Registration Rights. (a) Reference is made to the
Registration Rights Agreement. The Company's obligations under the Registration
Rights Agreement and the other terms and conditions thereof with respect to the
Warrant Shares, including, but not necessarily limited to, the Company's
commitment to file a registration statement including the Warrant Shares, to
have the registration of the Warrant Shares completed and effective, and to
maintain such registration, are incorporated herein by reference.
(b) In addition to the registration rights referred
to in the preceding provisions of Section 7.2(a), effective after the expiration
of the effectiveness of the Registration Statement as contemplated by the
Registration Rights Agreement, the Holder shall have piggy-back registration
rights with respect to the Warrant Shares then held by the Holder or then
subject to issuance upon exercise of this Warrant (collectively, the "Remaining
Warrant Shares"), subject to the conditions set forth below. If, at any time
after the Registration Statement has ceased to be effective, the Company
participates (whether voluntarily or by reason of an obligation to a third
party) in the registration of any shares of the Company's stock (other than a
registration on Form S-8), the Company shall give written notice thereof to the
Holder and the Holder shall have the right, exercisable within ten (10) business
days after receipt of such notice, to demand inclusion of all or a portion of
the Holder's Remaining Warrant Shares in such registration statement. If the
Holder exercises such election, the Remaining Warrant Shares so designated shall
be included in the registration statement at no cost or expense to the Holder
(other than any costs or commissions which would be borne by the Holder under
the terms of the Registration Rights Agreement). The Holder's rights under this
Section 7 shall expire at such time as the Holder can sell all of the Remaining
Warrant Shares under Rule 144 without volume or other restrictions or limit.
4
<PAGE>
8. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage pre-paid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission, or, if mailed, two days after the date of deposit in the United
States mails, as follows:
(i) if to the Company, to:
ADVANCED VIRAL RESEARCH CORP.
200 Corporate Boulevard South
Yonkers, NY 10701
Attn: Dr. Shalom Hirschman
Telephone No.: (914) 376-7383
Telecopier No.: (914) 376-7368
with a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
250 Park Avenue
New York, NY 10177
Attn: Robert Fisher, Esq.
Telephone No.: (212) 883-4901
Telecopier No.: (212) 986-0604
(ii) if to the Holder, to:
ATTN:
Telephone No.: ( ) -
Telecopier No.: ( ) -
with a copy to:
Krieger & Prager LLP, Esqs.
39 Broadway
Suite 1440
New York, NY 10006
5
<PAGE>
Attn: Samuel Krieger, Esq.
Telephone No.: (212) 363-2900
Telecopier No. (212) 363-2999
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant
may be amended or supplemented only by an instrument in writing signed by the
parties hereto. This Warrant of even date herewith contain the full
understanding of the parties hereto with respect to the subject matter hereof
and thereof and there are no representations, warranties, agreements or
understandings other than expressly contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a
contract made under the laws of the State of Delaware for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the City of
Wilmington or the state courts of the State of Delaware sitting in the City of
Wilmington in connection with any dispute arising under this Warrant and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. To the extent determined by such court, the Company shall
reimburse the Holder for any reasonable legal fees and disbursements incurred by
the Buyer in enforcement of or protection of any of its rights under any of the
Transaction Agreements.
11. Counterparts. This Warrant may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
12. Descriptive Headings. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of
the 28th day of December 28, 1999.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman
-------------------------------------
Shalom Z. Hirschman
President and Chief Executive Officer
6
BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
ATTORNEYS AND COUNSELORS
NATIONSBANK TOWER AT INTERNATIONAL PLACE
100 SOUTHEAST SECOND STREET, SUITE 3500
MIAMI, FLORIDA 33131-2130
CHARLES J. RENNERT PHONE (305) 577-4177
FAX (305) 373-6036
January 12, 2000
Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
Gentlemen:
You have requested our opinion, as counsel to Advanced Viral Research
Corp., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-1 (Registration No. 333-_____, as amended (the
"Registration Statement"), filed by the Company with the United States
Securities and Exchange Commission (the "Commission").
The Registration Statement relates to an offering of up to 33,104,737
shares (the "Shares") of the common stock of the Company, par value $0.00001 per
share, by certain shareholders, which include:
(i) 210,000 shares of the Company's common stock issuable upon the
exercise of certain warrants (the "Warrants"); and
(iii) 32,894,737 shares of the Company's common stock issuable upon
the exercise of certain convertible debentures (the
"Debentures").
We have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records,
certificates and instruments relating to the Company as we have deemed relevant
and necessary to the formation of the opinion hereinafter set forth. In such
examination, we have assumed the genuineness and authenticity of all documents
examined by us and all signatures thereon, the legal capacity of all persons
executing such documents, the conformity to originals of all copies of documents
submitted to us and the truth and correctness of any representations and
warranties contained therein.
We have also consulted with officers and directors of the Company and
have obtained such representations with respect to the matters of fact as we
have deemed necessary or advisable for purposes of rendering the opinion
<PAGE>
hereinafter expressed. We have not independently verified the factual statements
made to us in connection therewith, nor the veracity of such representations.
Based upon and subject to the foregoing, we are of the opinion that,
after the Commission has declared the Registration Statement to be effective
(such Registration Statement as is finally declared effective and the form of
Prospectus contained therein being hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively) and when the applicable
provisions of the "Blue Sky" or other state securities laws shall have been
complied with, the Shares covered by the Registration Statement, upon receipt of
payment therefor and the satisfaction of all other conditions as referenced in
the Warrants, the Debentures and all agreements relating thereto, will
constitute legally issued securities of the Company, fully paid and
non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference of this law firm in the Prospectus
under the heading "LEGAL MATTERS." In giving this consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Respectfully submitted,
/s/ BERMAN WOLFE RENNERT VOGEL & MANDLER, P.A.
----------------------------------------------
BERMAN WOLFE & RENNERT VOGEL & MANDLER, P.A.
ANNEX IV
TO SECURITIES PURCHASE AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of December 28,
1999 (this "Agreement"), is made by and between ADVANCED VIRAL RESEARCH CORP., a
Delaware corporation, with headquarters located at 200 Corporate Boulevard
South, Yonkers, NY 10701 (the "Company"), and each entity named on a signature
page hereto (each, an "Initial Investor") (each agreement with an Initial
Investor being deemed a separate and independent agreement between the Company
and such Initial Investor, except that each Initial Investor acknowledges and
consents to the rights granted to each other Initial Investor under such
agreement).
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement, dated as of December 28, 1999, between the
Initial Investor and the Company (the "Securities Purchase Agreement"; terms not
otherwise defined herein shall have the meanings ascribed to them in the
Securities Purchase Agreement), the Company has agreed to issue and sell to the
Initial Investor one or more 7% Convertible Debentures of the Company, in an
aggregate principal amount not exceeding $2,000,000 (the "Debentures"); and
WHEREAS, the Company has agreed to issue the Warrants to the
Initial Investor in connection with the issuance of the Debentures; and
WHEREAS, the Debentures are convertible into shares of Common
Stock (the "Conversion Shares"; which term, for purposes of this Agreement,
shall include shares of Common Stock of the Company issuable in lieu of accrued
interest on conversion as contemplated by the Debentures) upon the terms and
subject to the conditions contained in the Debentures and the Warrants may be
exercised for the purchase of shares of Common Stock (the "Warrant Shares") upon
the terms and conditions of the Warrants; and
WHEREAS, to induce the Initial Investor to execute and deliver
the Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares and the Warrant Shares;
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Investor" means the Initial Investor and any permitted
transferee or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof and who holds Debentures, Warrants
or Registrable Securities.
(b) "Potential Material Event" means any of the following: (i)
the possession by the Company of material information not ripe for disclosure in
a registration statement, which shall be evidenced by determinations in good
faith by the Board of Directors of the Company that disclosure of such
information in the registration statement would be detrimental to the business
and affairs of the Company; or (ii) any material engagement or activity by the
Company which would, in the good faith determination of the Board of Directors
of the Company, be adversely affected by disclosure in a registration statement
at such time, which determination shall be accompanied by a good faith
determination by the Board of Directors of the Company that the registration
statement would be materially misleading absent the inclusion of such
information.
(c) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(d) "Registrable Securities" means the Conversion Shares and
the Warrant Shares.
(e) "Registration Statement" means a registration statement of
the Company under the Securities Act.
(f) "Required Effective Date" means the relevant Initial
Required Effective Date or Increased Required Effective Date (as those terms are
defined below).
2. Registration.
(a) Mandatory Registration.
(i) The Company shall prepare and file with the SEC, as soon
as possible after the Initial Closing Date either a Registration Statement on
Form S-1or an amendment to an existing Registration Statement, in either event
registering for resale by the Investor a sufficient
2
<PAGE>
number of shares of Common Stock for the Initial Investors to sell the
Registrable Securities (or such lesser number as may be required by the SEC, but
in no event less than the aggregate number of shares equal to (A) two hundred
twenty-five percent (225%) of the number of shares into which the principal of
the Initial Debentures and the Additional Debentures would be convertible at the
time of filing of such Registration Statement (assuming for such purposes that
the Additional Debentures had been issued at such date and that all Debentures
had been eligible to be converted, and had been converted into Conversion Shares
in accordance with their terms, whether or not such issuance, eligibility or
conversion had in fact occurred as of such date) plus (B) the number of shares
which would be issued upon exercise of all of the Warrants (assuming for such
purposes that the Warrants issued in connection with the purchase and sale of
all Debentures, including on the Additional Closing Date, had been issued and
that all Warrants had been eligible to be exercised for the maximum number of
shares contemplated thereby and had been exercised in accordance with their
terms, whether or not such issuance, eligibility or exercise had in fact
occurred as of such date). The Registration Statement (W) shall include only the
Registrable Securities and the shares referred to in Exhibit 1 annexed hereto;
and (X) shall also state that, in accordance with Rule 416 and 457 under the
Securities Act, it also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Debentures and the
exercise of the Warrants to prevent dilution resulting from stock splits, or
stock dividends. The Company will use its reasonable best efforts to cause such
Registration Statement to be declared effective on a date (the "Initial Required
Effective Date") which no later than is the earlier of (Y) five (5) days after
oral or written notice by the SEC that it may be declared effective or (Z)
ninety-five (95) days after the Initial Closing Date.
(ii) If at any time (an "Increased Registered Shares Date"),
the number of shares of Common Stock represented by the Registrable Shares,
issued or to be issued as contemplated by the Transaction Agreements, exceeds
the aggregate number of shares of Common Stock then registered, the Company
shall, within ten (10) business days after receipt of a written notice from any
Investor, either (X) amend the Registration Statement filed by the Company
pursuant to the preceding provisions of this Section 2, if such Registration
Statement has not been declared effective by the SEC at that time, to register,
in the aggregate, at least the number of shares equal to (A) the number of
shares (the "Increased Shares Amount") theretofore issued on conversion of the
Debentures (including any interest paid on conversion by the issuance of
Conversion Shares), plus (B) the sum of (I) two hundred twenty-five percent
(225%) of the number of shares into which the then unconverted Debentures would
be convertible at the time of relevant filing with the SEC or as of the
Increased Registered Shares Date, whichever is higher, plus (II) the number of
shares which would be issued upon exercise of all of the Warrants issued in
connection with the purchase and sale of the Debentures, in each case computed
as contemplated by the immediately preceding subparagraph (i), or (Y) if such
Registration Statement has been declared effective by the SEC at that time, file
with the SEC an additional Registration Statement on Form S-1 or other
appropriate registration statement form (an "Additional Registration Statement")
to register the number of shares equal to the excess of the Increased Shares
Amount over the aggregate number of shares of Common Stock already registered.
The Company will use its reasonable best efforts to cause such Registration
Statement to be declared effective on a date (each, an "Increased Required
Effective Date")
3
<PAGE>
which is no later than (Q) with respect to a Registration Statement under clause
(X) of this subparagraph (ii), the Initial Required Effective Date and (R) with
respect to an Additional Registration Statement, the earlier of (I) five (5)
days after notice by the SEC that it may be declared effective or (II)
seventy-five (75) days after the Increased Registered Shares Date.
(iii) The Initial Investor acknowledges that, without the
consent (the "Focus Consent") of Focus Investors LLC ("Focus"), the Company is
prohibited from filing a Registration Statement covering the Registrable
Securities with the SEC until a registration statement covering the resale of
the Company's Common Stock issuable upon conversion of a convertible debenture
and exercise of warrants held by Focus is declared effective by the SEC (the
"Focus Effective Date"). The Initial Investor agrees that, for purposes of
Section 2(a)(i) and Section 3(a) hereof, the failure by the Company to file a
Registration Statement covering the Registrable Securities prior to the Focus
Effective Date or prior to obtaining the Focus Consent , whichever is earlier,
shall not be deemed to be a failure to file such Registration Statement as soon
as possible after the Initial Closing Date or a failure to promptly file such
Registration Statement.
(b) Payments by the Company.
(i) If the Registration Statement covering the
Registrable Securities is not effective by the relevant Required Effective Date
or if the Investor is restricted from making sales of Registrable Securities
covered by a previously effective Registration Statement at any time (the date
such restriction commences, a "Restricted Sale Date") after the Effective Date
other than during a Permitted Suspension Period (as defined below), then the
Company will make payments to the Initial Investor in such amounts and at such
times as shall be determined pursuant to this Section 2(b).
(ii) The amount (the "Periodic Amount") to be paid by
the Company to the Initial Investor shall be determined as of each Computation
Date (as defined below) and such amount shall be equal to the Periodic Amount
Percentage (as defined below) of the Purchase Price for all Debentures for the
period from the date following the relevant Required Effective Date or
Restricted Sale Date, as the case may be, to the first relevant Computation
Date, and thereafter to each subsequent Computation Date. The "Periodic Amount
Percentage" means (A) two percent (2.0%; except that, prior to the Effective
Date, it shall mean one and one-half percent [1.5%] )of the Purchase Price for
all the Debentures for the period from the date immediately following the
relevant Required Effective Date or Restricted Sale Date, as the case may be, to
the first or second relevant Computation Date and (B) two percent (2%) of the
Purchase Price of all Debentures to each Computation Date thereafter. Anything
in the preceding provisions of this paragraph (iii) to the contrary
notwithstanding, after the Effective Date the Purchase Price shall be deemed to
refer to the sum of (X) the principal amount of all Debentures not yet converted
and (Y) the Held Shares Value (as defined below). The "Held Shares Value" means,
for shares acquired by the Investor upon a conversion within the thirty (30)
days preceding the Restricted Sale Date, but not yet sold by the Investor, the
principal amount of the Debentures converted into such Conversion Shares;
provided, however, that if the Investor effected more than one
4
<PAGE>
conversion during such thirty (30) day period and sold less than all of such
shares, the sold shares shall be deemed to be derived first from the conversions
in the sequence of such conversions (that is, for example, until the number of
shares from the first of such conversions have been sold, all shares shall be
deemed to be from the first conversion; thereafter, from the second conversion
until all such shares are sold). By way of illustration and not in limitation of
the foregoing, if the Registration Statement is not declared effective until one
hundred seventy (170) days after the Initial Closing Date, the Periodic Amount
will aggregate five percent (5%) of the Purchase Price of the Debentures
theretofore issued (1.5% for days 96-125, plus 1.5% for days 126-155, plus 2%
for days 156-170).
(iii) Each Periodic Amount will be payable by the
Company in cash or other immediately available funds to the Investor monthly,
without requiring demand therefor by the Investor.
(iv) The parties acknowledge that the damages which
may be incurred by the Investor if the Registration Statement has not been
declared effective by a Required Effective Date, including if the right to sell
Registrable Securities under a previously effective Registration Statement is
suspended, may be difficult to ascertain. The parties agree that the Periodic
Amounts represent a reasonable estimate on the part of the parties, as of the
date of this Agreement, of the amount of such damages.
(v) Notwithstanding the foregoing, the amounts
payable by the Company pursuant to this provision shall not be payable to the
extent any delay in the effectiveness of the Registration Statement occurs
because of an act of, or a failure to act or to act timely by the Initial
Investor or its counsel, or in the event all of the Registrable Securities may
be sold pursuant to Rule 144 or another available exemption under the Act
without volume or other restrictions or limits.
(vii) "Computation Date" means (A) the date which is
the earlier of (1) thirty (30) days after any relevant Required Effective Date
or a Restricted Sale Date, as the case may be, or (2) the date after such
Required Effective Date or Restricted Sale Date on which the Registration
Statement is declared effective or has its restrictions removed, as the case may
be, and (B) each date which is the earlier of (1) thirty (30) days after the
previous Computation Date or (2) the date after the previous Computation Date on
which the Registration Statement is declared effective or has its restrictions
removed, as the case may be.
3. Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall do each of the
following:
(a) Prepare promptly, and file with the SEC a Registration
Statement with respect to not less than the number of Registrable Securities
provided in Section 2(a) above, and thereafter use its reasonable best efforts
to cause such Registration Statement relating to Registrable Securities to
become effective by the Required Effective Date and keep the Registration
Statement effective at all times during the period (the "Registration Period")
5
<PAGE>
continuing until the earliest of (i) the date that is two (2) years after the
last day of the calendar month following the month in which the Effective Date
occurs, (ii) the date when the Investors may sell all Registrable Securities
under Rule 144 without volume or other restrictions or limits or (iii) the date
the Investors no longer own any of the Registrable Securities, which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) Permit a single firm of counsel designated by the Initial
Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects;
(d) Notify each Investor, such Investor's legal counsel
identified to the Company and which has requested by written notice to the
Company that it receive such notification (which, until further notice, shall be
deemed to be Krieger & Prager LLP, Attn: Samuel Krieger, Esq., which firm has
requested to receive such notification; each, an "Investor's Counsel"), and any
managing underwriters immediately (and, in the case of (i)(A) below, not less
than two (2) business days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) business day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) whenever the SEC notifies the Company whether there will be a "review" of
such Registration Statement; (C) whenever the Company receives (or a
representative of the Company receives on its behalf) any oral or written
comments from the SEC in respect of a Registration Statement (copies or, in the
case of oral comments, summaries of such comments shall be promptly furnished by
the Company to the Investors); and (D) with respect to the Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC or any other Federal or state governmental
authority for amendments or supplements to the Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Securities or the initiation of any
proceedings for that purpose; (iv) if at any time any of the representations or
warranties of the Company contained in any agreement (including any underwriting
agreement) contemplated hereby ceases to be true and correct in all material
respects; (v) of the receipt by the Company of any notification with respect
6
<PAGE>
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any proceeding for such purpose; and (vi) of the occurrence of
any event that to the best knowledge of the Company makes any statement made in
the Registration Statement or Prospectus or any document incorporated or deemed
to be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. In addition, the Company shall furnish the Investors with
copies of all intended written responses to the comments contemplated in clause
(C) of this Section 3(d) not later than one (1) business day in advance of the
filing of such responses with the SEC so that the Investors shall have the
opportunity to comment thereon;
(e) Furnish to each Investor and such Investor's Counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(f) As promptly as practicable after becoming aware thereof,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(g) As promptly as practicable after becoming aware thereof,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop
order or other suspension of the effectiveness of the Registration Statement at
the earliest possible time;
(h) Notwithstanding the foregoing, if at any time or from time
to time after the date of effectiveness of the Registration Statement, the
Company notifies the Investors in writing of the existence of a Potential
Material Event, the Investors shall not offer or sell any Registrable
Securities, or engage in any other transaction involving or relating to the
Registrable Securities, from the time of the giving of notice with respect to a
Potential Material Event until such Investor receives written notice from the
Company that such Potential Material Event either has
7
<PAGE>
been disclosed to the public or no longer constitutes a Potential Material
Event; provided, however, that the Company may not so suspend the right to such
holders of Registrable Securities during the periods the Registration Statement
is required to be in effect other than during a Permitted Suspension Period. The
term "Permitted Suspension Period" means up to two suspension periods during any
consecutive 12-month period, each of which suspension period shall not either
(i) be for more than thirty (30) days or (ii) begin less than ten (10) business
days after the last day of the preceding suspension (whether or not such last
day was during or after a Permitted Suspension Period); provided further that
the Company shall, if lawful to do so, provide the Investor with at least two
(2) business days' notice of the existence (but not the substance of) a
Potential Material Event;
(i) Use its reasonable efforts to secure and maintain the
designation of all the Registrable Securities covered by the Registration
Statement on the "NASDAQ/Bulletin Board Market" of the National Association of
Securities Dealers Automated Quotations System ("NASDAQ") within the meaning of
Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the quotation of the Registrable Securities on The
NASDAQ/Bulletin Board Market; and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Securities;
(j) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(k) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts as the case may be, as the
Investors may reasonably request, and, within three (3) business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent for the Registrable
Securities (with copies to the Investors whose Registrable Securities are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(l) Take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such
8
<PAGE>
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least ten (10) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to have any
of such Investor's Registrable Securities included in the Registration
Statement. If at least two (2) business days prior to the filing date the
Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(e)
or 3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. All reasonable expenses (other
than underwriting discounts and commissions of the Investor) incurred in
connection with registrations, filings or qualifications pursuant to Section 3,
but including, without limitation, all registration, listing, and qualifications
fees, printers and accounting fees, the fees and disbursements of counsel for
the Company shall be borne by the Company. In addition, a fee for a single
counsel to review the Registration Statement on behalf of the Investors not
exceeding, in the aggregate for all Investors, $3,500, shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person" or
"Indemnified Party"), against any losses, claims, damages, liabilities or
expenses (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings,
9
<PAGE>
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to clause (b) of this Section 6, the Company shall reimburse the Investors,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a) shall not (I) apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, after such
prospectus was made available by the Company pursuant to Section 3(c) hereof;
(II) be available to the extent such Claim is based on a failure of the Investor
to deliver or cause to be delivered the prospectus made available by the Company
or the amendment or supplement thereto made available by the Company; (III) be
available to the extent such Claim is based on the delivery of a prospectus by
the Investor after receiving notice from the Company under Section 3(e), (f) or
(g) hereof (other than a notice regarding the effectiveness of the Registration
Statement or any amendment or supplement thereto), or (IV) apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably withheld
or delayed. Each Investor will indemnify the Company and its officers, directors
and agents (each, an "Indemnified Person" or "Indemnified Party") against any
claims arising out of or based upon a Violation which occurs in reliance upon
and in conformity with information furnished in writing to the Company, by or on
behalf of such Investor, expressly for use in connection with the preparation of
the Registration Statement or the amendment or supplement thereto, subject to
such limitations and conditions as are applicable to the Indemnification
provided by the Company to this Section 6. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
10
<PAGE>
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be. In case any such action is brought against any Indemnified Person
or Indemnified Party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such Indemnified Person or
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Person or Indemnified
Party under this Section 6 for any legal or other reasonable out-of-pocket
expenses subsequently incurred by such Indemnified Person or Indemnified Party
in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action of its
final conclusion. The Indemnified Person or Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and reasonable out-of-pocket expenses of such
counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the Indemnified Person or Indemnified Party provided such
counsel is of the opinion that all defenses available to the Indemnified Party
can be maintained without prejudicing the rights of the indemnifying party. The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such indemnifying
party of any liability to the Indemnified Person or Indemnified Party under this
Section 6, except to the extent that the indemnifying party is prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6; (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) except where the seller has committed fraud (other
than a fraud by reason of the information included or omitted from the
Registration Statement as to which the Company has not given notice as
contemplated under Section 3 hereof) or intentional misconduct, contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. Reports under Exchange Act. With a view to making available
to the Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule
11
<PAGE>
or regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of the Registration Rights. The rights to have
the Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any unconverted Debenture or unexercised
Warrant) only if: (a) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee and
(ii) the securities with respect to which such registration rights are being
transferred or assigned, (c) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, and
(d) at or before the time the Company received the written notice contemplated
by clause (b) of this sentence the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein. In the event
of any delay in filing or effectiveness of the Registration Statement as a
result of such assignment, the Company shall not be liable for any damages
arising from such delay, or the payments set forth in Section 2(c) hereof
arising from such delay.
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold an sixty-seven (67%) percent interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company
12
<PAGE>
receives conflicting instructions, notices or elections from two or more persons
or entities with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall
be given in the manner contemplated by the Agreement, (i) if to the Company or
to the Initial Investor, to their respective address contemplated by the
Agreement, and (iii) if to any other Investor, at such address as such Investor
shall have provided in writing to the Company, or at such other address as each
such party furnishes by notice given in accordance with this Section 11(b).
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the City of New York
or the state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Buyer for any reasonable legal fees and disbursements incurred by
the Buyer in enforcement of or protection of any of its rights under this
Agreement.
(e) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
13
<PAGE>
(j) The Company acknowledges that any failure by the Company
to perform its obligations under Section 3(a) hereof, or any delay in such
performance could result in loss to the Investors, and the Company agrees that,
in addition to any other liability the Company may have by reason of such
failure or delay, the Company shall be liable for all direct damages caused by
any such failure or delay, unless the same is the result of force majeure.
Neither party shall be liable for consequential damages.
(k) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
COMPANY:
ADVANCED VIRAL RESEARCH CORP.
By: /s/ Shalom Z. Hirschman
-------------------------------------------
Shalom Z. Hirschman
Title: President and Chief Executive Officer
INITIAL INVESTOR:
ENDEAVOUR CAPITAL FUND S.A.
By: /s/ Shamuli Margulies
-------------------------------------------
Name: Shamuli Margulies
Title: Director
-----------------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this registration statement on Form S-1 of Advanced Viral Research Corp. of our
report dated February 11, 1999 (which report contains an explanatory paragraph
that describes a condition that raises substantial doubt as to the ability of
Advanced Viral Research Corp. to continue as a going concern) relating to the
consolidated financial statements of Advanced Viral Research Corp. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 appearing in such Prospectus. We also consent to the
references to us under the heading "EXPERTS" in the Prospectus.
/s/ RACHLIN COHEN & HOLTZ LLP
-----------------------------
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
January 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,308,378
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,363,946
<PP&E> 1,093,548 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,020,770
<CURRENT-LIABILITIES> 623,170
<BONDS> 0
0
0
<COMMON> 3,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,020,770
<SALES> 6,517
<TOTAL-REVENUES> 34,468
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,133,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 920,595
<INCOME-PRETAX> (4,098,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,098,867)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<FN>
<F1> PP&E REPRESENT NET AMOUNTS.
</FN>
</TABLE>
