AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 2002.
REGISTRATION NO. 333-55430
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ADVANCED VIRAL RESEARCH CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 5129 59-2646820
- ------------------------------ --------------------------- ---------------------
(State or other jurisdiction of (Primary Standard Industrial IRS Employer
incorporation or organization) Classification Code Number) Identification Number
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
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(Address and telephone number of Registrant's principal executive offices)
SHALOM Z. HIRSCHMAN, M.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
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(Name, address and telephone number of agent for service)
---------------------
COPIES TO:
CHARLES J. RENNERT
BERMAN RENNERT VOGEL & MANDLER, P.A.
BANK OF AMERICA TOWER, SUITE 3500, 100 SOUTHEAST SECOND STREET
MIAMI, FLORIDA 33131-2130
PHONE: (305) 577-4177 FAX: (305) 373-6036
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Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are being
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. [ ]
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
PROSPECTUS
176,666,667 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
This prospectus may be used only in connection with the resale of
176,666,667 shares of common stock of Advanced Viral Research Corp. by the
selling shareholders listed on page 49 of this prospectus.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On April 17, 2002,
the high and low bid prices for the common stock on the Bulletin Board were
$0.125 and $0.121 per share, 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 April __, 2002.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................1
SUMMARY FINANCIAL DATA............................................................................................4
RISK FACTORS......................................................................................................5
ABOUT THIS PROSPECTUS............................................................................................10
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE..................................................................10
WHERE TO FIND MORE INFORMATION...................................................................................10
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................11
CAPITALIZATION...................................................................................................12
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................15
BUSINESS.........................................................................................................25
MANAGEMENT.......................................................................................................42
PRINCIPAL SHAREHOLDERS...........................................................................................50
SELLING SHAREHOLDERS.............................................................................................51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................52
DESCRIPTION OF COMMON STOCK......................................................................................53
USE OF PROCEEDS..................................................................................................53
PLAN OF DISTRIBUTION.............................................................................................54
LEGAL MATTERS....................................................................................................55
EXPERTS..........................................................................................................55
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................55
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
PART II - INFORMATION NOT REQUIRED IN THE PROSPECTUS...........................................................II-1
SIGNATURES....................................................................................................II-11
You should rely only on the information provided in this prospectus. We
have authorized no one to provide you with different information. The selling
shareholders are not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information in this
prospectus or any prospectus supplement is accurate as of any date other than
the date on the front of the document.
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.
THE COMPANY
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). In addition to Reticulose(R), which has been used
exclusively with Advanced Viral's original formulation, Advanced Viral is
developing a new or current formulation which to date, has been designated only
by its generic name Product R. As used in this prospectus, the term "Product R"
refers to the current formulation as well as the prior formulation of the
pharmaceutical drug known as Reticulose(R). Product R may be employed in the
treatment of certain viral and autoimmune diseases such as:
o Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
o Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND. On July 30, 2001, we submitted an
IND application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. In March 2002, we completed the Phase 1 trials and submitted
to the FDA the results, which indicated that Product R was safe and well
tolerated dermatologically in all the doses applied in the study. The data
accrued from the Phase 1 trials will form the basis for the Phase 2 protocol
planned to be submitted to the FDA in the future. On April 12, 2002, we began
Phase 2 of the IND by beginning the process of recruiting clinical sites to
perform studies in patients in the U.S. with genital warts.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States. Our Phase 1 studies were
performed in the United States on human patients. We do not know the cost of
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future clinical trials and we may not be able to raise the funds necessary to
begin or continue planned clinical trials. Additional financing to fund
subsequent clinical trials may not be available to us, which may force us to
reduce our clinical trials and operations.
In October 2001, we were awarded a U.S. patent entitled "Preparation of
a Therapeutic Composition," which issued patent protects the preparation and
composition of Product R. In March 2002, we were awarded a U.S. patent entitled
"Topical Treatment of Skin Disease and Eye Afflictions," which issued patent
protects the use of Product R for use in the topical treatment of viral skin
infections such as HPV, shingles and herpes simplex, and viral eye infections
including those caused by herpes simplex virus.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York is (914) 376-7383. We have
also established a website: WWW.ADVIRAL.COM. Information contained on our
website is not a part of this prospectus.
THE OFFERING
On February 9, 2001, we signed a private equity line of credit
agreement with Cornell Capital Partners, LP for the future issuance and purchase
of shares of our common stock. The private equity line of credit agreement
establishes what is sometimes termed an equity line of credit or an equity
drawdown facility. Cornell Capital has committed up to $50,000,000 to purchase
shares of our common stock. Until August 13, 2003, we may, from time to time, in
our sole discretion, sell or "put" shares of our common stock to Cornell Capital
at a purchase price equal to 95% of the average of the 3 lowest closing bid
prices of our common stock over the 25 trading day period ending on the advance
date. The number of shares that we will issue to Cornell Capital in return for
the advance will be determined by dividing the amount of the advance by the
purchase price of the common stock. The closing bid price of the common stock on
the advance notice date must be equal to or greater than the average bid price
of the previous (25) twenty-five days. No advance date may be less than 12
trading days after an advance notice date. In addition, Cornell Capital's
obligation to purchase the shares of our common stock is subject to the
satisfaction of certain other conditions included on page 36 of this prospectus.
We will receive the amount of the advance less any escrow agent fees
and a five percent (5%) cash placement fee payable to the placement agent, May
Davis Group, Inc., which introduced us to Cornell Capital. May Davis is not
obligated to purchase any of our shares, but as an additional placement fee, we
issued to May Davis and other investors Class A Warrants to purchase in the
aggregate 5,000,000 shares of our common stock at an exercise price per share
equal to $1.00, exercisable in part or in whole at any time until February 9,
2006, and Class B Warrant to purchase in the aggregate 5,000,000 shares of our
common stock at an exercise price equal to the greater of $1.00 or 110% of the
bid price of the common stock on the applicable advance date under the private
equity line of credit agreement. Each Class B Warrant is exercisable pro rata on
or after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the numerator of
which is the amount of the advance payable on the applicable advance date and
the denominator of which is $50,000,000, until sixty months from the date of
issuance. We may redeem the warrants at a redemption price of $0.01 per share
provided that the bid price for our common stock equals at least $4.00 per share
for a period of ten (10) consecutive trading days, as described therein. There
are also certain "piggyback" registration rights with respect to the shares of
common stock issuable upon exercise of the warrants pursuant to a registration
rights agreement.
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Securities offered (1)........................................176,666,667 shares of common stock.
Percentage of Advanced Viral's currently outstanding
securities represented by offering............................40%
Common stock to be outstanding
after the offering (2)........................................607,450,020 shares of common stock, assuming issuance
of the 176,666,667 shares pursuant to our equity line
of credit and exercise of all warrants for which shares
are being registered in this prospectus.
Use of proceeds...............................................We will not receive any proceeds from the sale of
common stock by the selling shareholders. We will
receive the cash proceeds, if any, from the exercise of
the warrants held by selling shareholders.
Risk factors..................................................An investment in the shares involves a high degree of
risk. See "Risk Factors."
OTC Bulletin Board trading symbol............................."ADVR"
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(1) Represents (i) up to 166,666,667 shares of our common stock issuable upon
the exercise from time to time of a private equity line of credit
established by Cornell Capital Partners, LP; and (ii) up to 10,000,000
shares of our common stock issuable upon the exercise of certain warrants
to certain investors under the equity line of credit agreement, of which
only the Class A Warrants to purchase in the aggregate 5,000,000 shares of
common stock is currently exercisable. Each Class B Warrant to purchase
5,000,000 shares of common stock at an exercise price equal to the greater
of $1.00 or 110% of the bid price of the common stock on the applicable
advance date under the private equity line of credit agreement, is
exercisable pro rata on or after each advance date with respect to that
number of warrant shares equal to the product obtained by multiplying
5,000,000 by a fraction, the numerator of which is the amount of the
advance payable on the applicable advance date and the denominator of which
is $50,000,000, until sixty months from the date of issuance.
(2) As of April 16, 2002. Does not include approximately 72,145,000 shares
issuable upon exercise of certain outstanding options and warrants other
than those held by the selling shareholders in this prospectus.
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SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 has 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
YEAR ENDED DECEMBER 31
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2001 2000 1999 1998 1997
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Net revenues $ 17,601 $ 8,363 $ 10,953 $ 656 $ 2,278
Net loss $ (11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710) $ (4,141,729)
Net loss per common share $ (0.03) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
Weighted average # of shares 389,435,324 362,549,690 302,361,109 294,809,073 274,534,277
SUMMARY BALANCE SHEET DATA
DECEMBER 31
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2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Total Assets $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
Long-term liabilities $ 74,568 $ 163,013 $ 4,676,652 $ 1,625,299 $ 2,384,793
Stockholders' equity per share $ 0.01 $ 0.02 $ 0.00 $ 0.00 $ 0.01
Shares outstanding at period end 403,296,863 380,214,618 303,472,035 296,422,907 277,962,574
4
RISK FACTORS
OUR SECURITIES ARE HIGHLY SPECULATIVE. YOU SHOULD NOT 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. In addition, 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 OF OUR OUTSTANDING WARRANTS OR OPTIONS OR DRAW DOWNS UNDER
OUR EQUITY LINE OF CREDIT COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON
THE MARKET PRICE OF OUR COMMON STOCK.
As of the date hereof, in addition to the 430,483,353 shares of our
common stock currently outstanding:
o we have outstanding stock options to purchase an aggregate of
48,438,380 shares of common stock at exercise prices ranging from
$0.15 to $0.36, of which 46,098,620 are currently exercisable;
o we have outstanding warrants to purchase an aggregate of 33,706,572
shares of common stock at prices ranging from $0.199 to $1.00, of
which warrants to purchase 28,706,572 shares are currently
exercisable; and
o up to 166,666,667 shares may be offered and sold, from time to time,
by Cornell Capital Partners, LP, which may purchase such shares
pursuant to our equity line of credit agreement, assuming a purchase
price equal to $0.30 per share. The closing bid price of our common
stock on April 17, 2002 was $0.121 per share. Under the terms of the
equity line of credit agreement, we can "put" up to an aggregate of
$50,000,000 of our common stock to Cornell Capital. The purchase
price per common share will vary based on the closing bid prices of
our common stock as reported on the Bulletin Board during the
valuation periods provided in the equity line of credit agreement.
For a full description of the equity line of credit agreement, see
"Business -- Equity Line of Credit Agreement."
If all the foregoing securities and put rights were fully issued,
exercised and/or converted, as the case may be, there would be outstanding
approximately 679.6 million shares of common stock. The sale or availability for
sale of this number of shares of common stock in the public market could depress
5
the market price of the common stock. Additionally, the sale or availability for
sale of this number of shares may lessen the likelihood that additional equity
financing will be available to us, on favorable or unfavorable terms.
3. THE OFFER AND SALE OF SHARES OF COMMON STOCK TO CORNELL CAPITAL UNDER
THE PRIVATE EQUITY LINE ARRANGEMENT MAY BE DEEMED NOT TO BE AN EXEMPT
SALE OF SECURITIES.
In a transaction like our sale of common stock to Cornell Capital, the
issuer of such securities generally may register the resale of securities prior
to their issuance if the issuer has completed a valid exempt sale of the
securities to the investor, and the investor is at market risk at the time of
filing of the registration statement. Because Cornell Capital might not be
deemed to have been at market risk prior to filing of the registration
statement, the transaction might not qualify for an exemption from the
registration requirements of the Securities Act of 1933. Accordingly, Cornell
Capital may have the right, for a period of up to one year from the date of its
purchase of common stock, to recover damages resulting from its purchase if
Cornell Capital is successful in its claim that the transaction was not a valid
private placement. These damages could total up to the amount put by Advanced
Viral and purchased by Cornell Capital under the equity line. If this occurs,
our business, results of operations and financial condition would be harmed. In
particular, such an occurrence would have a material adverse effect on our
liquidity position and our ability to meet short-term obligations and we might
not be able to secure alternative financing on favorable terms or at all.
4. IT IS UNLIKELY THAT WE WILL BE ABLE TO PAY ALL THE COSTS ASSOCIATED
WITH THE FULL RANGE OF TESTING AND CLINICAL TRIALS OF PRODUCT R
REQUIRED BY THE FDA WITHOUT AN IMPROVEMENT IN OUR LIQUIDITY, WHICH HAS
CONSTRAINED OUR ABILITY TO FINANCE NECESSARY RESEARCH, DEVELOPMENT AND
OTHER OPERATING EXPENSES AS NEEDED.
The independent certified public accountants' report on our
consolidated financial statements for the year ended December 31, 2001 includes
an emphasis paragraph regarding certain liquidity considerations. Note 2 to the
Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of Product R required by the FDA, and, unless and until Product
R is approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund operations for the next year. Although we may not be
successful in doing so, we intend to continue to sell our securities in an
attempt to mitigate the effects of our cash position. No assurance can be given
that equity or debt financing, if and when required, will be available.
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash availability to
meet our anticipated expenditures associated with continuing or completing
regulatory filings and clinical trials for Product R. Furthermore, to date we
have not obtained insurance coverage necessary to commence Phase 2 clinical
trials.
We are currently seeking additional financing. We anticipate that we
can continue operations through May 2002 with our current liquid assets, if none
of our outstanding convertible securities are exercised or additional securities
sold. Assuming we have satisfied the conditions precedent to draw on the equity
line of credit, and if we receive the full amount of proceeds available from the
equity line of credit, we can continue operations for at least an additional 12
months, if no convertible securities are exercised or additional securities
sold. Any proceeds received from the exercise of outstanding convertible
securities will contribute to working capital and
6
increase our budget for research and development and clinical trials and
testing, assuming Product R receives subsequent 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 below the exercise prices of certain of our outstanding
convertible securities. As such, recent trading levels may not be sustained nor
may any additional convertible securities be exercised. If none of the
outstanding convertible securities are exercised, we do not draw down on the
equity line of credit, 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 substantially limit operations. We anticipate
that we will be required to sell additional securities to obtain the funds
necessary to further our research and development activities. We are currently
seeking debt financing, licensing agreements, joint ventures and other sources
of financing, but the likelihood of obtaining such financing on favorable terms
is uncertain. Management is not certain whether, at present, debt or equity
financing will be readily obtainable or whether it will be on favorable terms.
Because of the large uncertainties involved in the FDA approval process
for commercial drug use on humans, it is possible that we may never be able to
sell Product R commercially.
5. THE EXERCISE OF OUR EQUITY LINE OF CREDIT MAY MAKE IT DIFFICULT TO
EVALUATE A SHAREHOLDER'S EQUITY POSITION IN ADVANCED VIRAL.
The number of shares of our common stock which is issuable upon
exercise from time to time under our equity line of credit will fluctuate based
on the average of the three lowest reported closing bid prices of our common
stock over a 25 trading day period ending on the advance notice date. Therefore,
the percentage of our common stock held by a shareholder on any given day may be
substantially different from another day depending on our closing bid prices, as
the number of shares of our common stock issuable pursuant to our equity line of
credit may vary significantly from day to day.
We expect to use the net proceeds from the draw downs under the equity
line of credit agreement with Cornell Capital for general corporate purposes. We
will have significant flexibility in applying the net proceeds. You will not
have the opportunity to evaluate the economic, financial or other information on
which we base our decisions on how to use the net proceeds. If we fail to apply
the net proceeds effectively, our business could be negatively affected.
6. IF WE DO NOT OBTAIN THE FDA'S APPROVAL TO CONDUCT CLINICAL TESTS OF
PRODUCT R IN THE UNITED STATES, WE WILL NOT BE ABLE TO COMPLETE ITS
DEVELOPMENT AND MAY NOT BE ABLE TO SELL IT ANYWHERE.
Product R is the only product we are developing, We will not be able to
sell it in the United States unless we submit, and the FDA approves, a new drug
application, or NDA. We must conduct clinical trials of Product R in humans
before we submit an NDA. On July 30, 2001, we submitted an IND application to
the FDA to begin Phase 1 clinical trials of Product R as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. In September
2001, the FDA cleared the IND application to begin Phase 1 clinical trials. In
March 2002, we completed the Phase 1 trials and submitted to the FDA the
results, which indicated that Product R was safe and well tolerated
dermatologically in all the doses applied in the study. The data accrued from
the Phase 1 trials will form the basis for the Phase 2 protocol planned to be
submitted to the FDA in the future. On April 12, 2002, we began Phase 2 of the
IND by beginning the process of recruiting clinical sites to perform studies in
patients in the U.S. with genital warts. We currently do not have the financial
resources to pursue Phase 2 of the IND other than to recruit clinical sites.
Furthermore, to date we have not obtained insurance coverage necessary to
commence Phase 2 clinical trials.
7
It is possible that clinical trials will not prove that Product R is
safe or effective in treating viruses of any kind, in which case we won't be
able to submit an NDA and we won't be able to sell Product R in the United
States.
We haven't been able to sell Product R outside the United States
because we don't have a free sales certificate for Product R. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Product R. Most countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured before allowing the registration of the
product in that country. Because we are unable to obtain a certificate from the
Bahamas, we are not able to meet registration requirements in the countries that
require the certificate, and will be unable to sell Product R in those
countries.
7. 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 December 31, 2001, we had an accumulated deficit of
approximately $41,795,000. We expect that our deficit will continue to increase.
The only product revenues we have ever had are insignificant amounts related to
our distribution of Product R for testing purposes. We do not currently have any
source of product revenue. At this time, we have no basis to believe that we
will ever generate operating revenues from the sale of Product R.
8. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT. IF WE ARE UNABLE TO
PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation or
other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and could
result in substantial costs and diversion of our efforts. See "Legal
Proceedings."
We currently have 11 patent applications pending with the PTO and 23
patent applications pending in other countries relating to Product R. In the
United States, we have 1 allowed patent and 6 issued patents from the PTO. We
also have 1 issued patent in Australia. As patent applications in the United
States are maintained in secrecy until patents issue and as publication of
discoveries in the scientific or patent literature often lag behind the actual
discoveries, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Furthermore, the patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
8
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with Product R. Therefore, Product R and any other drug candidates may give rise
to claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
9. 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 Shalom Z. Hirschman, M.D., our President, Chief Executive
Officer and Chairman of the Board of Directors. The loss or unavailability to us
of the services of Dr. Hirschman 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 life of Dr. Hirschman in the amount of
$2,000,000, respectively. If our level of operations significantly increases,
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.
10. THE VOTING CONTROL HELD BY PRESENT MANAGEMENT COULD SIGNIFICANTLY
IMPACT OUR BUSINESS.
As of the date hereof, our current officers and directors beneficially
owned 46,574,620 shares of our common stock, or approximately 9.8% of the shares
of common stock deemed outstanding on such date for the purposes of the
percentage calculation, including certain shares underlying options or warrants
9
beneficially owned by Dr. Hirschman, Eli Wilner, our Secretary and a director,
and Alan Gallantar, our Chief Financial Officer. 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 (SEC) to register the resale of the
shares issued or issuable to the selling shareholders as provided in this
prospectus. As permitted by the SEC'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.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to important factors, disclosed in this prospectus, which 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.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as registration
and proxy statements and other information, with the Securities and Exchange
Commission. These documents may be read and copied at the Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's regional
offices located at 233 Broadway, New York, New York 10279, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, copies of these reports and other information may be obtained at
10
prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549. Our SEC file number is 33-2262-A. You can get
further information about the SEC's Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a Web site at HTTP://WWW.SEC.GOV that
contains reports, registration statements and other information regarding
registrants like us that file electronically with the SEC.
To contact us, use the following information:
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
(914) 376-7383
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2000 and 2001, and for the first quarter of 2002. The high and low
bid prices for the periods indicated reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
LOW BID HIGH BID
------- --------
First Quarter 2000..................................$0.185 $1.40
Second Quarter 2000.................................$0.33 $0.61
Third Quarter 2000..................................$0.445 $0.648
Fourth Quarter 2000.................................$0.26 $0.45
First Quarter 2001..................................$0.285 $0.41
Second Quarter 2001.................................$0.265 $0.495
Third Quarter 2001..................................$0.171 $0.395
Fourth Quarter 2001.................................$0.179 $0.40
First Quarter 2002..................................$0.158 $0.285
Second Quarter 2002 through April 17................$0.121 $0.160
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
April 16, 2002 is 2,945 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).
11
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.
CAPITALIZATION
The following table sets forth our capitalization at April 16, 2002:
(1) on a historical basis and (2) as adjusted to give effect to the sale of (i)
an assumed 166,666,667 shares of common stock which may be offered by Cornell
Capital in this offering and the application of the net proceeds we may receive
for our shares from Cornell Capital under the private equity line of credit
agreement and (ii) 10,000,000 shares of common stock which are issuable or may
be issuable to certain investors pursuant to the Class A Warrants and the Class
B Warrants. The actual change in common stock and additional paid in capital
will depend on the actual amount raised and the market price of our common stock
at that time. In addition, we will pay May Davis a placement fee of five percent
(5%) of the draw. See "Use of Proceeds." This table should be read in
conjunction with our financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial data appearing elsewhere in this prospectus.
PRO FORMA
ACTUAL AS ADJUSTED*
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $0.00001 par value; 1,000,000,000 shares authorized;
430,783,353 shares outstanding Actual;
607,450,020 shares outstanding Pro Forma as Adjusted $ 4,308 $ 6,075
Additional paid-in-capital 51,788,840 90,203,740
Deficit accumulated during the development stage (40,795,470) (40,795,470)
Discount on Warrants (3,342,630) (3,342,630)
------------ ------------
Total Stockholders' Equity: $ 4,942,074 $ 45,981,714
============ ============
- --------------------
* Does not reflect approximately 72,145,000 shares subject to outstanding
options and warrants as of April 16, 2002.
12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Revenues $ 17,601 $ 8,363 $ 10,953 $ 656 $ 2,278
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 5,150,869 3,192,551 1,948,937 1,659,456 817,603
General and administrative 4,301,333 2,621,542 1,831,061 1,420,427 1,681,436
Compensation expense 691,404 1,901,927 210,144 -- --
Depreciation 532,264 362,392 230,785 110,120 26,288
------------ ------------ ------------ ------------ ------------
10,675,870 8,078,412 4,220,927 3,190,003 2,525,327
------------ ------------ ------------ ------------ ------------
Loss from Operations (10,658,269) (8,070,049) (4,209,974) (3,189,347) (2,523,049)
------------ ------------ ------------ ------------ ------------
Other Income (Expense):
Interest income 114,057 162,077 42,744 102,043 111,845
Other income -- -- -- 293 7,800
Interest expense (868,856) (1,446,692) (2,007,032) (1,470,699) (1,738,325)
Severance expense - former directors (302,500) -- -- -- --
------------
(1,057,299) (1,284,615) (1,964,288) (1,368,363) (1,618,680)
------------ ------------ ------------ ------------ ------------
Net Loss $(11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710) $ (4,141,729)
============ ============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.03) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
============ ============ ============ ============ ============
13
SELECTED BALANCE SHEET DATA
DECEMBER 31
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420 $ 236,059
Investments -- -- -- 821,047 2,984,902
Inventory -- 19,729 19,729 19,729 19,729
Other current assets 63,162 34,804 59,734 29,818 20,240
------------- ------------- ------------- ------------- -------------
Total current assets 1,562,971 6,017,166 916,339 1,795,014 3,260,930
Property and Equipment, Net 3,000,583 1,944,199 1,375,923 1,049,593 485,661
Other Assets 885,237 847,349 569,312 460,346 443,251
------------- ------------- ------------- ------------- -------------
Total assets $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
============= ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities $ 1,843,706 $ 902,961 $ 728,872 $ 279,024 $ 375,606
Current portion of capital lease
obligation 64,197 58,690 50,315 $ 38,335 --
Current portion of note payable 24,246 21,517 19,095 -- --
------------- ------------- ------------- ------------- -------------
Total current liabilities 1,932,149 983,168 798,282 317,359 375,606
------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net -- -- 4,446,629 1,457,919 2,384,793
Capital lease obligation - long term
portion 42,370 106,567 152,059 167,380 --
Note payable - long term portion 32,198 56,446 77,964 -- --
------------- ------------- ------------- ------------- -------------
Total long-term debt 74,568 163,013 4,676,652 1,625,299 2,384,793
------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase Agreement -- -- -- 600,000 --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000 shares of
$.00001 par value authorized, 403,296,863
and 380,214,618 shares issued and
outstanding 4,033 3,802 3,034 2,964 2,779
Additional paid-in capital 47,666,141 39,969,373 17,537,333 14,325,076 10,512,767
Subscription receivable -- -- -- -- (19,000)
Deficit accumulated during development
Stage (40,795,470) (29,079,902) (19,725,238) (13,550,976) (8,993,266)
Deferred compensation cost (14,769) (73,837)
Discount on warrants (3,432,630) (3,230,740) (428,489) -- --
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficiency) 3,442,074 7,662,533 (2,613,360) 762,295 1,429,443
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity (deficiency) $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
============= ============= ============= ============= =============
Shares outstanding at period end 403,296,863 380,214,618 303,472,035 296,422,907 277,962,574
------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND THE FINANCIAL
CONDITION OF ADVANCED VIRAL SHOULD BE READ IN CONJUNCTION WITH ADVANCED VIRAL'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Since our inception in July 1985, Advanced Viral has been engaged
primarily in research and development activities. We have not yet generated
significant operating revenues, and as of December 31, 2001 we had incurred a
cumulative net loss of approximately $40,795,000. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Product R. All of our research and
development efforts have been devoted to the development of Product R.
We have commenced clinical trials for regulatory approval of Product R
in the United States. On July 30, 2001, we submitted an IND application to the
FDA to begin Phase 1 clinical trials of Product R as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. We contracted
with GloboMax LLC of Hanover, Maryland to assist us in our preparation and
filing of the IND with the FDA, and to otherwise assist us through the FDA
process with the objective of obtaining full approval for the manufacture and
commercial distribution of Product R in the United States. In the IND we
included, among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be conducted on
humans; and
o information assuring the identification, quality and purity of
Product R and a description of the physical, chemical and
microbiological characteristics of Product R.
In September 2001, the FDA cleared the IND application to begin Phase 1
clinical trials. In March 2002, Advanced Viral completed the Phase 1 trials and
submitted to the FDA the results, which indicated that Product R was safe and
well tolerated dermatologically in all the doses applied in the trials. The data
accrued from the Phase 1 trials will form the basis for the Phase 2 protocol to
be submitted to the FDA in the future. On April 12, 2002, we began Phase 2 of
the IND by beginning the process of recruiting clinical sites to perform studies
in patients in the U.S. with genital warts. We currently do not have sufficient
resources to continue or complete Phase 2 trials.
Conducting the human clinical trials of Product R pursuant to the
approved IND will require significant cash expenditures. Furthermore, Product R
may never be approved for commercial distribution by any country. Because our
research and development expenses and clinical trial expenses will be charged
against earnings for financial reporting purposes, we expect that losses from
operations will continue to be incurred for the foreseeable future.
15
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
During the years ended December 31, 2001, 2000 and 1999 we incurred
losses of approximately $11,716,000, $9,355,000 and $6,174,000, respectively.
Our increased losses for the years ended December 31, 2001, 2000 and 1999 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $4,301,000, $2,622,000 and $1,831,000 in 2001, 2000
and 1999, respectively. General and administrative expenses increased by
approximately $1,679,000 in 2001 vs. 2000 and increased by $791,000 in 2000
vs.1999, resulting primarily from:
o increased payroll and related expenses (approximately $1,171,000 in
2001 vs. $717,000 in 2000 and $614,000 in 1999) primarily
attributable to increased employee and officer salaries and the
addition of two vice presidents for drug development and quality
assurance in 2001;
o increased insurance costs (approximately $421,000 in 2001 vs.
$308,000 in 2000 and $240,000 in 1999) representing increased
premiums for employee medical insurance and additional corporate
liability insurance including directors and officers liability
coverage; and
o increased professional fees from 2001 to 2000 (approximately
$1,431,000 in 2001 vs. $385,000 in 2000), compared to $425,000 1999.
The increase is primarily attributed to certain legal proceedings
the cost of which was approximately $953,000. See "Legal
Proceedings"
COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS.
Compensation expense was approximately $691,000 in 2001, compared to $1,902,000
and $210,000 in 2000 and 1999, respectively. These amounts are the result of the
calculation of the fair value of options, using the Black Scholes Pricing Model,
resulting from extending the exercise date of various non-employee options
outstanding.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $5,151,000 in 2001, compared to $3,193,000 and $1,949,000 in 2000
and 1999, respectively. The increase from 2000 to 2001 resulted primarily from
research expenses (approximately $1,417,000) relating to the GloboMax agreement
in connection with the preparation of our first IND filing and approximately
$233,000 for research expenditures relating to research and testing of Product R
in Israel. The increase from 1999 to 2000 resulted primarily from research
expenses related to the GloboMax agreement of approximately $1,250,000. The
approximate costs of rent, personnel, operating costs and laboratory supplies
associated with the Yonkers laboratory for the years ended 2001, 2000 and 1999
were charged to research and development expense as follows: $2,230,000,
$1,696,000 and $1,325,000.
DEPRECIATION EXPENSE. Depreciation expense was approximately $532,000
in 2001 compared to $362,000 and $231,000 in 2000 and 1999, respectively. The
increase from 2000 to 2001 resulted primarily from the acquisition of furniture,
16
fixtures and equipment for the Yonkers office, laboratory and production
facility. In addition, leasehold improvements were made to the laboratory and
production areas during 2001, 2000 and 1999.
INTEREST EXPENSE. Interest expense for the years ended 2001, 2000 and
1999 was approximately $869,000, $1,447,000 and $2,007,000, respectively.
Included in interest expense for these periods was:
o the beneficial conversion feature on certain convertible debentures
of approximately $0, $387,000, and $1,045,000 for the years ended
2001, 2000 and 1999, respectively;
o interest expense associated with certain convertible debentures of
approximately $0, $76,000 and $163,000 for the years ended 2001,
2000 and 1999, respectively;
o amortization of discount on certain warrants of approximately
$989,000, $611,000 and $148,000 for the years ended 2001, 2000 and
1999, respectively;
o amortization of loan costs of approximately $15,000, $106,000 and
$331,000 for the years ended 2001, 2000 and 1999, respectively;
o fees of approximately $265,000 in connection with the November 2000
securities purchase agreement with Harbor View;
o Additional financing costs related to effective date of certain
registration statements of approximately $286,000 in 1999 (of which
approximately $156,000 was reversed in 2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and the Company.
REVENUES. There were approximately $18,000 and $8,000 in sales revenue
in 2001 and 2000, respectively, compared to $11,000 in sales revenues for 1999.
All sales revenue resulted from distributors purchasing Product R for testing
purposes. Interest income was approximately $114,000 and $162,000 in 2001 and
2000, respectively, compared to approximately $43,000 in 1999.
LIQUIDITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
As of December 31, 2001, we had current assets of approximately
$1,563,000, compared to approximately $6,017,000 at December 31, 2000. We had
total assets of approximately $5,449,000 and $8,809,000 at December 31, 2001 and
2000, respectively. The decrease in current and total assets was primarily
attributable to unfavorable market conditions relating to the ability to obtain
investment capital (approximately $5.8 million in 2001 compared to approximately
$11.8 million in 2000) to fund future operating expenditures. The unfavorable
conditions reflected the general economic environment magnified by the tragic
events of September 11, 2001.
17
During 2001, we used cash of approximately $8,577,000 for operating
activities, as compared to approximately $5,742,000 in 2000. During 2001, we
incurred expenses of:
o approximately $2,703,000 for payroll and related costs primarily for
administrative staff, scientific personnel and executive officers;
o approximately $2,667,000 in consulting fees to GloboMax and its
subcontractors;
o approximately $362,000 for rent and utilities for our Yonkers
facility;
o approximately $407,000 for laboratory supplies;
o approximately $233,000 in expenditures on Product R research in
Israel;
o approximately $303,000 paid under severance agreements entered into
between the retiring directors and the Company; and
o approximately $421,000 for insurance costs and approximately
$1,431,000 for other professional fees including approximately
$953,000 for certain litigation proceedings, see "Legal
Proceedings'.
During the year ended December 31, 2001, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $5,783,000 offset by principal payments of approximately
$80,000 on equipment obligations. This compares to the year ended December 31,
2000 where funds of approximately $11,836,000 were provided by sale of
convertible debentures, the sale of common stock and exercise of options and
warrants offset by principal payments of approximately $69,000 on equipment
obligations.
During the year ended December 31, 2001, cash flow used by investing
activities were used for expenditures of approximately $1,589,000 for leasehold
improvements, research and laboratory equipment, and software for accounting,
administrative and production control at our Yonkers, New York facility.
On February 9, 2001 we entered into a private equity line of credit
agreement with Cornell Capital Partners, LP. Under the equity line of credit
agreement, we have the right to put shares of our common stock to Cornell
Capital from time to time to raise up to $50,000,000, subject to certain
conditions and restrictions. Pursuant to the terms of a registration rights
agreement entered in connection with the equity line of credit, we filed with
the SEC a registration statement to register the resale of shares of common
stock purchased by Cornell Capital upon the exercise of each put option. Such
registration statement was declared effective in February 2001.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2001,
includes an emphasis paragraph regarding certain liquidity considerations. Note
2 to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of Product R required by the FDA, and, unless and until Product
R is approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
18
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund operations for the next year. Although we may not be
successful in doing so, we intend to continue to sell our securities in an
attempt to mitigate the effects of our cash position. No assurance can be given
that equity or debt financing, if and when required, will be available.
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 December 1999.
.........................................................................................................................
CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
.........................................................................................................................
December 1999 - $2,000,000 Debentures 13,946,713 shares $0.1363-.3564 per share Fully converted
January 2000 Warrants 210,000 shares $0.19916667 per share December 30, 2002
.........................................................................................................................
February 2000 $3,000,000 Common Stock 13,636,357 shares n/a n/a
Warrants 2,727,272 shares $0.275 per share February 27, 2005
2,727,272 shares $0.33 per share
.........................................................................................................................
November 2000 $5,371,000 Common Stock 13,427,500 shares $0.40 per share n/a
thru March 2001 Warrants 4,028,250 shares $0.48 per share November 7, 2005
4,028,250 shares $0.56 per share
.........................................................................................................................
November 2000 $1,500,000 Common Stock 4,960,317 shares $0.3024 per share n/a
.........................................................................................................................
February 2001 Equity Line Warrants 10,000,000 shares $1.00 per share (1) February 9, 2006
.........................................................................................................................
July 2001 $1,000,000 Common Stock 3,125,000 shares $0.32 per share n/a
.........................................................................................................................
July 2001 $490,000 Common Stock 1,225,000 shares $0.40 per share n/a
Warrants 367,500 shares $0.48 per share July 27, 2006
367,500 shares $0.56 per share
.........................................................................................................................
August 2001 $600,000 Common Stock 2,000,000 shares $0.30 per share n/a
.........................................................................................................................
September 2001 $1,000,000 Common Stock 6,666,667 shares $0.15 per share n/a
.........................................................................................................................
December 2001 $200,000 Common Stock 740,741 shares $0.27 per share n/a
.........................................................................................................................
December 2001 $410,000 Common Stock 1,518,519 shares $0.27 per share n/a
.........................................................................................................................
December 2001 $2,000,000 Common Stock 7,407,407 shares $0.27 per share n/a
.........................................................................................................................
February 2002 $500,000 Common Stock 3,333,333 shares $0.15 per share n/a
.........................................................................................................................
February 2002 $500,000 Common Stock 3,333,333 shares $0.15 per share n/a
.........................................................................................................................
March 2002 $500,000 Common Stock 3,333,333 shares $0.15 per share n/a
.........................................................................................................................
April 2002 $1,939,000 Common Stock 17,486,491 shares $0.11089 per share n/a
.........................................................................................................................
- ----------------------------
(1) Represents warrants issued in connection with the equity line of credit,
including Class A Warrants to purchase in the aggregate 5,000,000 shares of
our common stock at an exercise price per share equal to $1.00, exercisable
at any time until February 9, 2006, and Class B Warrants to purchase in the
aggregate 5,000,000 shares of our common stock at an exercise price equal
to the greater of $1.00 or 110% of the bid price of the common stock on the
applicable advance date. Each Class B Warrant is exercisable pro rata on or
after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty
months from the date of issuance.
SECURITIES ISSUED IN 1999 AND 2000
ENDEAVOUR CAPITAL FUND S.A.: Pursuant to a securities purchase
agreement dated December 28, 1999 in a private offering transaction under
Section 4(2) of the Securities Act, we issued the first $1,000,000 tranche of
$2,000,000 in aggregate principal amount of our 7% convertible debentures due
December 31, 2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction").
In connection with the sale of the first tranche of debentures, we issued
warrants to purchase 100,000 shares of our common stock to Endeavour, and two
19
warrants to purchase 5,000 shares of common stock to Endeavour's legal counsel.
Accrued interest under the convertible debentures was computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment and was payable on conversion of the debenture or on
maturity in common stock using the same conversion formula. The convertible
debentures were convertible, at the option of the holder, into shares of common
stock pursuant to a specified formula.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share. The warrants provide that the holder may elect to receive
a reduced number of shares of common stock on the basis of a cashless exercise.
The warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date hereof, none of these
warrants had been exercised.
The fair value of the warrants issued as of December 28, 1999 in
connection with the securities purchase agreement was estimated to be $4,285
($0.0429 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On January 27, February 22 and 23, 2000 pursuant to notice by Endeavour
Capital Fund, $150,000, $135,000, and $715,000 principal amount of the first
tranche of the Endeavour debentures was converted into 1,105,435, 988,913, and
5,149,035 shares of common stock, respectively. As of February 23, 2000, the
first tranche of the debentures was fully converted. The second tranche of the
debentures issued to Endeavour in 2000, as more fully described below, were
fully converted as of October 23, 2000.
ENDEAVOUR CAPITAL FUND S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with warrants to purchase 100,000 shares of our common stock to
Endeavour Capital Fund, S.A. The terms of the second tranche of debentures and
warrants are the identical to the terms of the debentures and warrants issued in
first tranche of the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On February 24 and 29, and October 23, 2000 pursuant to notice by
Endeavour Capital Fund, $785,000, $200,000 and $15,000 principal amount of the
second tranche of the Endeavour debentures was converted into 5,622,696,
1,036,674 and 42,088 shares of common stock, respectively. As of October 23,
2000, the second tranche of the debentures were fully converted.
HARBOR VIEW GROUP, INC. On February 7, 2000 pursuant to a consulting
agreement with Harbor View Group, we issued to Harbor View warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share, and warrants to
purchase 1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to be
provided to us. Each warrant contains anti-dilution provisions which provide for
20
the adjustment of warrant price and warrant shares. As of the date hereof, none
of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($0.057 per
warrant) based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected volatility
of 90%; a risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). We determined that $89,045 of the
fair value relates to past services and, accordingly, we expensed this portion
in 2000. The remaining $111,204 was deferred and was amortized during the year
ended December 31, 2001.
HARBOR VIEW GROUP, INC., ET AL. In February 2000 pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,636,357 shares of common stock, and warrants to purchase an
aggregate of 5,454,544 shares of common stock in a private offering transaction
pursuant to Section 4(2) of the Securities Act, for an aggregate purchase price
of $3,000,000. Half of the warrants are exercisable at $0.275 per share, and
half of the warrants are exercisable at $0.33 per share, until February 28,
2005. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of the date hereof, warrants to purchase 181,818
shares of common stock had been exercised.
The fair value of the warrants issued as of February 16, 2000 in
connection with the securities purchase agreement was estimated to be $1,582,734
($0.290 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
February 28, 2005 expiration date. This amount is being amortized to interest
expense in the accompanying consolidated financial statements.
HARBOR VIEW GROUP, INC., ET AL. On November 8, 2000, pursuant to a
securities purchase agreement with Harbor View Group and various other
purchasers, we authorized the issuance and sale of up to 50,000,000 shares of
our common stock and warrants to purchase an aggregate of 30,000,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share. As of March 31, 2001, we
had closed on the sale of 13,427,500 shares and warrants to purchase 8,056,500
shares for an aggregate purchase price of $5,371,000. Half of the warrants are
exercisable at $0.48 per share, and half of the warrants are exercisable at
$0.56 per share, until November 8, 2005. Each warrant contains anti-dilution
provisions that provide for the adjustment of warrant price and warrant shares.
As of the date hereof, none of the warrants had been exercised.
ROSEWORTH GROUP. On November 16, 2000, we entered into a securities
purchase agreement with Roseworth Group, Ltd., whereby we agreed to sell
4,960,317 shares of our common stock at a price of $.3024 per share for an
aggregate purchase price of $1,500,000. We received such proceeds in November
2000.
SECURITIES ISSUED IN 2001 AND 2002
EQUITY LINE OF CREDIT AGREEMENT. On February 9, 2001, we entered into
an equity line of credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of our common stock. Under the
21
private equity line of credit, under which we may exercise "put options" to sell
shares for a price equal to 95% of the average of the three lowest reported
closing bid prices of our common stock over a 25 trading day period ending on
the advance notice date (the "Average Bid Price"). The agreement provides that
the closing bid price of the common stock on the put option notice date shall
not be less than the average closing bid price for the previous 25 trading days.
Upon signing the agreement, we issued to our placement agent, May Davis Group,
Inc., and certain investors Class A Warrants to purchase in the aggregate
5,000,000 shares of common stock at an exercise price per share equal to $1.00,
exercisable in part or in whole at any time until February 9, 2006, and Class B
Warrants to purchase in the aggregate 5,000,000 shares of common stock at an
exercise price equal to the greater of $1.00 or 110% of the bid price of the
common stock on the applicable advance date. Each Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance.
The fair value of the Class A Warrants is estimated to be $1,019,153
($0.024 per warrant share) based in a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This amount is being
amortized to interest expense over the term of the warrants.
As of December 30, 2001, we had incurred approximately $83,700 in fees
in connection with the equity line of credit. Such fees have been deferred and
will be amortized over the life of the line of credit.
VARIOUS PURCHASERS. On July 27, 2001, pursuant to a securities purchase
agreement with various purchasers, we authorized the issuance of and sold
1,225,000 shares of our common stock and warrants to purchase an aggregate of
735,000 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act for a purchase price of $0.40 per share, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
SHELF OFFERINGS. On March 31, 2000, we filed a shelf registration
statement with the SEC relating to the offering of shares of our common stock to
be used in connection with financings and resales of the shares issued
thereunder by the recipients of such shares. As of the date of this prospectus,
we have issued and sold approximately 36.4 million shares of our common stock
and received proceeds of approximately $8.2 million under the shelf registration
statement, as follows:
BNC BACH INTERNATIONAL. During 2001, we entered into several
stock purchase agreements with BNC Bach International, Ltd., a British Virgin
Islands corporation, as follows:
o On July 19, 2001, we entered into a stock purchase
agreement with BNC Bach pursuant to which we issued and
sold to BNC Bach 3,125,000 shares of our common stock at
$0.32 per share for an aggregate purchase price of
$1,000,000.
o On August 20, 2001, we entered into a stock purchase
agreement with BNC Bach pursuant to which we issued and
22
sold to BNC Bach 2,000,000 shares of our common stock at
$0.30 per share for an aggregate purchase price of
$600,000.
o On December 18, 2001, we entered into a Stock purchase
agreement with BNC Bach pursuant to which we issued and
sold to BNC Bach 7,407,407 shares of our common stock at a
negotiated price of $0.27 per share, for a total purchase
price of $2,000,000.
CAMBOIS FINANCE, LTD. On September 28, 2001, we entered into a
stock purchase agreement with Cambois Finance, Ltd. pursuant to which we issued
and sold to Cambois 6,666,667 shares of our common stock at $0.15 per share for
an aggregate purchase price of $1,000,000.
HARBOR VIEW GROUP. On December 17, 2001, we entered into a
Stock purchase agreement with Harbor View Group, Inc. pursuant to which we
issued and sold to Harbor View 1,518,519 shares of our common stock at a
negotiated price of $0.27 per share, for a total purchase price of $410,000.
RUSSEL KUHN. On December 17, 2001, we entered into a Stock
purchase agreement with Russel Kuhn pursuant to which we issued and sold to Mr.
Kuhn 740,741 shares of our common stock at a negotiated price of $0.27 per
share, for a total purchase price of $200,000.
ROSEWORTH GROUP. During the first quarter of 2002, we entered
into the following stock purchase agreements with Roseworth Group Limited, a
British Virgin Islands corporation wholly-owned subsidiary of Creon Management,
S.A., a British Virgin Islands corporation whose wholly-owned subsidiary,
Cambois Finance, Ltd., is discussed above:
o On February 7, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we issued
and sold to Roseworth Group 3,333,333 shares of our common
stock at a negotiated price of $0.15 per share, for a total
purchase price of $500,000.
o On February 21, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we issued
and sold to Roseworth Group 3,333,333 shares of our common
stock at a negotiated price of $0.15 per share, for a total
purchase price of $500,000.
o On March 22, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we issued
and sold to Roseworth Group 3,333,333 shares of our common
stock at a negotiated price of $0.15 per share, for a total
purchase price of $500,000.
INSTITUTIONAL INVESTORS. On April 12, 2002, we issued and sold
an aggregate of 17,486,491 shares of our common stock pursuant to subscription
agreements with each of Alpha Capital AG (3,497,298 shares), Ellis Enterprises
(1,311,487 shares), Kazi Management, Inc. (3,060,136 shares), Palisades Equity
Fund L.P. (4,808,785 shares) and Stonestreet L.P. (4,808,785 shares), for net
proceeds of $1,939,000, or $0.11089 per share.
23
OUTSTANDING CONVERTIBLE SECURITIES
As of April 16, 2002, in addition to the 430,783,353 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of 48,438,380 shares of common stock at exercise prices
ranging from $0.15 to $0.36, of which 46,098,620 are currently exercisable; (ii)
outstanding warrants to purchase an aggregate of 33,706,572 shares of common
stock at prices ranging from $0.199 to $1.00, of which warrants to purchase
23,706,572 shares are currently exercisable; and (iii) up to 166,666,667 shares
issuable under the equity line of credit, assuming a purchase price equal to
$0.30. See "Business -- Equity Line of Credit Agreement."
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $80.6 million,
and we would have approximately 662.1 million shares of common stock
outstanding. 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. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash availability to
meet our anticipated expenditures.
We are currently seeking additional financing. We anticipate that we
can continue operations through April 2002 with our current liquid assets, if
none of our outstanding convertible securities are exercised or additional
securities sold. Assuming we have satisfied the conditions precedent to draw on
the equity line of credit, and if we receive the full amount of proceeds
available from the equity line of credit, we can continue operations for at
least an additional 12 months, if no convertible securities are exercised or
additional securities sold. Any proceeds received from the exercise of
outstanding convertible securities will contribute to working capital and
increase our budget for research and development and clinical trials and
testing, assuming Product R receives subsequent 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
below the exercise prices of certain of our outstanding convertible securities.
As such, recent trading levels may not be sustained nor may any additional
convertible securities be exercised. If none of the outstanding convertible
securities are exercised, we do not draw down on the equity line of credit, 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 operations. We anticipate that we will be required to sell additional
securities to obtain the funds necessary to further our research and development
activities. We are currently seeking debt financing, licensing agreements, joint
ventures and other sources of financing, but the likelihood of obtaining such
financing on favorable terms is uncertain. Management is not certain whether, at
present, debt or equity financing will be readily obtainable or whether it will
be on favorable terms. Because of the large uncertainties involved in the FDA
approval process for commercial drug use on humans, it is possible that we may
never be able to sell Product R commercially.
24
BUSINESS
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). In addition to Reticulose(R), which has been used
exclusively with Advanced Viral's original formulation, Advanced Viral is
developing a new or current formulation which to date, has been designated only
by its generic name Product R. As used in this prospectus, the term "Product R"
refers to the current formulation as well as the prior formulation of the
pharmaceutical drug known as Reticulose(R). Product R may be employed in the
treatment of certain viral and autoimmune diseases such as:
o Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
o Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND. On July 30, 2001, we submitted an
IND application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. In March 2002, we completed the Phase 1 trials and submitted
to the FDA the results, which indicated that Product R was safe and well
tolerated dermatologically in all the doses applied in the study. The data
accrued from the Phase 1 trials will form the basis for the Phase 2 protocol
planned to be submitted to the FDA in the future. On April 12, 2002, we began
Phase 2 of the IND by beginning the process of recruiting clinical sites to
perform studies in patients in the U.S. with genital warts.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States. Our Phase 1 studies were
performed in the United States on human patients. We do not know the cost of
future clinical trials and we may not be able to raise the funds necessary to
begin or continue planned clinical trials. Additional financing to fund
subsequent clinical trials may not be available to us, which may force us to
reduce our clinical trials and operations.
In October 2001, we were awarded a U.S. patent entitled "Preparation of
a Therapeutic Composition," which issued patent protects the preparation and
25
composition of Product R. In March 2002, we were awarded a U.S. patent entitled
"Topical Treatment of Skin Disease and Eye Afflictions," which issued patent
protects the use of Product R for use in the topical treatment of viral skin
infections such as HPV, shingles and herpes simplex, and viral eye infections
including those caused by herpes simplex virus.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York is (914) 376-7383. We have
also established a website: WWW.ADVIRAL.COM. Information contained on our
website is not a part of this prospectus.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or IN VITRO testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: phase 1 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 2 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 3
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
26
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, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
On September 20, 1984, Bernard Friedland, our former President and
Chairman of the Board of Directors, as sponsor, submitted to the FDA an IND to
27
conduct a study testing the effectiveness of Product R on human subjects with
AIDS, as well as certain other viruses. The FDA has issued four letters of
deficiency with regard to the IND. In a letter dated November 29, 1984, the FDA
indicated, among other deficiencies noted, that the publications submitted with
the IND and relating to the effectiveness of Product R on virus related diseases
will not be accepted in support of the safety of Product R unless we could
establish that the proposed formulation of Product R is the same as the
formulation of Product R referenced in those publications. In addition, the FDA
required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage form and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that the
information assure the proper identification, quality, purity and strength of
Product R and a description of the physical, chemical and microbiological
characteristics of Product R. On September 11, 1987, we received a further
deficiency letter from the FDA, stating that no data had been submitted
supporting IN VITRO anti-HIV activity or any criterion for a biological response
modifier.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
received a third deficiency letter from the FDA dated July 27, 1992, which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and action on our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Product R in the United States. During
2000 and 2001, GloboMax continued its project management services for the
pre-clinical development and IND submission of Product R to the FDA, the
development of standard operating procedures and validation protocol for the
preparation and manufacture of Product R. Expenses paid during 2000 and 2001
relating to the GloboMax agreement were approximately $3,917,000. Pursuant to
the agreement with GloboMax, we are obligated to pay for services on an hourly
basis, at prescribed rates. On July 30, 2001, we submitted an IND application to
the FDA to begin Phase 1 clinical trials of Product R as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. On September
4, 2001, the IND was cleared by the FDA to begin Phase 1 trials. In March 2002,
Advanced Viral completed the Phase 1 trials and submitted to the FDA the
results, which indicated that Product R was safe and well tolerated
dermatologically in all the doses applied in the study. The data accrued from
the Phase 1 trials will form the basis for the Phase 2 protocol to be submitted
to the FDA. On April 12, 2002, we began Phase 2 of the IND by beginning the
process of recruiting clinical sites to perform studies in patients in the U.S.
with genital warts. Such IND is our only IND on file with the FDA.
We currently do not have the resources necessary to complete the FDA
approval process. It is possible that the clinical tests of Product R on humans
will not be approved by the FDA for human clinical trials on HPV or other
diseases, and that any tests previously conducted or to be conducted will not
satisfy FDA requirements. It is also possible that the results of such human
clinical trials, if performed, will not prove that Product R is safe or
28
effective in the treatment of HPV or other diseases, or that the FDA will not
approve the sale of Product R in the United States if we submitted a proper NDA.
It is not known at this time how extensive the Phase 2 and Phase 3 clinical
trials will be, if they are conducted. The data generated may not show that the
drug Product R is safe and effective, and even if the data shows that Product R
is safe and effective, obtaining approval of the NDA could take years and
require financing of amounts not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Product R for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. Clinical studies
conducted outside of any country may not be accepted by such country, and the
approval of any pharmaceutical or diagnostic product in one country does not
assure that such product will be approved in another country. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, we do not expect that we will be able to generate material
sales revenue. We received a grant of authority from the Bahamian Port
Authority, an authorized division of the Bahamian Government, on October 15,
1992 confirming the right of our subsidiary, Advance Viral Research, Ltd., a
Bahamian corporation, to carry on the manufacture and export sale of ethical
pharmaceutical products. See "--Marketing And Sales."
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through December 31,
2001 we expended approximately $14,000,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. In 1996, we retained Shalom
Z. Hirschman, M.D. as our Chief Executive Officer and President. Dr. Hirschman,
who is also our current Chairman of the Board of Directors, established our
research facility in Yonkers, New York, planned and monitored the testing of
Product R and recently performed analyses of Product R with our scientific
personnel, which analyses will be used in connection with the FDA approval
process. We currently are funding research and testing to:
o determine the safety and efficacy of the topical use of Product R on
animals and cultured human cells;
o assess the effectiveness of the topical application of Product R on
HPV;
o determine the effectiveness of Product R in the treatment of
cachexia (body wasting) in patients with AIDS;
o determine the effectiveness of Product R in the treatment of
patients with solid cancers;
o determine the effectiveness of Product R in the treatment of
patients with leukemias and lymphomas;
29
o compare the results of treatment of persons diagnosed with AIDS
taking a multi-drug cocktail (highly active anti-retroviral therapy,
HAART) and Product R with those taking a multi-drug cocktail and a
placebo;
o determine the effectiveness of Product R for the treatment of
rheumatoid arthritis;
o study the effects of Product R in inhibiting the production of key
cellular receptors for HIV (CCR5 and CXCR4 receptors). The CCR5 and
CXCR4 receptors are two of the cell receptors used by the AIDS
virus, HIV, to attach to its target cell and initiate infection;
o assess the effectiveness in inhibiting the replication of adenovirus
in cell culture;
o study the effects of Product R in mitigating the toxic effects of
other drugs used to treat HIV infections, such as nucleoside
analogues, protease inhibitors and non-nucleoside reverse
transcriptase inhibitors;
o study the effects of Product R in mitigating the toxic effects of
drugs used in the chemotherapy of cancers; and
o assess the direct inhibitory and therapeutic effects of Product R on
neoplasias, including lymphomas and lymphocytic leukemia.
On January 29, 2001, we entered into a 12-month agreement with The
Weizmann Institute of Science and Yeda, its developmental arm, in Israel to
conduct research on the effects of Product R on the immune system, especially on
T lymphocytes. Experiments included the impact of Product R on T cell
proliferation, migration, adhesion and cytokine secretion. In addition,
scientists explored the effects of Product R in animal models on adjuvant
arthritis and experimental allergic encephalitis. The cost of this research is
approximately $118,000 which has been funded from our current cash position.
We believe that the research at The Weizmann Institute has demonstrated
that Product R inhibits the development of arthritis and encephalitis in rat
models of adjuvant arthritis and experimental allergic encephalitis,
respectively, when Product R is administered at the same time as the
inflammatory stimulus. These models of the dampening effects of Product R on
autoimmune reactions are being fine-tuned and studies of possible molecular
mechanisms of the actions of Product R are to follow.
These animal models serve as experimental prototypes for the study of
autoimmune disorders, such as rheumatoid arthritis. Institute researchers also
propose to investigate other animal models, including a graft rejection model
and tumor growth and tumor metastasis models, for the immunomodulatory effects
of Product R.
On April 2, 2001, we entered into a 12-month agreement with The
Selikoff Center in Israel to develop clinical trials in Israel using Product R.
These trials would support our planned IND of injectable Product R. The Center
began designing clinical trials using Product R to mitigate the toxic effects of
chemotherapy in patients with advanced stage cancer to be conducted at hospitals
throughout Israel. The cost of the first phase of this research was $242,000, of
which $115,000 has been advanced to date.
During the planning of these clinical trials, we redesigned the
research program to investigate the effect of Product R on cachexia (body
wasting) in patients with solid cancers, leukemias and lymphomas. In addition,
the redesigned program will investigate Product R as salvage therapy in patients
30
with AIDS who have failed highly active anti-retroviral therapy (HAART). In this
trial, Product R will be used in combination with HAART.
During March 2002, the Selikoff Center advised us that it received approvals
from Israel's Helsinki Committees (the equivalent of a hospital's Institutional
Review Board in the U.S.) for these clinical trails at academic medical centers
in Israel. We are awaiting approval from Israel's Ministry of Health (i.e. the
equivalent of the U.S. FDA) before these clinical trials may begin. We
anticipate that these clinical trials will yield data which will assist us in
our design of future protocols for Phase 1 and 2 studies of injectable Product R
in the U.S. and Israel.
The studies being conducted pursuant to our agreements with The
Weizmann Institute and the Selikoff Center are subject to risks associated with
the political, economic and military conditions affecting Israel and the Middle
East, and recently a public announcement from Israel declaring a war against
terrorism has made it difficult to predict whether or in what manner these
problems will be resolved.
Our studies detailing the results of the above research and testing may
not positively impact the FDA's decision to approve a new IND for Product R or
approve the marketing, sales or distribution of Product R within the United
States, and as a result may not improve our chances of gaining approval for the
marketing, sales or distribution of Product R anywhere in the world. We
currently do not have the resources to engage in further testing, and we cannot
provide assurances that we will acquire such financial resources to continue or
complete the studies, or, if we acquire such resources, that we will do so on
favorable terms.
SCIENTIFIC ADVISORY BOARD
In January 2002, the Company formed a Scientific Advisory Board
currently consisting of five people with experience in oncology, hematology,
women's health and related fields for the purpose of having access to additional
expertise and counsel to support the development of Product R in connection with
the rigorous clinical trials required by the FDA's regulatory approval process.
The current members of the Scientific Advisory Board are:
DR. GEORGE P. CANELLOS is the William Rosenberg Professor of Medicine
at Harvard Medical School where he served as Chief of the Division of Medical
Oncology for 20 years at the Dana-Farber Cancer Institute, and was Acting
Clinical Director of the National Cancer Institute (NCI) and a member of the
FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past president
of the American Society for Clinical Oncology and a former Editor-in-Chief of
the Journal of Clinical Oncology. Dr. Canellos currently serves as Medical
Director for Network Development, Dana-Farber/Partners CancerCare and is on the
senior staff at the Brigham and Women's Hospital, Dana-Farber Cancer Institute
and Massachusetts General Hospital.
DR. MICHAEL HARRIS is Director of the Tomorrows Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible for
the review of Community Clinical Oncology Programs, and Associate Editor for
Pediatric Oncology for the scientific journal Cancer Investigation. Dr. Harris
previously served as Chief of Pediatric Hematology-Oncology at The Mt. Sinai
Medical Center in New York City.
31
DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's School of Medicine. His
research has focused on improving the quality of life of cancer patients,
especially by reversing the wasting process (cachexia) associated with cancer,
and in cancer treatment related fatigue syndrome.
MS. CAROL ARMENTI is the founder and Executive Director of the Center
for Cervical Health, a patient advocacy organization primarily devoted to
cervical health issues in the U.S. Ms. Armenti serves on the FDA advisory board
and other governmental consulting boards, and is a lecturer on women's health
issues.
DR. HOWARD YOUNG currently serves on the staff of a cancer research
institute. He has been elected to serve as the Vice President of the
International Society for Interferon and Cytokine Research in 2002 and 2003 and
as President in 2004 and 2005. During 2001, Dr. Young was elected a fellow to
the American Academy of Microbiology. Dr. Young served as Chair of the
Immunology Division of the American Society for Microbiology from 1996-1997. Dr.
Young has authored/co-authored over 200 research papers in the field of cellular
and molecular immunology. Dr. Young is a member of the editorial boards of the
"Journal of Interferon and Cytokine Research," "The Journal of Biological
Chemistry, "Genes and Immunity," and served on the editorial board of "The
Journal of Immunology" from 1997-2001. Dr. Young is Editor-in-Chief of the
"Newsletter of the International Society of Interferon and Cytokine Research."
BUSINESS ADVISORY BOARD
In December 2001, we established a Business Advisory Board currently
consisting of three people. Members of the Business Advisory Board provide us
with access to expertise in international finance, strategic management and
business opportunities. The current members of the Business Advisory Board are:
ALBERT REICHMANN IS THE co-founder of Olympia and York Developments
Limited, an international commercial property developer. Mr. Reichmann is also
an international philanthropist whose efforts have supported the establishment
of schools and other institutions around the world.
JOZEF STRAUS, PH.D., D.SC. (HON.) is Co-Chairman, President and Chief
Executive Officer of JDS Uniphase Corporation, a leading fiberoptic
communications firm and has numerous publications, presentations and other
honors to his credit.
PETER LUNDER is the former Co-Chairman and Treasurer of the Dexter Shoe
Company (now owned by Berkshire-Hathaway). Mr. Lunder serves as a Regent of the
Smithsonian Museum and is the Governing Board Chairman of Colby College's Museum
of Art, and a member of the Dana-Farber Cancer Institute's Visiting Committee.
PATENTS
In October 2001, we were awarded a U.S. patent entitled "Preparation of
a Therapeutic Composition," which issued patent protects the preparation and
composition of Product R. In March 2002, we were awarded a U.S. patent entitled
"Topical Treatment of Skin Disease and Eye Afflictions," which issued patent
32
protects the use of Product R for use in the topical treatment of viral skin
infections such as HPV, shingles and herpes simplex, and viral eye infections
including those caused by herpes simplex virus.
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We currently have 11 patent applications pending with the PTO and 23
patent applications pending in other countries relating to Product R. In the
United States, we have 1 allowed patent and 6 issued patents from the PTO. We
also have 1 issued patent in Australia. As patent applications in the United
States are maintained in secrecy until patents issue and as publication of
discoveries in the scientific or patent literature often lag behind the actual
discoveries, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Furthermore, the patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the period of time between the
filing of the NDA and FDA approval, with a five year maximum patent extension.
We cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
33
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with Product R. Therefore, Product R and any other drug candidates may give rise
to claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
EQUITY LINE OF CREDIT AGREEMENT
On February 9, 2001, we signed a private equity line of credit
agreement with Cornell Capital Partners, LP. Pursuant to this equity line of
credit agreement and subject to the satisfaction of certain conditions,
including those discussed below, Advanced Viral may sell and issue to Cornell
Capital, from time to time, up to an aggregate of $50,000,000 of our common
stock. Until August 14, 2003, assuming the registration statement covering the
resale of the shares issuable pursuant to the equity line of credit is
effective, we may, from time to time, in our sole discretion, sell or "put"
shares of our common stock to Cornell Capital at a price equal to 95% of the
market price of the common stock. Under the equity line of credit agreement, the
market price of Advanced Viral common stock, for purposes of determining the
purchase price, is the average of the three lowest closing bid prices, as
reported by Bloomberg, L.P., of our common stock for the 25 trading day period
ending on the date we notify Cornell Capital of our intention to put common
stock to it, or, in other words, request an advance. To date, we have not drawn
down on the line of credit.
The maximum advance amount on any advance notice date is equal to the
product of 150% times the 40 day average daily volume traded for the 40 trading
days preceding the advance notice date. The 40 day average volume traded is
equal to the bid price multiplied by the volume for each of the 40 trading days
preceding the advance notice date as reported by Bloomberg, L.P.
Our ability to put shares of common stock to Cornell Capital is subject
to certain conditions and limitations, including, but not limited to, the
following:
o the closing bid price of the common stock on the advance notice date
shall not be less than the average of the three lowest closing bid
prices of our common stock for the 25 trading day period ending on
the date we request an advance.
34
o the registration statement covering the resale of the shares must
have previously become effective and shall remain effective and
available for making resales of the put shares;
o our representations and warranties contained in the equity line of
credit agreement must be accurate as of the date of each put;
o we must have performed, satisfied and complied in all respects with
all covenants, agreements and conditions required to be performed,
satisfied or complied with at or prior to the date of each put;
o we must have obtained all permits and qualifications required by any
applicable state in accordance with the registration rights
agreement for the offer and sale of the put shares, or shall have
the availability of exemptions therefrom. The sale and issuance of
the put shares must be legally permitted by all laws and regulations
to which we are subject;
o no statute, rule, regulation, executive order, decree, ruling, or
injunction may be in effect which prohibits or directly and
adversely affects any of the transactions contemplated by the equity
line of credit agreement;
o at the time of an advance, there must not have been any material
adverse change in our business, operations, properties, prospects,
or financial condition since the date of filing of our most recent
report with the SEC;
o our common stock must not have been delisted from the Bulletin Board
or suspended from trading by the SEC or the Bulletin Board; and we
must not have received any notice threatening the continued listing
of our common stock on the Bulletin Board;
o at least 13 trading days must have elapsed since the last date we
put shares to Cornell Capital; and
o no advance date shall be less than 12 trading days after an advance
notice date.
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Cornell Capital, which will permit Cornell Capital to
resell the common stock from time to time in the open market or in
privately-negotiated transactions. We have agreed to bear certain expenses,
other than broker discounts and commissions, if any, in connection with the
preparation and filing of the registration statement and any amendments to it.
We intend to file amendments and supplements to the registration statement as
may be necessary in order to keep it effective as long as the equity line of
credit agreement remains in effect or Cornell Capital owns any of our common
stock. We cannot assure you that we will satisfy all of the conditions required
under the equity line of credit agreement or that Cornell Capital will have the
ability to purchase all or any of the shares of common stock put to it
thereunder.
In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral has agreed that he, she or it
will not, directly or indirectly, without the prior written consent of Cornell
Capital, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of any shares of common stock, including options,
35
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein for a period of 10 trading days following the
receipt of an advance notice by Advanced Viral pursuant to the agreement.
In conjunction with the equity line of credit agreement, we entered
into an agreement with May Davis Group, Inc., our placement agent. May Davis
assisted Advanced Viral in negotiating the equity line of credit agreement. As a
placement fee, we issued to May Davis and certain other investors Class A
Warrants to purchase 5,000,000 shares of our common stock at an exercise price
per share equal to $1.00, exercisable in part or in whole at any time until
February 9, 2006, and Class B Warrants to purchase in the aggregate 5,000,000
shares of our common stock at an exercise price equal to the greater of $1.00 or
110% of the bid price of the common stock on the applicable advance date under
the private equity line of credit agreement. Each Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance.
We may redeem the warrants at a redemption price of $0.01 per share
provided that the bid price for our common stock equals at least $4.00 per share
for a period of ten (10) consecutive trading days, as described therein. The
warrants contain provisions that adjust the purchase price and number of shares
issuable upon the occurrence of certain events, such as a stock split, reverse
stock split, stock dividend, merger, or recapitalization. Assuming the
registration statement covering the shares underlying the warrants and the
equity line of credit is not suspended, the holder may effect a cashless
exercise of the warrant commencing with the first advance date. There are also
certain "piggyback" registration rights with respect to the shares of common
stock issuable upon exercise of the warrants pursuant to a registration rights
agreement.
MARKETING AND SALES
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. As of the date hereof,
our efforts or the efforts of our representatives have produced no material
benefits to us regarding our ability to have Product R sold commercially
anywhere in the world. We have entered into exclusive distribution agreements
with four separate entities granting exclusive rights to distribute Product R in
the countries of Canada, China, Japan, Hong Kong, Macao, Taiwan, Mexico,
Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant to these
agreements, the distributors are obligated to cause Product R to be approved for
commercial sale in such countries and upon such approval, to purchase from us
certain minimum quantities of Product R to maintain the exclusive distribution
rights. Our marketing plans for Product R are still dependent upon registration
of Product R for sale in various jurisdictions where our distributors are
seeking approvals.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Product R. On July 30, 2001, we submitted an IND
application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. In March 2002, Advanced Viral completed the Phase 1 trials
36
and submitted to the FDA the results, which indicated that Product R was safe
and well tolerated dermatologically in all the doses applied in the study. The
data accrued from the Phase 1 trials will form the basis for the Phase 2
protocol to be submitted to the FDA in the future. On April 12, 2002, we began
Phase 2 of the IND by beginning the process of recruiting clinical sites to
perform studies in patients in the U.S. with genital warts.
An application for registration of Product R was filed in March 1998
requesting that Product R be permitted to be sold in Argentina. In this March
1998 filing, DCT, S.R.L., our distribution agent in Argentina, received an
investigational new drug identification number from the National Administration
for Drug, Food and Medical Technology in Argentina, or ANMAT. This allowed DCT
to begin pre-clinical studies on our behalf with Product R which have since been
concluded. In February 2000, DCT received approval from the ANMAT to proceed
with Phase 1 clinical trials in Argentina for Product R. We are currently
evaluating the costs and time necessary to complete Phase 1 clinical trials in
Argentina. DCT must apply for approval from the ANMAT to proceed with Phases II
and III clinical trials before Product R is approved for sale in Argentina. The
costs and time necessary to complete such trials cannot be predicted at this
time, especially given the current faltering political and economic climate in
Argentina. GloboMax Americas has been retained to review the application and
status of Product R in Argentina. Based upon recommendations received from
GloboMax Americas, we will decide how to proceed further in Argentina. We may
not receive regulatory approval in Argentina and therefore may not generate
sales of Product R in Argentina in the near future.
We initially targeted our sales and marketing efforts to those
countries where Product R was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex
and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia,
Taiwan, the Philippines and Malta. Registration of Product R will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of Product
R for sale in these countries has been frustrated due to our inability to obtain
the registration and approval to sell Product R in the Bahamas, the country of
origin, and a general lack of published data on the effectiveness of Product R.
Until Product R is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of Product R.
For the years ended December 31, 2001, 2000 and 1999, we reported no commercial
sales except limited sales for testing purposes. Product R is not legally
available for commercial sale anywhere in the world, except for testing
purposes. See "--Research, Development and Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council of
the Bahamas had refused our subsidiary's request for a "free sales certificate"
for Product R. A free sales certificate is a document typically issued by a
country in which a pharmaceutical product is manufactured which certifies that
such country permits the "free sale" of such product in such country. Most
countries require that, before allowing the registration of a pharmaceutical
product for use in that country, it must at least be registered and certified
for free sale in the country in which it is manufactured. However, the Bahamas
has no procedures currently in place to issue a free sales certificate for any
therapeutic drug, including Product R. If we do not obtain a free sales
certificate or other equivalent document from the Bahamas or another country, or
if we do not receive FDA approval, it is possible that we will not be able to
meet registration requirements in the countries which require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured.
The Company currently produces bulk clinical trial batches for topical
Product R in its facility in Freeport, Bahamas. The Company has reconfigured its
37
Yonkers, New York research facility to produce clinical trial batches for its
planned injectable Product R. The Company operates these two facilities to
produce clinical trial batches under current Good Manufacturing Procedures
(cGMP) as set forth by the United States Food and Drug Administration (FDA). The
FDA has not approved Product R for distribution or sale in the United States.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, other viruses,
cachexia (body wasting) and rheumatoid arthritis. We anticipate that we will
face intense and increasing competition as new products enter the market and
advanced technologies become available. Our competitors' products may be more
effective, or more effectively marketed and sold, than Product R. Competitive
products may render Product R obsolete or noncompetitive before we can recover
the expenses of developing and commercializing Product R. Furthermore, the
development of a cure or new treatment methods for the diseases we are targeting
could render Product R noncompetitive, obsolete or uneconomical. Many of our
competitors:
o have significantly greater financial, technical and human resources
than we have and may be better equipped to develop, manufacture and
market products;
o have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
o have products that have been approved or are in late stage
development and operate large, well-funded research and development
programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness and mitigate the toxic effects of other drugs
used to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
38
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 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for Product R as a treatment for rheumatoid arthritis.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Product R, we expect
to compete primarily on the basis of product performance and price with a number
of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have 37 full-time employees, consisting of our 3 executive officers,
2 vice presidents, 18 employees involved in research, 6 employees responsible
for quality assurance and quality control, an assistant controller, a chief
information officer and 6 administrative employees. Dr. Hirschman, our
President, Chief Executive Officer and Chairman of the Board of Directors, and
Alan V. Gallantar, our Chief Financial Officer and Treasurer, each devote all of
their business time to our day-to-day business operations. Eli Wilner, our
Secretary and a director, devotes as much time to his duties as is reasonably
necessary. Additionally, we may hire, as and when needed, and as available, such
sales and technical support staff and consultants for specific projects on a
contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers Lease"). The term of the Yonkers Lease is five years through April 2005
and our annual rental obligation under the Yonkers Lease is approximately
$260,000 until May 1, 2002 at which time our annual rental obligations will
increase to approximately $290,000.
The Bahamian manufacturing facility, which was acquired on December 16,
1987, is located in Freeport, Bahamas and consists of an approximate 29,000
39
square foot site containing a one-story concrete building of approximately 7,300
square feet and is equipped for all topical phases of the testing, production,
and packaging of bulk Product R. The Bahamian facility is currently being used
to store and produce bulk inventory for testing purposes.
LEGAL PROCEEDINGS
In June 2000, we filed an action and complaint in the Supreme Court of
New York, Westchester County, against Commonwealth Pharmaceuticals, Ltd.
("Commonwealth"), Immune Modulation Maximum Corp. ("IMMC") and Charles E. Miller
(collectively, the "Defendants") alleging a breach by Commonwealth of an
exclusive distribution agreement between Advanced Viral and Commonwealth,
misappropriation of trade secrets and confidential information, conversion and
conspiracy to convert our property interests in Reticulose(R). We further
alleged that Defendant Miller filed and obtained a U.S. patent entitled
"Composition Containing Peptides and Nucleic Acids and Methods of Making Same"
based on a study conducted by a third party using Reticulose(R), and that such
patent was assigned to Defendant IMMC, a company controlled by Defendant Miller,
in violation of the exclusive distribution agreement.
In our complaint, we sought relief in the form of (i) assignment of the
patent to Advanced Viral, (ii) adjudgment that Defendants breached,
misappropriated, converted and conspired to convert our property rights, (iii)
damages, profits realized and interest thereon; and (iv) attorneys' fees, costs
and expenses. In response, on August 3, 2000, Defendants filed a Motion to
Dismiss the Complaint alleging lack of personal jurisdiction or, in the
alternative, that the agreement underlying our claim is legally inoperative.
In August 2000, Commonwealth and IMMC filed a suit against Advanced
Viral in the United States District Court for the Eastern District of Michigan
which alleged that IMMC, and not Advanced Viral, was the owner of the
exclusive/broad rights in Reticulose(R), and sought, among other things: (i) a
declaratory judgment that IMMC is the exclusive owner of the broad/exclusive
rights to Reticulose(R) and the subject patent; (ii) an injunction against
Advanced Viral from further attempts to use, market or assert any claims of
ownership over any broad/exclusive rights in Reticulose(R), or the use,
publication or disclosure of information regarding Reticulose(R); (iii) return
of such information to IMMC; (iv) that Advanced Viral assign any
Reticulose(R)-related trademarks to IMMC and (v) that Advanced Viral pay the
plaintiffs in this case damages, profits, costs and attorneys' fees. Advanced
Viral was served with a copy of the complaint on August 8, 2000.
In January 2001, Advanced Viral and the Defendants stipulated to
dismiss the case in New York without prejudice. In July 2001, Advanced Viral
filed a Motion for Summary Judgment seeking dismissal of the Defendants' claim
of exclusive ownership to Reticulose and grant of such exclusive ownership to
Advanced Viral.
On November 8, 2001, the U.S. District Court for the Eastern District
of Michigan dismissed with prejudice all of the claims of the Defendants. In
connection with its dismissal order, the U.S. District Court further held that
Advanced Viral is the exclusive owner of all Reticulose(R) technology. In
connection with our counterclaims against the Defendants, on March 20, 2002,
Advanced Viral and the Defendants entered into a Settlement Agreement in
settlement of Advanced Viral's claims against the Defendants. The Settlement
Agreement was entered as part of the final judgment of the District Court on
March 25, 2002, and all remaining claims were dismissed. The Settlement
Agreement provided, among other things, that:
40
(i) the Defendants acknowledged that Advanced Viral is the sole
and rightful owner of all rights, title and interests for the
United States and throughout the world in and to the
Reticulose(R) trademark and all Reticulose(R) technology;
(ii) the Defendants sold, assigned and transferred, jointly and
severally, to Advanced Viral, its successors and assigns, all
their claims, rights, title and interests for the United
States and throughout the world in and to Reticulose(R), the
Reticulose(R) trademark, the Reticulose(R) technology, any
modifications, improvements or derivations thereto, and all
related patents, inventions, discoveries, currently pending
patent applications and any patents, discoveries and
inventions resulting therefrom or described therein, free and
clear from any encumbrance whatsoever;
(iii) Advanced Viral granted to IMMC a non-exclusive,
non-transferable, royalty-free license to make, use and sell
products coming within the scope of the patents transferred by
defendants to Advanced Viral, but only to the extent such
products are in the form of orally administered dietary
supplements which were already being sold on IMMC's then
current website;
(iv) Defendants agreed to indemnify, hold harmless and reimburse
Advanced Viral from and for any and all liabilities arising
from the manufacture, distribution, marketing, sale or use of
any of IMMC's products; and
(v) the Defendants agreed not to advertise or publicize that there
is any connection between any of Defendants' products and
Advanced Viral, its predecessors or Reticulose(R), nor will it
copy, distribute or publicize, orally or otherwise, any data
obtained by or produced on behalf of Advanced Viral or any of
its predecessors relating to Reticulose(R) or any other
product of Advanced Viral as if the data were developed by or
for Defendants or was derived from product of any of the
Defendants, and such data shall be returned to Advanced Viral
to the extent it is in the possession of the Defendants.
Advanced Viral is not currently a party to any material litigation,
nor, to the knowledge of management, is any such litigation currently
threatened.
41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
NAME AGE POSITION
---- --- --------
Shalom Z. Hirschman, M.D............65 President, Chief Executive Officer, Chief Scientific
Officer, Chairman of the Board
Alan V. Gallantar...................44 Chief Financial Officer, Treasurer
James F. Dicke II (1)...............56 Director
Christopher Forbes..................51 Director
David Seligman (1)..................63 Director
Eli Wilner (1)......................46 Secretary, Director
---------------------
(1) Member of the Audit and Compensation Committee.
SHALOM Z. HIRSCHMAN, M.D. has been President, Chief Executive Officer
and a director since October 1996, and Chairman of the Board since December
2001. Dr. Hirschman 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.
ALAN V. GALLANTAR has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from March 1998 to September 1999 of AMBI Inc., a nutraceutical company, senior
vice president and chief financial officer from 1992 to 1997 of Bradley
Pharmaceuticals, Inc., a pharmaceutical manufacturer, and vice president and
divisional controller from 1989 to 1991 for PaineWebber Incorporated. From 1985
to 1989, Mr. Gallantar was second vice president at The Chase Manhattan Bank,
N.A., and from 1983 to 1985, was a senior accountant at Philip Morris
Incorporated. From 1979 to 1983, Mr. Gallantar was a senior accountant in the
audit department of Deloitte & Touche.
ELI WILNER, our Secretary and a director since December 2001, is the
founder and CEO of Eli Wilner & Company, a New York City art gallery established
in 1983, and is also a leading frame dealer, restorer, collector and published
author. Mr. Wilner was a Bryant Fellows Member of the Metropolitan Museum of Art
in New York City from 1990 to 2000 and since 1990 has been a member of the Forum
and Director's Circle of the National Museum of American Art in Washington, D.C.
Mr. Wilner is a graduate of Brandeis University, where he received his B.A. in
Fine Arts in 1976, and Hunter College, where he received his M.A. in 1978.
JAMES F. DICKE II, director since December 2001, has been the President
and CEO of Crown Equipment Corporation, a global manufacturer and distributor of
electric forklift trucks, material handling products and television antenna
rotators since 1980. Mr. Dicke sits on the boards of the Culver Educational
Foundation (since 1977), Trinity University (since 1979), Dayton Power and Light
Company (since 1990), Dayton Art Institute (since 1996), Anderson-Cook
Corporation (since 1997). Mr. Dicke graduated from Trinity University in San
Antonio in 1968 with a B.S. in Business Administration.
CHRISTOPHER FORBES, director since December 2001, has been the Vice
Chairman of Forbes, Inc., a leading provider of business information for
executives and investors, including the company's flagship publication, Forbes
42
Magazine, since 1989 and a director of Forbes, Inc. since 1977. As Vice Chairman
of Forbes, Inc., Mr. Forbes shares responsibility for the advertising and
promotion departments of Forbes Magazine. Mr. Forbes is Vice Chairman of The
Business Committee for the Arts and sits on the boards of The Newark Museum, The
New York Academy of Art, The Victorian Society in America and The Princess
Margarita of Romania Foundation. He is also currently serving a four-year term
on the Advisory Council of the Victorian Society in America. He is a member of
the Board of Advisors of The Princeton University Art Museum and is a National
Trustee of The Baltimore Museum of Art. Since 1987, Mr. Forbes has been a member
of the Board of Regents of the Cathedral of St. John the Divine in New York
City. Mr. Forbes graduated MAGNA CUM LAUDE from Princeton University with a B.A.
in Art History in 1972, and was awarded an honorary degree of Doctor of Humane
Letters by New Hampshire College in 1986.
DAVID SELIGMAN, director since December 2001, is a partner and founder
of the Law Office of David Seligman, established in 1995. Since 1997, Mr.
Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan, Griffinger
and Vecchione. Mr. Seligman has over thirty years of legal experience in the
pharmaceutical industry, twenty-five of which were spent supervising the
activities of law department attorneys and outside counsel. From 1989 to 1995,
Mr. Seligman was Associate Vice President and responsible for the general legal
activities of various divisions of Hoffman-La Roche, Inc. Mr. Seligman is a
member of the New York State Bar and the American Bar Association, and sits on
the boards of Oxford Pharmaceutical Services, Inc., NitrOSystems, Inc. and
Greenbrook Pharmaceuticals, LLC. Mr. Seligman graduated from Columbia
University, College of Pharmacy (B.S.) in 1959, Fordham University School of Law
(J.D.) in 1962, and New York University School of Law (L.L.M.) in 1966.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, none of our current or former officers served on the Audit
and Compensation Committee, which was established in late December 2001. No
interlocking relationships exist between any member of our board of directors
and any other company's board of directors or compensation committee. No
interlocking relationship existed between any member of our board of directors
and any member of any other company's board of directors or compensation
committee in 2001.
AUDIT AND COMPENSATION COMMITTEE
In late December 2001, we established our Audit and Compensation
Committee. It is anticipated that the Committee, the current members of which
are James F. Dicke II, David Seligman, and Eli Wilner, will recommend to the
board of directors the independent certified public accountants to be selected
to audit our annual financial statements and will approve any special
assignments given to those accountants. The Committee also will review the
planned scope of the annual audit, the independent accountants' letter of
comments and management's response thereto regarding any major accounting
changes made or contemplated and the effectiveness and efficiency of our
internal accounting staff. It is intended that the Committee also will make
recommendations to the board of directors regarding the compensation payable to
our executive officers, reviews general policies relating to the compensation
and benefits of our employees. The Audit and Compensation Committee did not meet
during 2001, and met for the first time in March 2002.
43
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
We currently do not pay directors fees for their attendance at meetings
of the board of directors. Advanced Viral may revisit this position in the
future.
The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to Advanced Viral and its
subsidiaries for the years ended December 31, 2001, 2000 and 1999.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------- -----------------------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(3) OPTIONS/SARs(4) COMPENSATION(5)
------------------ ---- ---------- ----- ---------------- ---------------- ----------------
Shalom Z. Hirschman, M.D., 2001 $361,000 $25,000(2) $30,192 -- $ 21,270 (5)
Chairman since December 2001, 2000 $361,000 $0 $30,775 -- $ 4,540 (5)
President, Chief Executive 1999 $325,000 $0 $34,738 -- $ 4,316 (5)
Officer and Chief Scientific
Officer since October 1996
and consultant from May 24,
1995 until October 1996.
...........................................................................................................................
Alan V. Gallantar, Chief 2001 $225,000 $25,000 $ 6,000 -- --
Financial Officer since 2000 $200,000 $25,000 $21,000 -- --
October 1999. 1999 $ 43,750 $0 $ 1,500 4,547,880 --
...........................................................................................................................
William Bregman, Secretary 2001 $ 70,000 -- -- -- $150,000 (6)
and director from 1985 until 2000 $ 60,000 -- -- -- $ 2,500 (5)
December 2001, treasurer from 1999 $ 35,000 -- -- -- $ 2,500 (5)
1985 to 1999.
...........................................................................................................................
Bernard Friedland, President 2001 $ 70,000 -- -- -- $150,000 (6)
of subsidiary Advance Viral 2000 $ 60,000 -- -- -- $ 1,800 (5)
Ltd. from 1984 until 1999 $ 35,000 -- -- -- $ 1,800 (5)
December 2001; Director of
Advanced Viral from 1985 to
December 2001, Chairman from
1985 to December 2001
- --------------------------------------
(1) Dr. Hirschman's salary increased for the year 2000 to $361,000. Mr.
Gallantar's salary increased in October 2000 to $200,000 and in October
2001 to $225,000. Mr. Gallantar was hired in October 1999 and therefore his
salary in 1999 reflects only three months of his $175,000 annual salary.
(2) Represents portion of bonus paid to Dr. Hirschman pursuant to the terms of
his employment agreement in connection with the IND number granted by the
FDA. The remaining $75,000 due has been accrued as of September 30, 2001.
(3) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate incremental
cost to Advanced Viral of Dr. Hirschman's automobile lease, gas, oil,
repairs and maintenance. Other Annual Compensation for Mr. Gallantar
includes an automobile allowance of $500 per month and allowance for moving
expenses of approximately $15,000.
44
(4) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(5) Represents the dollar value of insurance premiums paid by or on behalf of
Advanced Viral with respect to term life insurance for the benefit of the
Named Executive Officers.
(6) Represents payments made to Messrs. Bregman and Friedland pursuant to the
terms of the severance agreements discussed below.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2001 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2001 by the Named Executive Officers.
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
- ---- ------------ ------------ ------------------------- -------------------------
Shalom Z. Hirschman, M.D. 0 N/A 39,100,000 / 0 $628,250 / $0 (2)(3)
Alan V. Gallantar 0 N/A 3,031,320 / 1,515,960 $60,487 / $30,243 (2)(4)
William Bregman 0 N/A 0 / 0 $0 / $0
Bernard Friedland 0 N/A 0 / 0 $0 / $0
- --------------------------------
(1) Based on 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) Based on the difference between the average of the closing bid and ask
prices per share of the common stock as reported by the Bulletin Board on
December 31, 2001, $0.2625, and the exercise or base price of in-the-money
stock options.
(3) As of December 31, 2001, 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;
4,000,000 shares of common stock at $0.36 per share, and 23,000,000 shares
of common stock at $0.27, all of which are currently exercisable.
(4) As of December 31, 2001, Mr. Gallantar held options to purchase 4,547,880
shares of common stock at $0.24255 per share, of which 3,031,320 were
exercisable as of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf.
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
45
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
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 earlier to occur of (i) the date an IND number is obtained from
and approved by the FDA so that human research may be conducted using Product R;
or (ii) 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.
On September 4, 2001, the Company received an IND number from the FDA. To date,
approximately $25,000 of the $100,000 bonus described above has been paid to Dr.
Hirschman, and $75,000 has been accrued.
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, to bind
us, to release or discharge any debt due us unless we have received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
46
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
GALLANTAR EMPLOYMENT AGREEMENT
Advanced Viral entered into an Employment Agreement dated as of October
1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is employed as
our Chief Financial Officer on a full business time basis. Under the agreement,
the term of Mr. Gallantar's employment continues until October 1, 2002. If the
agreement is terminated by us for cause, Mr. Gallantar will have no accrued
right to receive any bonus for the year in which his employment is terminated,
all unvested stock options will be cancelled, and any vested stock options will
terminate 90 days after the effective date of termination. If the agreement is
terminated by Advanced Viral not for cause, we are required to pay to Mr.
Gallantar all accrued and unpaid compensation, and all stock options granted as
of the date of the agreement shall become 100% vested. Upon such termination not
for cause, all options which became vested as a result of this provision may be
exercised by Mr. Gallantar until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement as a result of
a change in control, he will be paid his base salary for the remaining term of
the agreement, and all stock options granted on the date of the agreement will
become 100% vested and exercisable until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement for any other
reason, he will be paid all unaccrued and unpaid base salary, and he will have
the right to exercise any vested stock until 90 days after the effective date of
termination. All payments made to Mr. Gallantar in connection with the
termination of the agreement are subject to reduction to the extent they exceed
2.99 times the "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of the board
of directors. As of the date of the agreement, Mr. Gallantar received options to
purchase an aggregate of 4,547,880 shares of our common stock. The options
expire on October 1, 2009, and are exercisable in three increments of 1,515,960
on the October 1, 2000, 2001 and 2002, respectively. The agreement further
provides that:
o Mr. Gallantar and his family are entitled to receive the same
employee 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.
47
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.
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.
SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.
In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In addition,
the Severance Agreements provide as follows:
o That Messrs. Bregman and Friedland shall have the combined right
until November 29, 2003 to appoint one additional member to the
Board of Directors of Advanced Viral reasonably acceptable to
Advanced Viral, so long as both Messrs. Bregman and Friedland own
shares of Advanced Viral. The Bregman/Friedland designee, if
appointed, shall serve on Advanced Viral's Board of Directors until
his successor is duly elected and qualified, and may be removed as a
member of the Board of Directors of Advanced Viral, with or without
cause, by the affirmative vote of the members of Advanced Viral's
then Board of Directors at any time following the date which is the
earlier to occur of: (i) November 29, 2003 or (ii) the complete
divestiture of both Messrs. Bregman's and Friedland's ownership in
Advanced Viral.
o All agreements regarding the voting or disposition of shares of
common stock of Advanced Viral held by each of Messrs. Bregman and
Friedland are terminated.
o Advanced Viral shall have a right of first refusal to purchase
shares of common stock owned by Messrs. Bregman and Friedland upon
the receipt by Messrs. Bregman or Friedland, as the case may be, of
48
a bona fide offer from an unrelated third party to purchase such
shares in an "on-the-market" or "off-the-market" transaction, upon
the terms set forth in the Severance Agreements.
o With respect to the election of directors and compensation packages
for directors of Advanced Viral, each of Messrs. Bregman and
Friedland agreed to grant Advanced Viral an irrevocable proxy to
vote all the shares of its common stock they beneficially own at any
annual, special or adjourned meeting of the stockholders of Advanced
Viral until the earlier to occur of November 29, 2003 or, as to
those shares sold, the date of the sale of such shares by Messrs.
Bregman or Friedland, as the case may be, to one or more unrelated
third parties in a bona fide sale after Messrs. Bregman or
Friedland, as the case may be, shall have first complied with
Advanced Viral's right of first refusal described in the Severance
Agreements.
o Advanced Viral agreed, to the fullest extent permitted by Delaware
law and its charter documents, to indemnify each of Messrs. Bregman,
Friedland and Silver for all amounts (including reasonable
attorneys' fees) incurred or paid in connection with any action,
proceeding, suit or investigation arising out of or relating to
their performance of services for Advanced Viral.
o Advanced Viral agreed to continue the directors' and officers'
liability insurance for each of Messrs. Bregman, Friedland and
Silver until November 29, 2007.
In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan in the amount of
$200,000 from our Chief Financial Officer, Alan Gallantar, as evidenced by a
Demand Promissory Note dated December 14, 2001 (the "Note"). We were obligated
to repay the Note upon our receipt of proceeds upon the consummation of new
financing. The Note was repaid in full on December 17, 2001.
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(K))
In December 1999, we adopted a 401(k) plan that allows eligible
employees to contribute up to 20% of their salary, subject to annual limits,
which were $10,500 in 2000. We match 50% of the first 6% of the employee
contributions in our stock and may, at our discretion, make additional
contributions based upon earnings. In March 2001, we funded the plan with
approximately $24,000 to enable the plan to purchase shares of our common stock
on the open market in order to contribute the employer match for the year ended
December 31, 2000. As of March 2002 we have not funded our matching contribution
of approximately $33,000 for the year ended 2001.
49
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of March 26, 2002 with
respect to (i) each stockholder known to us to be the beneficial owner of more
than 5% of our outstanding common stock, (ii) each director, (iii) our Chief
Executive Officer and our other executive officers named in the Summary
Compensation Table, and (iv) all of our directors and executive officers as a
group. Except as set forth below, each of the named persons and members of the
group has sole voting and investment power with respect to the shares shown.
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) PERCENT OWNED
- ------------------------------------ ---------------------- -------------
Shalom Z. Hirschman, M.D. 39,101,000 (2) 8.3%
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Alan V. Gallantar 3,031,920 (3) *
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
James F. Dicke II 0 *
Crown Equipment Corporation
44 South Washington Street
New Bremen, Ohio 45869
Christopher Forbes
Forbes Building
60 Fifth Avenue 0 *
New York, New York 10011
David Seligman
4 Oxford Road 0 *
North Caldwell, New Jersey 07006-4216
Eli Wilner
1525 York Avenue 4,441,700 (4) 1.0%
New York, New York 10028
Bernard Friedland
P. O. Box 3947 39,146,730 (5) (7) 9.1%
Sarasota, FL 34230-3947
William Bregman
939 W 47th Ct 38,496,988 (6) (7) 8.9%
Miami Beach , FL 33139
ALL OFFICERS & DIRECTORS AS A GROUP (6 PERSONS) 46,574,620 (2)(3)(4) 9.8%
- ----------------------
* Less than 1%
(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, 430,783,353 shares of the
common stock were outstanding as of April 16, 2002.
(2) Includes 39,100,000 shares that may be acquired pursuant to options to
purchase common stock exercisable within 60 days from the date hereof.
(3) Includes currently exercisable options to purchase 3,031,920 shares of
common stock at $0.24255 per share.
50
(4) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 1,782,500 shares beneficially owned by his wife
Barbara Ann Brennan; (iii) 100,000 shares beneficially owned by his sister
Celia Conaway; (iv) 17,000 shares beneficially owned by his mother Zelotta
Wilner; and (v) 16,900 shares beneficially owned by his father Abraham
Wilner.
(5) Includes 1,000,000 shares of common stock owned by Mr. Friedland and Beth
Friedland, his daughter, as joint tenants; 20,000,000 shares owned by Mr.
Friedland and Shirley Friedland, his spouse, as joint tenants; and 400,000
shares owned by 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.
(6) Includes 22,293,614 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 165,000 shares owned by Carol Bregman,
his daughter; 165,000 shares owned by Janet Berlin, his daughter; 165,000
shares owned by Forest Berlin, his grandson; 165,000 shares owned by
Jessica Berlin, his granddaughter; and 55,000 shares owned by David Berlin,
his son-in-law.
(7) Pursuant to their severance agreements with Advanced Viral, each of Messrs.
Bregman and Friedland have granted to Advanced Viral (i) the right of first
refusal to purchase their shares of common stock subject to certain
conditions and for a limited time; and (ii) with respect to the election of
directors and compensation packages for directors of Advanced Viral, an
irrevocable proxy to vote such shares of common stock at any stockholders
meeting until the earlier to occur of November 29, 2003 or as to those
shares sold, the date of the sale of such shares by either Mr. Bregman or
Mr. Friedland, as the case may be, to one or more unrelated parties.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date hereof 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.
POSITION WITH OR SHARES OWNED SHARES OWNED
RELATIONSHIP BEFORE OFFERING (1) SHARES BEING SOLD AFTER OFFERING(3)
SELLING SHAREHOLDER TO ADVANCED VIRAL NUMBER PERCENT IN OFFERING(2) NUMBER PERCENT
- ------------------- ----------------- ------------ ------- ------------------ ------ -------
Cornell Capital Partners, LP (4)(5) Investor 166,666,667 75.6% 166,666,667 0 0%
Mark Angelo (5)(6) Investor 1,995,000 * 1,995,000 0 0%
Kevin Davis (6) Investor 50,000 * 50,000 0 0%
Joseph Donahue (5)(6) Investor 1,995,000 * 1,995,000 0 0%
Robert Farrell (5)(6) Investor 1,995,000 * 1,995,000 0 0%
Hamid Fashandi (5) Investor 25,000 * 25,000 0 0%
Adam Goldberg Investor 25,000 * 25,000 0 0%
Kimberly Holt-May (6) Investor 1,495,000 * 1,495,000 0 0%
Michael Jacobs Investor 40,000 * 40,000 0 0%
Owen May (6) Investor 385,000 * 385,000 0 0%
Hunter Singer (5)(6) Investor 1,995,000 * 1,995,000 0 0%
TOTAL SHARES (1) 176,666,667 76.2% 176,666,667 0 0%
SHARES OUTSTANDING AFTER OFFERING (2) 607,450,020
- ---------------------------------
* Less than 1%
(1) This number includes (solely for purposes of this prospectus) (i) up to an
aggregate of 166,666,667 shares of our common stock that we may sell to the
selling shareholders pursuant to the private equity line of credit
agreement, assuming a purchase price equal to $0.30; and (ii) up to
10,000,000 shares of common stock underlying purchase warrants issuable to
May Davis as placement agent. Except for shares issuable upon the exercise
of a Class A Warrant to purchase 5,000,000 shares of our common stock at an
exercise price per share equal to $1.00, exercisable in part or in whole at
any time until February 9, 2006, such shares are NOT deemed to be
beneficially owned within the meaning of Sections 13(d) and 13(g) of the
Exchange Act.
51
(2) Assumes the full use of the equity line of credit agreement and full
exercise of the warrants. (3) Assumes that all of the shares are sold by
the selling shareholders and no additional shares of common stock are
acquired.
(4) Represents (solely for purposes of this prospectus) up to an aggregate of
up to 166,666,667 shares of our common stock that we may sell to the
selling shareholders pursuant to the private equity line of credit
agreement.
(5) Based on information provided to us by Cornell Capital Partners, LP. Mark
Angelo, Joseph Donahue, Robert Farrell and Hunter Singer are employees of
May Davis Group, Inc., and control persons and beneficial owners of all of
the outstanding capital stock of Yorkville Advisors Management, LLC, the
general partner of Cornell Capital.
(6) Represents (i) shares issuable upon the exercise of a Class A Warrant to
purchase in the aggregate 5,000,000 shares of our common stock at an
exercise price per share equal to $1.00, exercisable in part or in whole at
any time until February 9, 2006, and (ii) shares issuable upon the exercise
of a Class B Warrant to purchase in the aggregate 5,000,000 shares of our
common stock at an exercise price equal to the greater of $1.00 or 110% of
the bid price of the common stock on the applicable advance date under the
private equity line of credit agreement. The Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of
warrant shares equal to the product obtained by multiplying 5,000,000 by a
fraction, the numerator of which is the amount of the advance payable on
the applicable advance date and the denominator of which is $50,000,000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into
employment agreements with certain of our executive officers, and have entered
into severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."
In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan in the amount of
$200,000 from our Chief Financial Officer, Alan Gallantar, as evidenced by a
Demand Promissory Note dated December 14, 2001 (the "Note"). We were obligated
to repay the Note upon our receipt of proceeds upon the consummation of new
financing. The Note was repaid in full on December 17, 2001. Other than the
foregoing, there were no material transactions between Advanced Viral and any of
its officers or directors which involved $60,000 or more during the past three
fiscal years.
52
DESCRIPTION OF COMMON STOCK
Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of April 16, 2002,
there were outstanding 430,783,353 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock:
o have equal ratable rights to dividends from funds legally available
therefore, when, as and if declared by our board of directors;
o entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
o do not have preemptive, subscription, or conversion rights and there
are no redemption or sinking fund provisions applicable thereto; and
o are entitled to one noncumulative vote per share on all matters
which shareholders may vote on at all meetings of shareholders.
American Stock Transfer & Trust Company is our transfer agent and
registrar, and is located in Brooklyn, New York.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the cash proceeds, if any, from the
exercise of any of the stock options held by the selling shareholders.
53
PLAN OF DISTRIBUTION
We are registering the proposed resale by the selling shareholders of
176,666,667 shares of our common stock issuable upon the exercise of certain
stock options. The selling shareholders may offer the shares at various times in
one or more of the following transactions:
o in the over-the-counter market;
o in transactions other than market transactions;
o in connection with short sales of our shares;
o by pledge to secure debts or other obligations;
o in connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
o in a combination of any of the above.
The selling shareholders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
The selling shareholders may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
selling shareholders, or they will receive commissions from purchasers of shares
for whom they have acted as agents. Selling shareholders may be deemed to be
underwriters with respect to the shares sold by them. Broker-dealers who act in
connection with the sale of the common stock may also be deemed to be
underwriters. Profits on any resale of the common stock as a principal by these
broker-dealers, and any commissions received by the broker-dealers, may be
deemed underwriting discounts and commissions under the Securities Act of 1933.
No underwriting commissions or finder's fees have been or will be paid
to us. The selling shareholders will pay all broker-dealer commissions and
related selling expenses associated with the sale of the common stock. The
common stock offered hereby is being registered pursuant to our contractual
obligations, and we have agreed to pay the costs of registering the shares,
including the fees outlined above.
In connection with the offering, persons participating in the offering
may purchase and sell shares of common stock on the open market. These
transactions may include short sales, stabilizing transactions in accordance
with Rule 104 of Regulation M under the Exchange Act and purchases to cover
positions created by short sales. Short sales involve the sale by an underwriter
of a greater number of shares than they are required to purchase in the offering
which creates a short position. Stabilizing transactions consist of certain bids
or purchases made for the purpose of preventing or limiting a decline in the
market price of the common stock.
These activities, if taken by the underwriters, may stabilize, maintain
or otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected in the
over-the-counter market or otherwise.
54
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for Advanced Viral by Berman Rennert Vogel & Mandler, P.A., Bank of America
Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
shall be liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability
o for any breach of the director's duty of loyalty to us or our
shareholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under section 174 of the Delaware General Corporation Law; or
o for any transaction from which the director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of our
shareholders (through shareholders' derivative suits on behalf of Advanced
Viral) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our shareholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling Advanced Viral pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making the offer is not qualified to do so or to anyone
to whom it is unlawful to make such offer or solicitation.
55
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets, December 31, 2001 and 2000 F-2
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999 and from
Inception (February 20, 1984) to December 31, 2001 F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to F-4
December 31, 2001
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 and from
Inception (February 20, 1984) to December 31, 2001 F-14
Notes to Consolidated Financial Statements F-15-F-44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2001 and 2000,
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,
2001 and for the period from inception (February 20, 1984) to December 31, 2001.
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 auditing standards generally accepted
in the United States. 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, 2001 and 2000
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2001 and for the period from
inception (February 20, 1984) to December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
As more fully described in Note 2, the Company is subject to certain liquidity
considerations. The Company's plans with respect to this matter are also
described in Note 2.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
March 25, 2002
F-1
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,499,809 $ 5,962,633
Inventory -- 19,729
Other current assets 63,162 34,804
------------ ------------
Total current assets 1,562,971 6,017,166
Property and Equipment, Net 3,000,583 1,944,199
Other Assets 885,237 847,349
------------ ------------
Total assets $ 5,448,791 $ 8,808,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,843,706 $ 902,961
Current portion of capital lease obligation 64,197 58,690
Current portion of note payable 24,246 21,517
------------ ------------
Total current liabilities 1,932,149 983,168
------------ ------------
Long-Term Debt:
Capital lease obligation - long term portion 42,370 106,567
Note payable - long term portion 32,198 56,446
------------ ------------
Total long-term debt 74,568 163,013
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 403,296,863 and 380,214,618
shares issued and outstanding 4,033 3,802
Additional paid-in capital 47,666,141 39,969,373
Deficit accumulated during the development stage (40,795,470) (29,079,902)
Discount on warrants (3,432,630) (3,230,740)
------------ ------------
Total stockholders' equity 3,442,074 7,662,533
------------ ------------
Total liabilities and stockholders' equity $ 5,448,791 $ 8,808,714
============ ============
See notes to consolidated financial statements.
F-2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
----------------------------------------------- DECEMBER 31,
2001 2000 1999 2001
------------- ------------- ------------- ------------
Revenues $ 17,601 $ 8,363 $ 10,953 $ 231,892
------------- ------------- ------------- ------------
Costs and Expenses:
Research and development 5,150,869 3,192,551 1,948,937 13,875,824
General and administrative 4,301,333 2,621,542 1,831,061 16,069,183
Compensation expense relating to
modifications of option terms 691,404 1,901,927 210,144 2,803,475
Depreciation 532,264 362,392 230,785 1,440,879
------------- ------------- ------------- ------------
10,675,870 8,078,412 4,220,927 34,189,361
------------- ------------- ------------- ------------
Loss from Operations (10,658,269) (8,070,049) (4,209,974) (33,957,469)
------------- ------------- ------------- ------------
Other Income (Expense):
Interest income 114,057 162,077 42,744 878,175
Other income -- -- -- 120,093
Interest expense (868,856) (1,446,692) (2,007,032) (7,533,769)
Severance expense - former directors (302,500) -- -- (302,500)
------------- ------------- ------------- ------------
(1,057,299) (1,284,615) (1,964,288) (6,838,001)
------------- ------------- ------------- ------------
Net Loss $ (11,715,568) $ (9,354,664) $ (6,174,262) $(40,795,470)
============= ============= ============= ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.03) $ (0.03) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 389,435,324 362,549,690 302,361,109
============= ============= =============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
----------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
----------- ----------- --------- ----------- ---------
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 $ 0.00 113,846,154 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 0.01 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 0.03 819,860 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)
----------- --------- -------- ---------
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
--------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------------ ------------ ------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ 0.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- (258,663)
------------ ------------ ------------ ------------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------ ------------ ------------ ------------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------ ------------ ------------ ------------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption 0.05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 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)
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
F-5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------------ ------------ ------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ 0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter warrants 0.12 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 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 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 0.055 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.035 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)
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
F-6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- --------- ----------- ------------ ----------- ------------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting
services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of options 0.10 190,000 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 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting
services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting
services 0.14 300,000 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) --
----------- --------- ----------- ----- ----------- -----
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
----------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
----- ----------- ----------- ------------ ------------- ----------- ------------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock, exercise
of options $0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock, exercise
of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock, exercise
of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock, exercise
of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock, exercise
of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock, exercise
of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock, exercise
of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock, exercise
of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered 0.50 350,000 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)
----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------------ ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 0 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock, exercise
of options $ 0.08 3,333,333 33 247,633 -- -- --
Issuance of common stock, conversion
of debt 0.20 1,648,352 16 329,984 -- -- --
Issuance of common stock, conversion
of debt 0.15 894,526 9 133,991 -- -- --
Issuance of common stock, conversion
of debt 0.12 2,323,580 23 269,977 -- -- --
Issuance of common stock, conversion
of debt 0.15 1,809,524 18 265,982 -- -- --
Issuance of common stock, conversion
of debt 0.16 772,201 8 119,992 -- -- --
Issuance of common stock, for
services rendered 0.41 50,000 -- 20,500 -- -- --
Issuance of common stock, for
services rendered 0.24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture 0 -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture 0 -- -- 1,350,000 -- -- --
Warrant costs, February debenture 0 -- -- 37,242 -- -- --
Warrant costs, October debenture 0 -- -- 291,555 -- -- --
Amortization of deferred
compensation cost 0 -- -- -- -- -- 399,322
Imputed interest on convertible
debenture 0 -- -- 4,768 -- -- --
Net loss, year ended December 31, 1997 0 -- -- -- -- (4,141,729) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 0 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
---------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- ------ ------------ -------- ------------ ------------
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 $0.12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options 0.26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.23 1,870,869 19 424,981 -- -- --
Issuance of common stock, for
services rendered 0.21 100,000 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)
----------- ------ ------------ -------- ------------ --------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
---------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED DISCOUNT
PER PAID-IN DEVELOPMENT COMPENSATION ON
SHARE SHARES AMOUNT CAPITAL STAGE COST WARRANTS
----- ----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1998 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
Issuance of common stock, securities
purchase agreement $0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock, securities
purchase agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock, for services
rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock, for services
rendered 0.25 180,000 2 44,998 -- -- --
Beneficial conversion feature, August
debenture -- -- 687,500 -- -- --
Beneficial conversion feature, December
debenture -- -- 357,143 -- -- --
Warrant costs, securities purchase
agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities purchase
agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August debenture -- -- 52,592 -- -- --
Warrant costs, December debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred
compensation cost -- -- -- -- 14,769 --
Credit arising from modification of
option terms -- -- 210,144 -- -- --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ------ ----------- ------------ -------- ---------
See notes to consolidated financial statements.
F-11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DISCOUNT
PER PAID-IN DEVELOPMENT ON
SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS
------- ----------- ------ ------------ ------------ -----------
Balance, December 31, 1999 303,472,035 $3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock, exercise
of options $0.1400 600,000 6 83,994 -- --
Issuance of common stock, exercise
of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock, exercise
of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock, exercise
of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock, exercise
of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock, exercise
of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock, exercise
of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock, exercise
of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock, exercise
of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock, exercise
of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock, exercise
of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock, exercise
of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock, cashless
exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock, services
rendered 0.4650 100,000 1 46,499 -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion feature,
January Debenture -- -- 386,909 -- --
Warrant costs, consulting agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,600 -- --
Warrant costs, private placement -- -- 3,346,414 -- (3,346,414)
Recovery of subscription receivable
previously written off -- -- 19,000 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 544,163
Credit arising from modification of
option terms -- -- 1,901,927 -- --
Net loss, year ended December 31, 2000 -- -- -- (9,354,664) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) (3,230,740)
----------- ------ ------------ ------------ -----------
See notes to consolidated financial statements.
F-12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
-------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DISCOUNT
PER PAID-IN DEVELOPMENT ON
SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS
------ ----------- ------- ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 $ 3,802 $ 39,969,373 $(29,079,902) $(3,230,740)
Issuance of common stock, exercise
of options 0.2700 40,000 1 10,799 -- --
Issuance of common stock, exercise
of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock, cashless
exercise of warrants 76,411 1 77,491 -- --
Issuance of common stock, for
services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904
Cashless exercise of warrants -- -- (77,491) -- --
Warrant costs, private placement -- -- 168,442 -- (168,442)
Warrant costs, private equity
line of credit -- -- 1,019,153 -- (1,019,153)
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 985,705
Credit arising from modification of
option terms -- -- 691,404 -- --
Net loss, year ended December 31, 2001 -- -- -- (11,715,568) --
----------- ------- ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 $ 4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
=========== ======= ============ ============ ===========
See notes to consolidated financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
------------------------------------------- DECEMBER 31,
2001 2000 1999 2001
------------ ------------ ----------- ------------
Cash Flows from Operating Activities:
Net loss $(11,715,568) $ (9,354,664) $(6,174,262) $(40,795,470)
------------ ------------ ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 532,264 362,392 230,785 1,440,789
Amortization of debt issue costs 15,344 106,030 331,250 794,559
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 386,909 1,044,643 3,818,663
Amortization of discount on warrants 985,705 611,134 148,262 2,035,398
Amortization of discount on warrants - consulting services -- 230,249 -- 230,249
Amortization of deferred compensation cost -- -- 14,769 760,500
Issuance of common stock for debenture interest -- 76,212 -- 76,212
Issuance of common stock for services 35,000 46,500 67,000 1,586,000
Compensation related to modification of option terms 691,404 1,901,927 210,144 2,803,475
Changes in operating assets and liabilities:
Increase in other current assets (28,358) (5,063) (29,917) (93,156)
Decrease in inventory 19,729 -- -- --
Increase in other assets (53,232) (278,037) (440,216) (1,548,227)
Increase in accounts payable and accrued liabilities 940,745 174,089 449,848 1,849,906
------------ ------------ ----------- ------------
Total adjustments 3,138,601 3,612,342 2,026,568 13,754,368
------------ ------------ ----------- ------------
Net cash used by operating activities (8,576,967) (5,742,322) (4,147,694) (27,041,102)
------------ ------------ ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- -- (6,292,979)
Proceeds from sale of investments -- -- 821,047 6,292,979
Acquisition of property and equipment (1,588,648) (917,471) (407,150) (4,055,669)
------------ ------------ ----------- ------------
Net cash provided (used) by investing activities (1,588,648) (917,471) 413,897 (4,055,669)
------------ ------------ ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,000,000 3,000,000 9,500,000
Proceeds from sale of securities, net of issuance costs 5,783,000 10,835,970 702,500 23,300,058
Payments under capital lease (58,690) (50,324) (41,986) (167,602)
Payments on note payable (21,519) (19,096) (14,261) (54,876)
Recovery of subscription receivable written off -- 19,000 -- 19,000
------------ ------------ ----------- ------------
Net cash provided by financing activities 5,702,791 11,785,550 3,646,253 32,596,580
------------ ------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,462,824) 5,125,757 (87,544) 1,499,809
Cash and Cash Equivalents, Beginning 5,962,633 836,876 924,420 --
------------ ------------ ----------- ------------
Cash and Cash Equivalents, Ending $ 1,499,809 $ 5,962,633 $ 836,876 $ 1,499,809
============ ============ =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 20,556 $ 36,681 $ 118,870
============ ============ ===========
During 2000, the Company purchased equipment
under a capital lease totaling $13,197.
See notes to consolidated financial statements.
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
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
initially named Reticulose, the current formulation of which is now
known as and hereinafter referred to as "Product R". While the
Company has had limited sales of this product, primarily for
research purposes, the success of the Company will be dependent
upon obtaining certain regulatory approval for its pharmaceutical
product, Product R, to commence commercial operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research,
Ltd. (LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985,
and, since that time, has been primarily involved in organizational
activities, research and development activities, and raising
capital. Planned operations, as described above, have not commenced
to any significant extent. Accordingly, the Company is considered
to be in the development stage, and the accompanying consolidated
financial statements represent those of a development stage
enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (primarily a
money market fund), with original maturities of three months or
less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. Gain or loss on disposition of assets is recognized
currently. Maintenance and repairs are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the
Company.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs
will be amortized over the life of the patent, commencing at the
time Product R is marketed. Loan costs include fees paid in
connection with the February 2001 private equity line of credit
agreement and are being amortized over the life of the agreement
(see Note 6).
INCOME TAXES
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES, which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the
estimated fair value of the Company's financial instruments
presented in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 107. Fair value estimates
discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31,
2001 and 2000. Since the reported fair values of financial
instruments are based upon a variety of factors, they may not
represent actual values that could have been realized as of
December 31, 2001 and 2000 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash, a money market fund and accounts payable.
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.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At
various times during the year, the Company had cash balances in
excess of federally insured limits. The Company maintains its cash,
which consists primarily of demand deposits, with high quality
financial institutions, which the Company believes limits this
risk.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No.
25), and related interpretations, in accounting for its employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
APB No. 25 provides that the compensation expense relative to the
Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a
pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in
accounting for stock options issued to non-employees.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No.
128, EARNINGS PER SHARE. This standard requires dual presentation
of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
diluted earnings per share computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year. The Company's potentially issuable
shares of common stock pursuant to outstanding stock options and
warrants are excluded from the Company's diluted computation, as
their effect would be anti-dilutive.
REVENUE RECOGNITION
The limited sales generated by the Company have consisted of sales
of Product R for testing and other purposes. The Company records
sales when the product is shipped to customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
RECLASSIFICATIONS
Certain amounts in the 1999 and 2000 financial statements have been
reclassified to conform to 2001 presentation.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144), which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes Statement No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and
reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, and EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, for the disposal of a segment of a
business. SFAS 144 retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed
of or is classified as held for sale. The Company has not
determined the impact that SFAS 144 will have, if any, on its
financial statements.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS,
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS which
replace Accounting Principles Board Opinion Nos. 16, BUSINESS
COMBINATIONS and 17, INTANGIBLE ASSETS, respectively. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and that the
use of the pooling-of-interests method be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to
an impairment-only method. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon
adoption of SFAS No. 142, which the Company will be required to
adopt on January 1, 2002. After December 31, 2001, goodwill can
only be written down upon impairment discovered during annual tests
for fair value, or discovered during tests taken when certain
triggering events occur. The Company believes that the adoption of
this statement will not have an impact on the results of operations
or financial position of the Company.
In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133 AN
AMENDMENT OF SFAS NO. 133, which deferred the effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Adoption of the new standard on January 1, 2001 had no effect on
the financial statements.
In March 2000, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF
APB OPINION NO. 25 (FIN 44). FIN 44 clarifies the application of
APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequences of
various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective
July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12,
2000. The Company adopted FIN 44 in the third quarter of 2000 and
there was no material impact on the Company's results of operations
or financial position.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of approximately $41,000,000 during its
history. The Company is dependent upon registration of Product R for
sale before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA. Unless
and until Product R is approved for sale in the United States or
another industrially developed country, the Company will be dependent
upon the continued sale of its securities, debt or equity financing for
funds to meet its cash requirements.
During the year ended December 31, 2001, the Company completed several
equity transactions in which it received cash proceeds of approximately
$5,800,000, of which $2,610,000 was received in December 2001. In
addition, in February 2001, the Company entered into an equity line
credit agreement to sell up to $50,000,000 of the Company's common
stock (see Note 6).
Subsequent to year end, the Company completed several private
placements of its securities under a previously filed shelf
registration in which it received cash proceeds of $2,000,000 (see Note
6).
Management believes that cash flows from sales of securities and from
current financing arrangements will be sufficient to fund operations
for the next year. Management intends to continue to sell the Company's
securities in an attempt to meet its cash flow requirements; however,
no assurance can be given that equity or debt financing, if and when
required, will be available.
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 was a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market Reticulose
(currently referred to as Product R) worldwide, except within the
Bahamas, for $50,000. The Company also purchased inventory of Product R
from LTD for $45,000 and was obligated to pay $3 per ampule of Product
R for the initial 100,000 ampules purchased and $2 per ampule for
purchases exceeding 100,000 ampules. On December 16, 1987, the Company
acquired the controlling beneficial interest in 99.6% of the common
stock of LTD through an appropriate trust agreement to satisfy the
rules of the Bahamian Government, from two of the principal
stockholders of the Company. Both stockholders concurrently canceled
$86,565 of indebtedness due them from LTD.
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL
LIVES (YEARS) 2001 2000
----------------- ---------- ----------
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,233,524 896,720
Machinery and equipment 5 3,170,759 1,918,693
---------- ----------
4,438,833 2,849,963
Less accumulated depreciation 1,438,250 905,764
---------- ----------
$3,000,583 $1,944,199
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $433,119 as of
December 31, 2001 and $402,694 as of December 31, 2000, including
$17,623 expended in 1987 to purchase a land lease expiring in 2068.
Included with machinery and equipment is $13,197 of equipment purchased
under a capital lease during 2000. Depreciation expense for equipment
under the capital leases was approximately $10,368, $7,729 and $47,040
in 2001, 2000 and 1999, respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
2001 2000
-------- --------
Patent development costs $765,388 $715,655
Loan costs, net of accumulated amortization of $794,559
and $779,225 68,353 80,198
Other 51,496 51,496
-------- --------
$885,237 $847,349
======== ========
NOTE 6. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000,
respectively, principal amount of its ten-year 7% Convertible
Debentures (the "February Debenture" and the "October Debenture",
collectively, the "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal 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. As of May 5, 1998, the October Debenture was fully
converted.
F-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants was $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants were
estimated to be $37,242 ($0.209 per warrant), $19,196 ($0.108 per
warrant), and $9,946 ($0.056 per warrant), respectively, based upon
a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model. This amount has been reflected in the
accompanying financial statements as interest expense related to
the convertible February Debenture.
In connection with the issuance of the October Debenture, the
Company issued to RBB three warrants (the "October Warrants") to
purchase Common Stock, each such October Warrant entitling the
holder to purchase, from the date of grant through August 30, 2007,
600,000 shares of the Common Stock. The exercise price of the three
October Warrants was $0.20, $0.23 and $0.27 per warrant share,
respectively. The fair value of the three October Warrants was
established to be $106,571 ($0.178 per warrant), $97,912 ($0.163
per warrant) and $87,472 ($0.146 per warrant), respectively, based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model. This amount has been reflected in the
accompanying financial statements as a discount on the convertible
debenture, with a corresponding credit to additional paid-in
capital, and is being amortized over the expected term of the
notes, which at December 31, 1997 was 120 months. In May 1998, the
remaining unamortized discount of $276,957 was amortized upon full
conversion of the October Debenture.
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. As of March 7, 2000, the November
Debenture was fully converted.
In connection with the issuance of the November Debenture, the
Company issued to RBB two warrants (the "November Warrants") to
purchase Common Stock, each such November Warrant entitling the
holder to purchase 375,000 shares of the Common Stock at any time
and from time to time through October 31, 2008. The exercise price
of the two November Warrants was $0.20 and $0.24 per warrant share,
respectively. The fair value of the November warrants was estimated
to be $48,000 ($0.064 per warrant) based upon a financial analysis
of the terms of the warrants using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one
year. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. 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 was convertible, at the
option of the holder, into shares of common stock. On January 19,
2000, February 17, 2000 and March 3, 2000 pursuant to notice by the
holder, Focus, to the Company under the August Debenture, $300,000,
$900,000 and $800,000, respectively, of the principal amount of the
August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3,
2000 the November Debenture was fully converted. Based on the terms
for conversion associated with the August Debenture, there was an
intrinsic value associated with the beneficial conversion feature
of $687,500. This amount has been recorded as interest expense in
1999.
In 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 was $0.2461 per warrant share. The fair value of the
August Warrants was estimated to be $52,592 ($0.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate
of 5.75% and an expected holding period of five years. This amount
is being amortized to interest expense in the accompanying
consolidated financial statements.
In December 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to sell $2,000,000 principal amount of the Company's 7%
convertible debenture (the December Debenture) due December 28,
2009 to Endeavour Capital ("Endeavour"). Accrued interest under the
December Debenture was payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the December Debenture may be made prior to the maturity date
without the consent of the holder. The December Debenture was
convertible, at the option of the holder, into shares of common
stock. During 1999, $1,000,000 of these debentures was sold. The
remaining $1,000,000 was not available until the shares underlying
the first $1,000,000 were registered. Such registration statement
was declared effective in January 2000 and the remaining $1,000,000
transaction was consummated. Based on the terms for conversion
associated with the first $1,000,000 of the December Debenture,
there was an intrinsic value associated with the beneficial
conversion feature of $357,143. This amount has been recorded as
interest expense in 1999. Based on the terms for conversion
associated with the second $1,000,000 of the December Debenture,
there was an intrinsic value associated with the beneficial
conversion feature of $386,909. This amount has been recorded as
interest expense in 2000.
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
On January 27, 2000, February 22, 2000, February 23, 2000, February
24, 2000, February 29, 2000 and October 25, 2000 pursuant to notice
by the holder, Endeavour, to the Company under the December
Debenture, $150,000, $135,000, $715,000, $785,000, $200,000 and
$15,000, respectively, of the principal amount of the December
Debenture was converted into 1,105,435, 988,913, 5,149,035,
5,622,696, 1,036,674 and 43,960 shares of the common stock,
respectively.
In connection with the issuance of the first $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock
at any time and from time to time through December 31, 2002. The
exercise price of the December Warrant was $0.19 per warrant share.
The fair value of the December Warrants was estimated to be $4,285
($0.0429 per warrant share) based upon a financial analysis of the
terms of the warrant using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years.
This amount was amortized to interest expense.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrants
entitling the holder to purchase 110,000 shares of the Common Stock
at any time and from time to time through December 31, 2002. The
exercise price of the December Warrant was $0.20 per warrant share.
The fair value of the December Warrants was estimated to be $13,600
($0.136 per warrant share) based upon a financial analysis of the
terms of the warrant using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 90%; a risk free
interest rate of 6% and an expected holding period of three years.
This amount was amortized to interest expense.
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 $0.204 to $0.2448 per
share at any time until December 31, 2003. The fair value of these
warrants was estimated to be $494,138 ($0.209 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 6% and an
expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements. As of December 31, 2001, 482,830 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $126,000.
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company issued
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 provided 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 ($0.04 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
Pursuant to a securities purchase agreement with Harbor View Group
and other various purchasers, dated February 16, 2000, the Company
received $3,000,000 on March 9, 2000 in exchange for 13,636,357
shares of common stock.
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%)
of the warrants are exercisable at $0.275 per share and fifty
percent (50%) of the warrants are exercisable at $0.33 per share,
until February 28, 2005. The fair value of these warrants was
estimated to be $1,582,734 ($0.295 and $0.285 per warrant share)
based upon a financial analysis of the terms of the warrant using
the Black-Scholes Pricing Model with the following assumptions;
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements. As of December 31, 2001, 216,577 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $105,000.
On November 8, 2000, the Company entered into a securities purchase
agreement with Harbor View Group, Inc. and various other
purchasers, whereby the Company authorized the issuance and sale of
up to 50,000,000 shares of common stock in a private offering
transaction at a purchase price of $0.40 per share. As of December
31, 2001, 13,427,500 shares were issued for a purchase price of
$5,371,000.
Such agreement also provided for the issuance of warrants to
purchase an aggregate of 30,000,000 shares of common stock, half at
an exercise price of $0.48 and half at an exercise price of $0.56.
As of December 31, 2000, 7,959,000 warrants had been issued
(3,979,500 at $0.48 and 3,979,500 at $0.56) exercisable at any time
until November 8, 2005. The fair value of these warrants was
estimated to be $1,763,680 ($0.222 per warrant) based upon a
financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; 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. The Company paid a fee of $265,300 relative
to this agreement, which has been charged to interest expense in
the accompanying consolidated financial statements.
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
On November 16, 2000, the Company entered into a securities
purchase agreement with Roseworth Group, Ltd., whereby the Company
agreed to sell 4,960,317 shares of its common stock at a price of
$0.3024 per share for an aggregate purchase price of $1,500,000.
The Company received such proceeds in November 2000.
On July 19, 2001, the Company entered into a securities purchase
agreement with BNC Bach International, Ltd., whereby the Company
sold to BNC Bach International 3,125,000 shares of its common stock
at a price of $0.32 per share for an aggregate purchase price of
$1,000,000.
On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, the Company issued 1,225,000 shares of its
common stock at a price of $0.40 per share for an aggregate
purchase price of $490,000. Such agreement also provided for the
issuance of 735,000 warrants to purchase common stock, half of such
warrants are exercisable at $0.48 per share and half of such are
exercisable at $0.56 per share until July 27, 2006. The fair value
of these warrants was estimated to be $144,500 ($0.20 per warrant
for $0.48 warrants) and ($0.19 per warrant for $0.56 warrants)
based upon a financial analysis of the terms of the warrants using
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; a risk free interest rate of 5.5% and
an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
On August 20, 2001, the Company entered into an additional
securities purchase agreement with BNC Bach International, Ltd.
whereby the Company sold to BNC Bach International 2,000,000 shares
of its common sock at a price of $0.30 per share for an aggregate
purchase price of $600,000.
On September 28, 2001, the Company entered into a securities
purchase agreement with Cambois Finance, Ltd. whereby the Company
agreed to sell 6,666,667 shares of its common stock to Cambois
Finance, Ltd. for an aggregate purchase price of $1,000,000. The
Company received such proceeds and issued such shares of common
sock on October 1, 2001.
In December 2001, the Company sold 9,666,667 shares of its common
stock at $0.27 per share to various purchasers for an aggregate
purchase price of $2,610,000. The purchasers included Harbor View
Group, Inc. (1,518,519 shares), BNC Bach International, Ltd.
(7,407,407 shares) and an individual purchaser (740,741 shares).
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of
credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of the
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
PRIVATE EQUITY LINE OF CREDIT (Continued)
Company's common stock. Under such agreement, the Company may
exercise "put options" to sell shares for certain prices based on
certain average trading prices. Upon signing this agreement, the
Company issued to its placement agent, May Davis Group, Inc., and
certain investors, Class A warrants to purchase an aggregate of
5,000,000 shares of common stock at an exercise price of $1.00 per
share, exercisable in part or whole until February 9, 2006, and
Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or
110% of the bid price on the applicable advance date. Such Class B
warrants are exercisable pro rata with respect to the number of
warrant shares as determined by the fraction of the advance payable
on that date as the numerator and $20,000,000 as the denominator
multiplied by 5,000,000, until sixty months from the date of
issuance.
The fair value of the Class A warrants was estimated to be
$1,019,153 ($0.204 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; 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.
SUBSEQUENT FINANCINGS
On February 7, 2002, the Company entered into a Stock Purchase
Agreement with Roseworth Group pursuant to which we issued and sold
to Roseworth Group 3,333,333 shares of our common stock at a
negotiated price of $0.15 per share, for a total purchase price of
$500,000.
On February 21, 2002, the Company entered into a Stock Purchase
Agreement with Roseworth Group pursuant to which we issued and sold
to Roseworth Group 3,333,333 shares of our common stock at a
negotiated price of $0.15 per share, for a total purchase price of
$500,000.
On March 22, 2002, the Company entered into a Stock purchase
Agreement with Roseworth Group pursuant to which we issued and sold
to Roseworth Group 3,333,333 shares of our common stock at a
negotiated price of $0.15 per share, for a total purchase price of
$500,000.
NOTE 7. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
equipment and calls for monthly installments of $2,476 at 12% per annum
for 60 months, commencing in March 1999 and expiring in February 2004.
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. NOTE PAYABLE (Continued)
The aggregate maturities of the installment purchase agreement are as
follows:
Year ending December 31:
2002 $24,246
2003 27,521
2004 4,677
-------
56,444
Less current portion 24,246
-------
Note payable - long-term portion $32,198
=======
NOTE 8. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. The Company has not as yet
received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since
Product R was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea
pigs. Therefore, the Company could be subjected to claims for
adverse reactions resulting from the use of Product R. In the event
any claims for substantial amounts were successful, they could have
a material adverse effect on the Company's financial condition and
on the marketability of Product R. As of the date hereof, the
Company does not have product liability insurance for Product R.
There can be no assurance that the Company will be able to secure
such insurance in adequate amounts or 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 six issued patents and one allowed U.S. patent and
one issued Australian patent for the use of Product R. The Company
currently has 11 patent applications pending with the U.S. Patent
Office and 23 foreign patent applications. The Company can give no
assurance that other companies, having greater economic resources,
will not be successful in developing a similar product. There can
be no assurance that such patents, if obtained, will be
enforceable.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $0.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$0.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options were exercisable through June 30, 2000
at an exercise price of $0.15 and $0.17, respectively. The fair
value of these options was estimated to be $32,925 ($0.0348 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Through December 31, 2001, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug Product R on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50.
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
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 $0.20 per share. Pursuant to several
amendments, the DCT options were exercisable through June 30, 2000
at an exercise price of $0.21 per share. The fair value of these
options was estimated to be $1,788 ($0.0012 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. Effective July
1, 2000, these options were extended to December 31, 2000 at an
exercise price of $0.22 per share. As a result of the modification
of the option terms, the fair value of these options was estimated
to be $166,860 ($0.2273 per option share) based on a financial
analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility
of 50%; risk free interest rate of 6%. This amount has been charged
to expense related to modification of existing option terms during
the year ended December 31, 2000. Effective December 31, 2000,
these options were extended to December 31, 2001 at an exercise
price of $0.24 per share. As a result of the modification of the
option terms, the fair value of these options was estimated to be
$108,429 ($0.1457 per option share) based on a financial analysis
of the terms of the options using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount has been charged to expense
related to modification of existing option terms during the year
ended December 31, 2000. As of December 31, 2001, 1,256,000 shares
of common stock were issued pursuant to the exercise of these
options for an aggregate exercise price of approximately $261,500.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Product R in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Product R for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
to advance additional funds towards such study. In connection with
the HIV-HPV Agreement, the Company advanced approximately $665,000,
which was accounted for as research and development expense. The
amounts have been used to cover expenses associated with clinical
activities of the HIV-HPV Study. The HIV-HPV Agreement provides
that (i) in the event the data from the HIV-HPV Study is used in
connection with Product R being approved for commercial sale
anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the
costs of the HIV-HPV Study, then DCT is obligated to reimburse the
Company for all amounts expended in connection with the HIV-HPV
Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively, to assess the efficacy of the topical application of
Product R for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company advanced approximately
$58,000 and $132,000, respectively. Such expenses were accounted
for as research and development expense. The amounts expended have
been used to cover expenses associated with pre-clinical
activities. Neither the Herpes Study nor the HPV Topical Study has
commenced. Both Agreements with DCT provide that (i) in the event
the data from the Studies are used in connection with Product R
being approved for commercial sale anywhere within the territory
granted under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and Product R with those taking a
three drug cocktail and a placebo. As of December 31, 2001, the
Company advanced approximately $50,000 for such study, which has
been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company advanced approximately
$95,000, which has been accounted for as research and development
expense.
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 2001, the Company advanced
approximately $70,000 for such study, which has been accounted for
as research and development expense.
As of December 31, 2001, the Company advanced approximately
$442,000 for expenses in connection with the drug approval process
in Argentina, which has been accounted for as research and
development expense. Based on information received from DCT, the
Company believes that the drug will not be approved for commercial
distribution in Argentina in the foreseeable future.
ISRAEL STUDIES
In January 2001, the Company entered into a 12 month agreement with
the Weizmann Institute of Science, and Yeda, its developmental arm
in Israel, to conduct research on the effects of Product R on the
immune system, especially on T lymphocytes. In addition, scientists
will explore the effects of Product R in animal models. The total
cost to the Company of this research is expected to be $118,000. As
of December 31, 2001, the Company advanced $118,000 for such
research, which has been accounted for as research and development
expense.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel
using Product R. It is anticipated that these trials will support
future FDA applications. The cost of the first phase of this
research is expected to be $242,000. As of December 31, 2001, the
Company advanced $115,000 for such research, which has been
accounted for as research and development expense.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 $0.18 per share. As of December 31, 2001, 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 February 17, 2008 at
an exercise price of $0.19 per share, of which options to acquire
500,000 shares (exercisable until March 23, 2001) were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman; (ii)
options to purchase 5,000,000 shares exercisable at any time and
from time to time commencing March 24, 1997 and ending February 17,
2008 at an exercise price of $0.27 per share, of which options to
acquire 500,000 shares (exercisable until March 23, 2001) were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending February 17, 2008 at an exercise price of $0.36 per
share, of which options to acquire 500,000 shares (exercisable
until March 23, 2001) were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman. In addition, the Company has
agreed to cause the shares underlying these options to be
registered so long as there is no cost to the Company.
As of December 31, 2001, 976,000 shares of common stock were
issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options
and 75,000 of his $0.36 options to Elliot Bauer, an individual who
also received and exercised shares and options as a result of the
"Cohen Agreements".
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $0.19, 500,000 at $0.27, and 500,000 at $0.36).
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
Effective March 23, 2001, the remaining unexercised $0.19, $0.27
and $0.36 options referred to above which were exercisable until
March 23, 2001, were extended to December 31, 2001 at their same
exercise prices. As a result of the modification of the option
terms, the fair value of the options was estimated to be $357,975
based on a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2001.
Effective December 31, 2001, the remaining unexercised $0.27 and
$0.36 options, which had been extended to December 31, 2001, were
further extended to June 30, 2002 at exercise prices of $0.28 and
$0.37, respectively. As a result of this modification of the option
terms, the fair value of the options was estimated to be $6,158
based on a financial analysis of the terms of the options using the
Black-Scholes pricing model with the following assumptions:
expected volatility of 80%; risk free interest rate of 5%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2001.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement.
Pursuant to this Agreement, Dr. Hirschman was employed to serve as
Chief Executive Officer and President of the Company until December
31, 2002. The Agreement further provides that Bernard Friedland and
William Bregman will vote all shares owned or voted by them in
favor of Dr. Hirschman as a member of the Board of Directors of the
Company. The Agreement provides for Dr. Hirschman to receive an
annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the
payment of $100,000 to Dr. Hirschman on the earlier to occur of (i)
the date an IND number is obtained from and approved by the FDA so
that human research may be conducted using Product R; or (ii) 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. On September 4, 2001, the Company received an
IND number from the FDA. Therefore, of the $100,000 described
above, $25,000 was paid as of December 31, 2001. The Agreement also
provides for previously issued options to acquire 23,000,000 shares
of common stock at $0.27 per option share to be immediately vested
as of the date of this agreement and are exercisable until February
17, 2008.
The fair value of these options was estimated to be $5,328,441
($0.2317 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 80%; a risk free
interest rate of
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
6% and an expected life of 32 months. The Company is recognizing
the $5,328,441 fair value of the options as compensation expense on
a pro-forma basis over the 32 month service period (the term of the
employment agreement).
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $0.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options was estimated to be $376,126
($0.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected life of ten years. The Company
is recognizing the $376,126 fair value of the options as
compensation costs on a pro-forma basis over the three year service
period (the term of the employment agreement). Performance bonuses
for Mr. Gallantar's first two years in the amount of $25,000 each
year have been charged to expense in the appropriate years in the
accompanying consolidated financial statements.
OTHER EMPLOYEES
On January 3 and December 29, 2000, the Company issued to certain
other employees stock options to acquire an aggregate of 430,000
and 716,000 shares of common stock at an exercise price of $0.21
and $0.33 per share, respectively. These options expire on January
2, 2010 and December 29, 2010, respectively, and vest in 20%
increments at the end of each year for five years.
The fair value of the these options was estimated to be $42,342
($0.1721 per option share) and $117,893 ($0.2788 per option share),
respectively, based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate
of 6%; an expected life of ten years; and a
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
termination rate of 10%. The Company will recognize the fair value
of the options as compensation costs on a pro-forma basis over a
one year service period (the term of the employment agreements).
Financial reporting of the Hirschman, Gallantar and other employee
options has been prepared pursuant to the Company's policy of
following APB No. 25, and related interpretations, in accounting
for its employee stock options. Accordingly, the following pro
forma financial information is presented to reflect amortization of
the fair value of the options.
AS REPORTED PRO FORMA AS
DECEMBER 31, 2001 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (11,715,568) $ (2,374,643) $ (14,090,211)
============== ============== ==============
Net loss per share $ (0.03) $ (0.01) $ (0.04)
============== ============== ==============
AS REPORTED PRO FORMA AS
DECEMBER 31, 2000 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (9,354,664) $ (1,799,827) $ (11,154,491)
============== ============== ==============
Net loss per share $ (0.03) $ (0.00) $ (0.03)
============== ============== ==============
AS REPORTED PRO FORMA AS
DECEMBER 31, 1999 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (6,174,262) $ (31,344) $ (6,205,606)
============== ============== ==============
Net loss per share $ (0.02) $ (0.00) $ (0.02)
============== ============== ==============
There were no other options outstanding that would require pro
forma presentation.
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through June 30, 2000), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $0.09
per share (which exercise price has been increased to $0.16 per
share) (the "September 1992 Cohen Options"). The fair value of
these options was estimated to be $59,030 ($0.0347 per option
share) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Effective July 1, 2000, these options were extended to December 31,
2000 at an exercise price of $0.17 per share. As a result of the
modification of the option terms, the fair value of these options
was estimated to be $55,023 ($0.2751 per option share) based on a
financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Effective December 31, 2000, these options were
extended to December 31, 2001 at an exercise price of $0.19 per
share. As a result of the modification of the option terms, the
fair value of these options was estimated to be $17,311 ($0.1731
per option share) based on a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; risk free interest rate of
6%. This amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Effective December 31, 2001, these options were
further extended to June 30, 2002 at an exercise price of $0.20. As
a result of this modification of the option terms, the fair value
of the options was estimated to be $8,912 based on a financial
analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility
of 80%; risk free interest rate of 5%. This amount bas been charged
to compensation expense related to the modification of existing
option terms during the year ended December 31, 2001. As of
December 31, 2001, 2,900,000 of the September 1992 Cohen Options
have been exercised for cash consideration of $403,000.
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.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
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 $0.10 per share exercisable through May 1,
1996 (the "Bauer and Rizzuto Options"). Pursuant to several
amendments, the remaining Bauer options were exercisable through
June 30, 2000 at an option price of $0.14. The fair value of these
options was estimated to be $116,101 ($0.0541 per option share)
based upon a financial analysis of the terms of the options using
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. Effective July
1, 2000, these options were extended to December 31, 2000 at an
exercise price of $0.16 per share. As a result of the modification
of the option terms, the fair value of these options was estimated
to be $953,885 ($0.2848 per option share) based on a financial
analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility
of 50%; risk free interest rate of 6%. This amount has been charged
to expense related to modification of existing option terms during
the year ended December 31, 2000. Effective December 31, 2000,
these options were extended to December 31, 2001 at an exercise
price of $0.18 per share. As a result of the modification of the
option terms, the fair value of these options was estimated to be
$600,419 ($0.1793 per option share) based on a financial analysis
of the terms of the options using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount has been charged to
compensation expense related to modification of existing option
terms during the year ended December 31, 2000. Effective December
31, 2001, these options were further extended to June 30, 2002 at
an exercise price of $0.19. As a result of this modification of the
option terms, the fair value of the options was estimated to be
$318,359 based on a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; risk free interest rate of
5%. This amount bas been charged to compensation expense related to
the modification of existing option terms during the year ended
December 31, 2001. Through December 31, 2001, 6,650,500 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $696,050.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. In addition, GloboMax and its
subcontractors are assisting the Company in conducting Phase I
clinical trials for Product R. The contract was extended by
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GLOBOMAX AGREEMENT (Continued)
mutual consent of both parties. The Company has paid approximately
$4,127,000 for services rendered and reimbursement of expenses by
GloboMax and its subcontractors through December 31, 2001.
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting
agreement with Harbor View Group, Inc. for past and future
consulting services related to corporate structures, financial
transactions, financial public relations and other matters through
December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share
and warrants to purchase 1,750,000 shares at an exercise price of
$0.26 per share until February 28, 2005. The fair value of the
warrants was estimated to be $200,249 ($0.057 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of eleven months (the term of the
consulting agreement). This amount has been amortized to consulting
expense during the year ended December 31, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
F-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
SOFTWARE ACQUISITION
During 2001, the Company contracted with a software vendor at a cost of
approximately $500,000 to acquire and install an SAP system for
accounting, administrative and production control. As of December 31,
2001, the entire cost has been incurred and has been capitalized as an
additional element of cost of the computer equipment.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The Company
has commenced these clinical trials. The Phase I initial trials are
placebo controlled, open label, dose escalation safety studies in
healthy volunteers. These studies are being conducted in the United
States under the supervision of GloboMax, LLC. Upon successful
completion of Phase I studies, the Company expects to initiate Phase II
trials to investigate the efficacy and dosages of Product R in the
topical treatment of genital warts. Phase III trials are pivotal
clinical investigations designed to establish the efficacy and safety
of Product R.
LEASES
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement
for equipment totaling $222,318. The lease calls for monthly
payments of $4,529 for 60 months commencing on September 1998 and
expiring on July 2003. During 1999, the Company entered into a
purchase lease agreement for equipment totaling $38,645. The lease
calls for monthly payments of $965 for 48 months commencing in
August 1999 and expiring in July 2003. Additionally, during 2000,
the Company entered into a purchase lease agreement for equipment
totaling $13,197. The lease calls for monthly payments of $447 for
36 months commencing in January 2001 and expiring in December 2003.
Future minimum capital lease payments and the net present value of
the future minimum lease payments at December 31, 2001 are as
follows:
Year ending December 31:
2002 $ 71,292
2003 43,822
--------
Total minimum lease payments 115,114
Less amount representing interest 8,547
--------
Net present value of future minimum lease payments 106,567
Less current maturities 64,197
--------
$ 42,370
========
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued)
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 $17,000 annually. The Company has three options to
renew for an additional one year per option. Management has
exercised its second option for the year 2001. Effective December
2001, the Company closed its Florida office.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective
May 1, 1999. The new lease adds 10,550 square feet (for a total of
16,650 square feet) and extends its term until April 2005. Annual
rent on the original lease is approximately $85,000. Rent for the
additional facilities is approximately $175,000. Total rental
commitment for the Yonkers facilities will be $260,000 until May 1,
2002 at which time it will increase to approximately $290,000.
The Company leased an automobile in November 1999 for 36 months at
$711 per month expiring in November 2002.
Total lease expense for the years ended December 31, 2001, 2000 and
1999 amounted to $263,609, $296,064 and $191,974, respectively.
Future minimum lease commitments as of December 31, 2001 are as
follows:
Year ending December 31:
2002 $ 288,000
2003 290,000
2004 290,000
2005 290,000
----------
Total $1,158,000
==========
NOTE 9. SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the term
and conditions of separate severance agreements. The resignations were
not due to any disagreement with the Company or any matter relating to
the Company's operations, policies or practices.
In connection with their resignation, the Company paid $150,000 to each
of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
connection with the severance agreements, the Company obtained a loan
in the amount of $200,000 from the Company's Chief Financial Officer,
as evidenced by a demand promissory note dated December 14, 2001. The
note was repaid in full on December 17, 2001.
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. LITIGATION
In June 2000, the Company filed an action and complaint in the Supreme
Court of New York, Westchester County, against Commonwealth
Pharmaceuticals, Ltd. ("Commonwealth"), Immune Modulation Maximum Corp.
("IMMC") and Charles E. Miller (collectively, the "Defendants")
alleging a breach by Commonwealth of an exclusive distribution
agreement between the Company and Commonwealth, misappropriation of
trade secrets and confidential information, conversion and conspiracy
to convert the Company's property interests in Reticulose(R). The
agreement, which the Company alleges in its complaint is currently in
force and effect, provides that: (i) all laboratory or clinical studies
initiated by Commonwealth for which Reticulose(R) is provided for free
must first be approved by the Company; (ii) the results of all studies,
all research data and documentation and any research publications
resulting from studies initiated by Commonwealth or any of its agents
will belong to the Company and will be made use of at the Company's
discretion; and (iii) such studies are only permitted as part of such
agreement. In its complaint, the Company alleged that Defendant Miller
filed and obtained a U.S. patent entitled "Composition Containing
Peptides and Nucleic Acids and Methods of Making Same" (the "1996
Patent") based on a study conducted by a third party using
Reticulose(R) obtained free of charge from the Company, and that such
patent was assigned to Defendant IMMC, a company controlled by
Defendant Miller, in violation of the exclusive distribution agreement.
In its complaint, the Company seeks relief in the form of (i)
assignment of the patent to the Company; (ii) adjudgment that
Defendants breached, misappropriated, converted and conspired to
convert the Company's property rights; (iii) damages, profits realized
and interest thereon; and (iv) attorneys' fees, costs and expenses. In
response, on August 3, 2000, Defendants filed a Motion to Dismiss the
Complaint alleging lack of personal jurisdiction or, in the
alternative, that the agreement underlying the Company's claim is
legally inoperative.
In August 2000, Commonwealth and IMMC filed a suit against the Company
in the United States District Court for the Eastern District of
Michigan which alleged that IMMC, and not the Company, was the owner of
the exclusive/broad rights in Reticulose(R), and sought, among other
things, (i) a declaratory judgment that Defendant IMMC was the
exclusive owner of the broad/exclusive rights to Reticulose(R) and the
subject patent; (ii) an injunction against the Company from further
attempts to use, market or assert any claims of ownership over any
broad/exclusive rights in Reticulose(R), or the use, publication or
disclosure of information regarding Reticulose(R); (iii) return of such
information to IMMC; (iv) that the Company assign any
Reticulose(R)-related trademarks to IMMC; and (v) that the Company pay
Plaintiffs of this case damages, profits, costs and attorneys' fees.
The Company was served with the Complaint on August 8, 2000.
In January 2001, the Company and Commonwealth, et al., agreed to
dismiss the case in New York without prejudice. In July 2001, the
Company filed a Motion for Summary Judgment seeking dismissal of the
Defendants' claim of exclusive ownership of Reticulose(R) and grant of
such exclusive ownership to the Company.
F-41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. LITIGATION (Continued)
On November 8, 2001, the U.S. District Court for the Eastern District
of Michigan dismissed with prejudice all of the claims of the
Defendants. In connection with its dismissal order, the U.S. District
Court further held that the Company is the exclusive owner of all
Reticulose(R) technology. In connection with the Company's
counterclaims against the Defendants, on March 20, 2002, the Company
and the Defendants entered into a Settlement Agreement in settlement of
the Company's claims against Defendants. The Settlement Agreement was
entered as part of the final judgment of the District Court on March
25, 2002, and all remaining claims were dismissed. The Settlement
Agreement provided, among other things, that:
(i) the Defendants acknowledged that the Company is the sole and
rightful owner of all rights, title and interests for the United
States and throughout the world in and to the Reticulose(R)
trademark and all Reticulose(R) technology;
(ii) the Defendants sold, assigned and transferred, jointly and
severally, to the Company, its successors and assigns, all their
claims, rights, title and interests for the United States and
throughout the world in and to Reticulose(R), the Reticulose(R)
trademark, the Reticulose(R) technology, any modifications,
improvements or derivations thereto, and all related patents,
inventions, discoveries, currently pending patent applications
and any patents, discoveries and inventions resulting therefrom
or described therein, free and clear from any encumbrance
whatsoever;
(iii) the Company granted to IMMC a non-exclusive, non-transferable,
royalty-free license to make, use and sell products coming within
the scope of the patents transferred by the Defendants to the
Company, but only to the extent such products are in the form of
oral dietary supplements which were already being sold on IMMC's
then current website;
(iv) Defendants agreed to indemnify, hold harmless and reimburse the
Company from and for any and all liabilities arising from the
manufacture, distribution, marketing, sale or use of any of
IMMC's products; and
(v) the Defendants agreed not to advertise or publicize that there is
any connection between any of Defendants' products and the
Company, its predecessors or Reticulose(R), nor will it copy,
distribute or publicize, orally or otherwise, any data obtained
by or produced on behalf of the Company or any of its
predecessors relating to Reticulose(R) or any other product of
the Company as if the data were developed by or for Defendants or
was derived from product of any of the Defendants, and such data
shall be returned to the Company to the extent it is in the
possession of the Defendants.
NOTE 11. STOCKHOLDERS' EQUITY
During 2000, the Company issued 76,742,583 shares of common stock for
an aggregate consideration of $16,564,500. The amounts were comprised
of the issuance of 31,861,674 shares of common stock for cash of
$9,806,000, issuance of 5,158,500 shares common stock
F-42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. STOCKHOLDERS' EQUITY (Continued)
pursuant to the exercise of options for $982,000, issuance of 1,186,593
shares of common stock pursuant to the exercise of warrants for
$154,000, issuance of common stock upon conversion of debt of
38,435,816 shares for $5,576,000 and issuance of 100,000 shares of
common stock in exchange for services for $46,500.
During 2001, the Company issued 23,082,245 shares of common stock for
an aggregate consideration of $5,895,491. The amounts were comprised of
the issuance of 22,845,834 shares of common stock for cash of
$5,765,000, issuance of 60,000 shares common stock pursuant to the
exercise of options for $18,000, issuance of 76,411 shares of common
stock pursuant to the cashless exercise of warrants for $77,491 and
issuance of 100,000 shares of common stock in exchange for services for
$35,000.
NOTE 12. 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, 2001 and 2000, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $34,500,000 and $21,000,000, which expire in varying
amounts to 2020.
The Company presently has temporary differences between financial
reporting and income tax reporting relating to the amortization of
warrant costs, compensation expense for the extension of options,
depreciation and patent costs.
The components of the deferred tax asset as of December 31, 2001 and
2000 were as follows:
2001 2000
----------- ----------
Benefit of net operating loss carryforwards $11,730,000 $7,174,000
Less valuation allowance 11,730,000 7,174,000
----------- ----------
Net deferred tax asset $ -- $ --
=========== ==========
As of December 31, 2001 and 2000, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of future changes
F-43
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. INCOME TAXES (Continued)
in the ownership of the Company from the exercise of options and
warrants or other future issuances of common stock.
NOTE 13. 401(K) PLAN
In December 1999, the Company adopted a 401(K) plan that allows
eligible employees to contribute up to 20% of their salary, subject to
annual limits imposed by the Internal Revenue Service. The Company
matches 50% of the first 6% of the employee contributions in our stock
and may, at our discretion, make additional contributions based upon
earnings. In March 2001, the Company funded the plan with approximately
$24,000 to enable the plan to purchase shares of the Company's common
stock on the open market in order to contribute the employer match for
the year ended December 31, 2000. As of March 22, 2002, the Company has
not funded its matching contribution of approximately $33,000 for the
year ended December 31, 2001.
F-44
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
176,666,667 SHARES
OF
COMMON STOCK
___________, 2002
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be paid
solely by Advanced Viral Research Corp. (the "Registrant"). All amounts shown
are estimates, except the Commission registration fee:
Commission registration fee ...................... $ 0
Printing and mailing expenses .................... $10,000
Legal fees and expenses .......................... $15,000
Accounting fees and expenses ..................... $ 5,000
TOTAL ........................................ $30,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Ninth of our Certificate of Incorporation contains the
following provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person, who has
ceased to be director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection
with such action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed
II-1
to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made , with respect to a
person who is a director or officer at the time of such determination,
(1) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such
directors, even though less than a quorum, or (3) if there are no such
directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and 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.
II-2
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to our securities issued or sold
within the past three years which were not registered under the Securities Act.
No underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, each of these transactions was completed
without registration of the respective securities under the Securities Act in
reliance upon the exemptions provided by Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering. The purchasers were
sophisticated with access to the kind of information registration would provide
and such purchasers acquired such securities without a view toward the
distribution thereof.
1. In November 1998 pursuant to a securities purchase agreement, we
sold $1,500,000 principal amount of our ten-year 7% convertible debenture due
October 31, 2008 to RBB Bank, A.G., as agent for the accounts of certain
persons, in an offshore transaction. In connection with the issuance of the
debenture, we also issued to RBB two warrants to purchase common stock , each
warrant entitling the holder to purchase, until October 31, 2008, 375,000 shares
of the common stock at exercise prices of$0.20 and $0.24 per warrant share,
respectively. This transaction was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Regulation S.
2. In December 1998, pursuant to a securities purchase agreement, we
sold to Harbor View Group, Inc. and various other purchasers 4,917,276 shares of
common stock, and warrants to purchase an aggregate of 2,366,788 shares of
common stock, including (x) warrants to purchase an aggregate of 1,966,788
shares of common stock and (y) a finder's fee paid to Harbor View Group
consisting of two warrants to purchase an aggregate 400,000 shares of common
stock, for an aggregate purchase price of $802,500. Half of the warrants are
exercisable at $0.204 per share, and half of the warrants are exercisable at
$0.2448 per share, until December 31, 2003.
3. During our fiscal year ended December 31, 1998, we issued
approximately 16.8 million shares in connection with the conversion of
debentures; 100,000 shares for consulting services; and 1,555,000 shares issued
upon exercise of options.
4. In July 1999 pursuant to a securities purchase agreement, we sold to
Michael Berman, Pak-Lin Law and Kwong Wai Au 1,851,852 shares of common stock
and warrants to purchase an aggregate of 925,926 shares of common stock, for an
II-3
aggregate purchase price of $500,000. The warrants entitle the holders to
purchase 463,264 and 463,264 shares of common stock at exercise prices of $0.324
and $0.378 per share, respectively, and are exercisable at any time and from
time to time until June 28, 2004.
5. In August 1999 pursuant to a securities purchase agreement with
Focus Investors LLC and various other purchasers, we sold $2,000,000 principal
amount of our ten-year 7% convertible debentures due August 3, 2009, and series
W warrants to purchase an aggregate of 1,000,000 shares of our common stock at
an exercise price of $0.2461 per warrant share until August 3, 2004.
6. In October 1999, we granted Alan Gallantar, our Chief Financial
Officer, stock options to acquire 4,547,880 shares of common stock, exercisable
at $0.24255 per share in one third increments on October 1, 2000, 2001, and
2002, until October 1, 2009. Mr. Gallantar is an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
7. In December 1999, pursuant to a securities purchase agreement, we
issued the first $1,000,000 tranche of $2,000,000 in aggregate principal amount
of our 7% convertible debentures due December 31, 2004 to Endeavour Capital
Fund, S.A. In connection with the sale of the first tranche of debentures, we
issued warrants to purchase 100,000 shares of our common stock to Endeavour, and
two warrants to purchase 5,000 shares of common stock to Endeavour's legal
counsel. The warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share.
8. During our fiscal year ended December 31, 1999, we issued 280,000
shares for consulting services.
9. In January 2000, pursuant to the securities purchase agreement with
Endeavour Capital Fund, S.A. discussed above, we issued the second $1,000,000
tranche of $2,000,000 in aggregate principal amount of our 7% convertible
debentures due December 31, 2004 to Endeavour Capital Fund, S.A.
10. In February 2000 pursuant to a consulting agreement with Harbor
View Group, we issued to Harbor View warrants to purchase 1,750,000 shares at an
exercise price of $0.21 per share, and warrants to purchase 1,750,000 shares at
an exercise price of $0.26 per share, until February 28, 2005, in exchange for
consulting services provided or to be provided to us.
11. In February 2000 pursuant to a securities purchase agreement, we
sold to Harbor View Group and various other purchasers 13,636,357 shares of
common stock, and warrants to purchase an aggregate of 5,454,544 shares of
common stock for an aggregate purchase price of $3,000,000. Half of the warrants
are exercisable at $0.275 per share, and half of the warrants are exercisable at
$0.33 per share, until February 28, 2005.
12. In May 2000, we granted Louis Silver, a director stock options to
acquire 100,000 shares of common stock, exercisable at $0.25 per share, until
May 31, 2002. Mr. Silver is an "accredited investor" as defined in Rule 501(a)
under the Securities Act.
13. On September 18, 2000 we entered into a private equity line of
credit agreement with Spinneret Financial Systems, Inc., who assigned their
rights to GMF Holdings, Inc., for the right to put shares of our common stock to
the investor from time to time to raise up to $20,000,000, subject to certain
II-4
conditions and restrictions. This agreement and all agreements contemplated in
connection with such agreement was terminated by mutual agreement of the parties
on January 22, 2001.
14. From November 2000 through March 2001, pursuant to a securities
purchase agreement, we sold to Harbor View Group and various other purchasers
13,427,500 shares of common stock, and warrants to purchase an aggregate of
8,056,500 shares of common stock for an aggregate purchase price of $5,371,000.
Half of the warrants are exercisable at $0.48 per share, and half of the
warrants are exercisable at $0.56 per share, until November 8, 2005.
15. During the year 2000, we issued approximately 38.4 million shares
in connection with the conversion of debentures; approximately 1.2 million
shares upon the exercise of warrants; and approximately 5.2 million shares upon
exercise of options.
16. We entered into an equity line of credit agreement dated February
9, 2001 with Cornell Capital Partners, LP. Pursuant to the equity line of credit
agreement, subject to the satisfaction of certain conditions, Cornell Capital,
an "accredited investor" as defined in Rule 501(a) under the Securities Act, may
sell and issue, from time to time, up to an aggregate of $50,000,000 of its
common stock. In connection with the equity line of credit, we issued to the
placement agent, May Davis Group, Inc., which introduced Cornell Capital to us,
and certain other investors Class A Warrants to purchase in the aggregate
5,000,000 shares of our common stock at an exercise price per share equal to
$1.00, exercisable in part or in whole at any time until February 9, 2006, and
Class B Warrants to purchase in the aggregate 5,000,000 shares of our common
stock at an exercise price equal to the greater of $1.00 or 110% of the bid
price of the common stock on the applicable advance date under the private
equity line of credit agreement. The Class B Warrant is exercisable pro rata on
or after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the numerator of
which is the amount of the advance payable on the applicable advance date and
the denominator of which is $50,000,000, until sixty months from the date of
issuance.
17. In June 2001 we issued 60,000 shares of our common stock pursuant
to the exercise of certain options.
18. On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, we authorized the issuance and sale of up to 1,225,000
shares of our common stock and warrants to purchase an aggregate of 735,000
shares of common stock in a private offering transaction pursuant to Section
4(2) of the Securities Act for a purchase price of $0.40 per share, for an
aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
19. During the year 2001, we issued approximately 76,000 shares upon
the cashless exercise of warrants, and 60,000 shares upon exercise of options.
II-5
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1 Articles of Incorporation of Advanced Viral Research Corp. ("ADVR")(2)
3.2 Bylaws of ADVR, as amended(1)
3.3 Amendment to Articles of Incorporation of ADVR(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between ADVR and American Stock Transfer and Trust
Company(1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR to TRM
Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to Plata
Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common
Stock granted by ADVR to Leonard Cohen(6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, M.D.
dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between
ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between
ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2448 per share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and between ADVR
and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock
of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock
of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between ADVR
and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of
common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between ADVR and
Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common
stock at $0.19916667 per share. (16)
4.24 Form of Warrant dated February 7, 2000 to purchase shares of common
stock at $0.21 per share. (17)
4.25 Form of Warrant dated February 7, 2000 to purchase shares of common
stock at $0.26 per share. (17)
4.26 Form of Warrant dated February 16, 2000 to purchase shares of common
stock at $0.275 per share. (17)
4.27 Form of Warrant dated February 16, 2000 to purchase shares of common
stock at $0.33 per share. (17)
4.28 Form of Class A Warrant dated September 18, 2000 to purchase 5,000,000
shares of common stock. (19)
4.29 Form of Class B Warrant dated September 18, 2000 to purchase 5,000,000
shares of common stock. (19)
4.30 Form of Class A Warrant dated February 9, 2001 to purchase 5,000,000
shares of common stock. (21)
4.31 Form of Class B Warrant dated February 9, 2001 to purchase 5,000,000
shares of common stock. (21)
5.1 Opinion and Consent of the law firm of Berman Rennert Vogel & Mandler,
P.A. *
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor
of ADVR dated November 16, 1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique
Medical Actuel and ADVR. (3)
10.3 Letter, dated March 15, 1991 to ADVR from Health Protection Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and
ADVR.(11)(a
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and
ADVR. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell
Inc. and ADVR. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and
ADVR. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between
Lionel Resnick, M.D. and ADVR. (11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc.
and ADVR. (12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between
C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c)
II-6
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between
C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR. (11)(d)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT
S.R.L. and ADVR, as amended(11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and ADVR. (11)(f)
10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z. Hirschman,
M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between
AVIX International Pharmaceutical Corp. and ADVR. (12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995
with Commonwealth Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December
28, 1995, between AVIX International Pharmaceutical Corp., Beijing
Unistone Pharmaceutical Co., Ltd. and ADVR. (11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR. (11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between
ADVR and Shalom Z. Hirschman, M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International
Pharmaceutical Corp. and ADVR. (11)(i)
10.23 Employment Agreement, dated October 17, 1996, between ADVR and Shalom
Z. Hirschman, M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and
ADVR. (12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between
ADVR and Interfi Capital Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development
Agreement, dated March 13, 1997, between National Institute of Health,
Food and Drug Administration and the Centers for Disease Control and
Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between
ADVR and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research
and Development Agreement, dated March 4, 1998, between National
Institute of Health, Food and Drug Administration and the Centers for
Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between
ADVR and Shalom Z. Hirschman, M.D.(11)(n)
10.30 Agreement between ADVR and Angelo Chinnici, M.D. dated July 1, 1999.
(14)
10.31 Consulting Agreement between ADVR and GloboMax LLC dated January 18,
1999. (15)
10.32 Registration Rights Agreement dated August 3, 1999 between ADVR
Research and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between ADVR and Alan V.
Gallantar (15)
10.34 Registration Rights Agreement dated December 28, 1999 between ADVR and
Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement dated February 7, 2000 between ADVR and Harbor
View Group, Inc.(17)
10.36 Securities Purchase Agreement dated February 16, 2000 between ADVR and
Harbor View Group, Inc. (17)
10.37 Letter Agreement dated November 16, 1999 between ADVR and Bratskeir &
Company. (18)
10.38 Amended and Restated Employment Agreement dated May 12, 2000 between
ADVR and Shalom Z. Hirschman, M.D. (18)
10.39 Equity Line of Credit Agreement dated as of September 18, 2000 between
ADVR and Spinneret Financial Systems, Inc.(19)
10.40 Registration Rights Agreement dated as of September 18, 2000 between
ADVR and Spinneret Financial Systems, Inc. (19)
10.41 Registration Rights Agreement dated as of September 18, 2000 between
ADVR and May Davis Group, Inc.(19)
10.42 Placement Agent Agreement dated September 18, 2000 between ADVR and
May Davis Group, Inc.(19)
10.43 Assignment and Assumption Agreement dated December 12, 2000 between
Spinneret Financial Systems, Inc. and GMF Holdings Inc. (20)
10.44 Agreement to Waive Assignment Rights dated December 12, 2000 by GMF
Holdings Inc. (20)
10.45 Termination Agreement dated January 22, 2001 between GMF Holdings,
Inc., May Davis Group, Inc. and ADVR. (21)
10.46 Equity Line of Credit Agreement dated as of February 9, 2001 between
ADVR and Cornell Capital Partners, LP. (21)
II-7
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.47 Registration Rights Agreement dated as of February 9, 2001 between
ADVR and Cornell Capital Partners, LP.(21)
10.48 Registration Rights Agreement dated as of February 9, 2001 between
ADVR and May Davis Group, Inc. (21)
10.49 Placement Agent Agreement dated February 9, 2001 between ADVR and May
Davis Group, Inc. (21)
10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff Center
of Ra'Anana, Israel. (22)
10.51 Agreement dated as of January 29, 2001 between ADVR and The Weizmann
Institute of Science and Yeda. (22)
10.52 Securities Purchase Agreement dated November 8, 2000 by and between
ADVR and various investors. (23)
10.53 Securities Purchase Agreement dated July 27, 2001 by and between ADVR
and various investors. (23)
10.54 Severance Agreement dated November 29, 2001 by and between ADVR and
William Bregman. (11)(p)
10.55 Severance Agreement dated November 29, 2001 by and between ADVR and
Bernard Friedland. (11)(p)
10.56 Severance Agreement dated November 29, 2001 by and between ADVR and
Louis Silver. (11)(p)
10.57 Promissory Note and Guaranty in favor of Alan Gallantar dated November
29, 2001 by ADVR. (11)(p)
10.58 Settlement Agreement dated March 20, 2002 by and among ADVR, Immune
Modulation Maximum Corporation, Commonwealth Pharmaceuticals, Ltd, and
Charles E. Miller. (24)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian
corporation.
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public
Accountants.**
23.2 Consent of the law firm of Berman Rennert Vogel & Mandler, P.A. (See
Exhibit 5.1).
- -----------------------------
* Previously filed.
** 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
Quarterly Report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Current Reports on Form 8-K and
exhibits thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
(p) A report on Form 8-K dated December 3, 2002.
II-8
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
15. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 33-70523, filed
with the Securities and Exchange Commission on January 13, 1999, and
Amendment No. 5 thereto, declared effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-94529, filed
with the Securities and Exchange Commission on January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
18. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-37974, filed
with the Securities and Exchange Commission on June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits to
Post-effective Amendment No. 1 to our Registration Statement on Form S-1,
as amended, File No. 333-70523, filed with the Securities and Exchange
Commission on September 25, 2000.
20. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-49038, filed with the
Securities and Exchange Commission on October 31, 2000 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-55430, filed with the
Securities and Exchange Commission on February 12, 2001 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
23. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-62788, filed with the
Securities and Exchange Commission on June 13, 2001 and amended pursuant
to Amendment No. 1 to Form S-1 filed with the Commission on August 23,
2001.
24. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(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
We hereby undertake:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
II-9
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 a 20% 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 information 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.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, 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 Act and is, therefore, unenforceable. In the event that 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 the 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 Act and will
be governed by the final adjudication of the issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant under Rule 424(b)(1) or (4) or 497 (h)
under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Yonkers, State of New
York, on April 18, 2002.
Date: April 18, 2002 ADVANCED VIRAL RESEARCH CORP. (Registrant)
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
-----------------------------------------
Shalom Z. Hirschman, M.D.,
President, Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Post-Effective Amendment No. 1 to the Registration Statement on Form S-1
has been signed by the following persons in the capacities and on the dates
indicated.
Date: April 18, 2002 By: /s/ ELI WILNER
-----------------------------------------
Eli Wilner, Secretary and Director
Date: April 18, 2002 By: /s/ ALAN V. GALLANTAR
-----------------------------------------
Alan V. Gallantar, Principal Financial
and Accounting Officer
Date: April 18, 2002 By: /s/ JAMES F. DICKE II
-----------------------------------------
James F. Dicke II, Director
Date: April 18, 2002 By: /s/ CHRISTOPHER FORBES
-----------------------------------------
Christopher Forbes, Director
Date: April 18, 2002 By: /s/ DAVID SELIGMAN
-----------------------------------------
David Seligman, Director
II-11
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public
Accountants
II-12