-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Joictdn5llgWovwOxAdOfGPEOw73XNLsd/mtsA0nQIj2mBleNYsAa52gTL6GFWoq AOGp6IsZfW1QAh0Ol+H3qA== 0000950144-03-008704.txt : 20030724 0000950144-03-008704.hdr.sgml : 20030724 20030718174827 ACCESSION NUMBER: 0000950144-03-008704 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20030721 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED VIRAL RESEARCH CORP CENTRAL INDEX KEY: 0000786623 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 592646820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-107178 FILM NUMBER: 03793621 BUSINESS ADDRESS: STREET 1: 200 CORPORATE BOULEVARD SOUTH STREET 2: . CITY: YONKERS STATE: NY ZIP: 10107 BUSINESS PHONE: 9143767383 MAIL ADDRESS: STREET 1: 200 CORPORATE BOULEVARD SOUTH STREET 2: . CITY: YONKERS STATE: NY ZIP: 10107 S-1 1 g83525sv1.txt ADVANCED VIRAL RESEARCH As filed with the Securities and Exchange Commission on July 18, 2003 SEC Registration No. _______ ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DELAWARE ADVANCED VIRAL RESEARCH CORP. 59-2646820 (State or other jurisdiction of (Name of issuer in its charter) (I.R.S. Employer incorporation or organization) Identification No.) 200 CORPORATE BOULEVARD SOUTH 5129 SHALOM Z. HIRSCHMAN, M.D. YONKERS, NEW YORK 10701 (Primary Standard Industrial 200 CORPORATE BOULEVARD SOUTH (914) 376-7383 Classification Code Number) YONKERS, NEW YORK 10701 (Address and telephone number of (914) 376-7383 Registrant's principal executive offices) (Name, address, and telephone number of agent for service)
WITH COPIES TO: Clayton E. Parker, Esq. Harris C. Siskind, Esq. Kirkpatrick & Lockhart LLP 201 S. Biscayne Blvd., Suite 2000 Miami, FL 33131 Telephone No. (305) 539-3305 Telecopier No.: (305) 358-7095 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE - ---------------------------------------------------------------------------------------------------------------------------------- Common stock, par value $0.00001 per share 22,445,027 shares(2) $ 0.07125 $ 1,599,208 $ 129 Common stock, par value $0.00001 per share issued under Equity Line of Credit 95,712,595 shares $ 0.07125 $ 6,819,522 $ 552 Common stock, par value $0.00001 per share issued upon conversion of convertible debentures 268,179,878 shares $ 0.07125 $ 19,107,816 $ 1,546 Common stock, par value $0.00001 per share issued upon exercise of warrants 29,570,875 shares $ 0.07125 $ 2,106,925 $ 170 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL 415,908,375 shares $ 0.07125 $ 29,633,472 $ 2,397 ==================================================================================================================================
- ---------- (1) In accordance with Rule 457(c), the price represents the average of the closing bid and ask prices of the registrant's common stock on July 11, 2003, on the Over-the-Counter Bulletin Board. (2) Includes 107,527 shares of common stock issued to Katalyst Securities LLC as placement agent. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Subject to Completion, dated July 18, 2003. PROSPECTUS ADVANCED VIRAL RESEARCH CORP. 415,908,375 SHARES OF COMMON STOCK This prospectus relates to the sale of up to 415,908,375 shares of common stock of Advanced Viral Research Corp.'s ("Advanced Viral"), common stock by persons who are stockholders of Advanced Viral and Cornell Capital Partners, L.P. ("Cornell Capital"), who is beneficially a stockholder of Advanced Viral. Please refer to "Selling Shareholders" beginning on page 18. Advanced Viral is not selling any shares of common stock in this offering and, therefore, will not receive any proceeds from this offering. Advanced Viral will receive proceeds from the sale of up to 95,712,595 shares of common stock issuable under an Equity Line of Credit Agreement entered into by Advanced Viral and Cornell Capital on April 28, 2003, from the sale of additional convertible debentures to Cornell Capital and from the proceeds of the exercise of warrants issued to Cornell Capital to purchase 15,000,000 shares of our common stock. All costs associated with this registration will be borne by Advanced Viral. The shares of common stock are being offered for sale by the selling stockholders at prices established on the Over the Counter Bulletin Board. The prices will fluctuate based on the demand for the shares of common stock. Our common stock trades on the OTC Bulletin Board under the symbol "ADVR.OB" On July 11, 2003, the last reported sale price of our common stock on the OTC Bulletin Board was $0.071 per share. The selling stockholders consist of: o Cornell Capital, which intends to sell up to 378,892,473 shares of common stock, of which 95,712,595 shares are issuable under the Equity Line of Credit, and of which 15,000,000 are issuable upon the exercise of certain warrants. o Katalyst Securities LLC, which intends to sell up to 107,527 shares of common stock. o Certain investors in a private placement as more fully set forth on page 18, who intend to sell 36,908,375 shares of common stock, of which 14,570,975 shares are issuable upon the exercise of certain warrants. Cornell Capital is an "underwriter" within the meaning of the Securities Act of 1933 in connection with the sale of common stock under the Equity Line of Credit Agreement. Cornell Capital will pay Advanced Viral 100% of the lowest closing bid price of the common stock during the five consecutive trading day period immediately following an advance notice date. Of each advance notice, Cornell Capital will retain a fee in the amount of 5% as an underwriting discount. Our obligation to sell our common stock is conditioned, at our option, upon the per share purchase price being equal to or greater than a minimum acceptable price we set on the advance notice date, which may not be set any closer than 7.5% percent below the closing bid price of the common stock the day prior to an advance date. In connection with a securities purchase agreement entered into on April 28, 2003, Cornell Capital has purchased $1,000,000 of convertible debentures, shall purchase an additional $1,500,000 in convertible debentures, and has received warrants to Cornell Capital to purchase up to 15,000,000 shares of common stock exercisable for 5 years at an exercise price of $0.091. The warrants are not exercisable prior to October 28, 2003. In connection with a Securities Purchase Agreement entered July 18, 2003, Cornell Capital shall purchase an additional $1,000,000 in secured convertible debentures from Advanced Viral. Advanced Viral has engaged Katalyst Securities LLC, an unaffiliated registered broker-dealer, to advise us in connection with the Equity Line of Credit. Katalyst Securities LLC was paid a fee of 107,527 shares of Advanced Viral's common stock. Brokers or dealers effecting transactions in these shares should confirm that the shares are registered under applicable state law or that an exemption from registration is available. THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. BEGINNING ON PAGE 9, WE HAVE LISTED SEVERAL RISK FACTORS WHICH YOU SHOULD CONSIDER. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE YOU MAKE YOUR INVESTMENT DECISION. With the exception of Cornell Capital, which is an "underwriter" within the meaning of the Securities Act of 1933, no other underwriter or person has been engaged to facilitate the sale of shares of common stock in this offering. This offering will terminate 24 months after the accompanying registration statement is declared effective by the Securities and Exchange Commission, or 36 months after the effective date if we file either an amendment hereto or a new registration statement has been declared effective by the Securities and Exchange Commission. None of the proceeds from the sale of stock by the selling stockholders will be placed in escrow, trust or any similar account. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is _______, 2003. TABLE OF CONTENTS
PAGE NO. -------- PROSPECTUS SUMMARY..............................................................................................1 THE OFFERING....................................................................................................3 SUMMARY FINANCIAL DATA..........................................................................................4 SELECTED CONSOLIDATED FINANCIAL DATA............................................................................5 SUPPLEMENTARY FINANCIAL INFORMATION.............................................................................7 CAPITALIZATION..................................................................................................8 RISK FACTORS....................................................................................................9 FORWARD-LOOKING STATEMENTS.....................................................................................15 USE OF PROCEEDS................................................................................................16 DETERMINATION OF OFFERING PRICE................................................................................16 DILUTION.......................................................................................................17 SELLING STOCKHOLDERS...........................................................................................18 PLAN OF DISTRIBUTION...........................................................................................22 DESCRIPTION OF SECURITIES TO BE REGISTERED.....................................................................23 DEBENTURES.....................................................................................................23 WARRANTS.......................................................................................................24 EQUITY LINE OF CREDIT..........................................................................................24 INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS............................................................25 DESCRIPTION OF BUSINESS........................................................................................26 DESCRIPTION OF PROPERTY........................................................................................35 LEGAL PROCEEDINGS..............................................................................................36 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS..................................................................................37 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......................................................38 CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS......................................................................50 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................50 MANAGEMENT.....................................................................................................50 AUDIT COMMITTEE REPORT.........................................................................................52 EXECUTIVE COMPENSATION.........................................................................................54 COMPARATIVE STOCK PERFORMANCE..................................................................................57 PRINCIPAL STOCKHOLDERS.........................................................................................59 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................61 DESCRIPTION OF SECURITIES......................................................................................62 HOW TO GET MORE INFORMATION....................................................................................63 FINANCIAL STATEMENTS..........................................................................................F-1
Our audited financial statements for the fiscal year December 31, 2002, were contained in our Annual Report on Form 10-K. i PROSPECTUS SUMMARY 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). The current formulation of Reticulose is currently known as "Product R." We believe 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. Since our inception in July 1985, we have been engaged primarily in research and development activities. We have not generated significant operating revenues, and as of March 31, 2003 we had incurred a cumulative net loss of $52,887,259. 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. Our operations over the last five years have been limited principally to research, testing and analysis of Product R in the United States, and since November 2002, primarily in Israel, 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 both inside and outside 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. In September 2001, the FDA cleared the IND application to begin Phase 1 clinical trials. Our Phase 1 study was performed in the United States on human volunteers. In March 2002, we completed the Phase 1 trial 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. Currently, we do not have sufficient funds available to pursue the Phase 2 clinical trials of Product R as a topical treatment for genital warts caused by HPV infection. In November 2002 we began testing injectable Product R in the following clinical trials in Israel: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. We believe that Product R may have three major beneficial effects in patients with AIDS. First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS. Second, the mitigation of the toxicity of drugs included in HAART regimens for the treatment of AIDS. Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS. Thus, we believe that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. 1 Our objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, we anticipate that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. Whether we will be able to proceed with clinical trials in Israel for injectable Product R or anywhere else in the world is dependent upon our ability to secure sufficient funds. If sufficient funds do not become available, we will have to curtail our operations by, among other things, limiting our clinical trials for Product R. We may not be able to raise the funds we currently need to continue or complete the clinical trials for injectable Product R in Israel. While we continue to attempt to secure funds through the sale of our securities, there is no assurance that such funds will be raised on favorable terms, if at all. As reflected in Advanced Viral's financial statements for the quarter ended March 31, 2003, Advanced Viral's accumulated deficit of $52,887,259 and cash position raise substantial doubt about our ability to continue as a going concern. The ability of Advanced Viral to continue as a going concern is dependent on the approval of Product R for sale in the United States or another industrially developed country, or alternatively, Advanced Viral's ability to obtain additional debt and capital financing including the ability to raise capital under the Equity Line of Credit. ABOUT US Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this report. 2 THE OFFERING This offering relates to the sale of common stock by certain persons who are, or who are beneficially deemed to be, our stockholders. The selling stockholders consist of: o Cornell Capital, who intends to sell up to 378,892,473 shares of common stock. o Other selling stockholders, who intend to sell up to 36,908,375 shares of common stock. o Katalyst Securities, LLC, who intends to sell up to 107,527 shares of common stock. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically issue and sell to Cornell Capital shares of common stock for a total purchase price of $50 million. For each share of common stock purchased under the Equity Line of Credit, Cornell Capital will pay 100% of the lowest closing bid price of our common stock on the Over the Counter Bulletin Board for the five trading days immediately following the notice date. The amount of each advance is subject to a maximum of $500,000 per advance, with a minimum of seven trading days between advances. In addition, Cornell Capital shall retain 5% of each advance under the Equity Line of Credit. Our obligation to sell our common stock is conditioned, at our option, upon the per share purchase price being equal to or greater than a minimum acceptable price, set by us on the advance notice date, which may not be set any closer than 7.5% below the closing bid price of our common stock the day prior to the notice date. For each day during the five days after the notice date that the closing bid price for our common stock is below a minimum acceptable price, the amount of the advance shall decrease by twenty percent (20%) of the amount requested. Cornell Capital intends to sell any shares purchased under the Equity Line of Credit at the then prevailing market price. This prospectus relates to the shares of our common stock to be issued under the Equity Line of Credit, the shares which may be issued upon conversion of up to $3,500,000 of convertible debentures issued or to be issued pursuant to a securities purchase agreements and shares of common stock underlying warrants issued to Cornell Capital to purchase 15,000,000 shares of our common stock. We have engaged Katalyst Securities LLC, an unaffiliated registered broker-dealer, to advise us in connection with the Equity Line of Credit. Katalyst Securities LLC was paid a fee of 107,527 shares of our common stock, which were valued at $10,000. COMMON STOCK OFFERED 415,908,375 shares OFFERING PRICE Market Price COMMON STOCK OUTSTANDING PRIOR TO THIS OFFERING(1) 483,484,636 shares USE OF PROCEEDS The shares of common stock offered pursuant to this prospectus are offered by the Selling Stockholders listed on page 21. We will not receive any proceeds from the sale of the shares offered hereby, except the exercise price of warrants, whose under shares are being registered hereunder. We will also receive proceeds from the sale of common stock to Cornell Capital under the Equity Line of Credit, which will be used for general working capital. See "Use of Proceeds." RISK FACTORS An investment in our common stock is highly speculative and involves a high degree of risk and immediate substantial dilution. You should read the "Risk Factors" and "Dilution" sections. OTC BULLETIN BOARD SYMBOL ADVR.OB
--------------- (1) This represents the number of shares of common stock outstanding on July 14, 2003, but excluding: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at an exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 58.7 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 43.7 million shares are currently exercisable; (iii) approximately 50.0 million 3 shares of common stock underlying certain outstanding convertible debentures; and (iv) up to 95,712,595 shares of common stock to be issued under the Equity Line of Credit. Some of these equity equivalents include shares of common stock being registered in this offering. SUMMARY FINANCIAL DATA The following selected historical financial data as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 has been derived from our audited financial statements. The financial data as of and for the three months ended March 31, 2003 is derived from our unaudited consolidated financials included elsewhere in this prospectus. 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
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------- --------------------------------------------------------------------------------- MARCH 31, 2003 2002 2001 2000 1999 1998 -------------- ------------- ------------- ------------- ------------- ------------- Net revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656 Net loss (1,749,454) (10,342,335) (11,715,568) (9,354,664) (6,174,262) (4,557,710) Net loss per common share (0.00) (0.02) (0.03) (0.03) (0.02) (0.02) Weighted average # of shares 469,468,368 439,009,322 389,435,324 362,549,690 302,361,109 294,809,073
SUMMARY BALANCE SHEET DATA
AS OF AS OF DECEMBER 31, -------------- ------------------------------------------------------------------------------ MARCH 31, 2003 2002 2001 2000 1999 1998 -------------- ------------- ------------- ------------- ------------- ------------- Total assets $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 Total current liabilities 2,082,468 684,591 1,932,149 983,168 798,282 317,359 Long-term liabilities 1,184,765 1,668,944 74,568 163,013 4,676,652 1,625,299 Capital lease obligations - long-term portion -- 5,834 42,370 106,567 152,059 167,380 Notes payable-long-term portion -- 4,879 32,198 56,446 77,964 -- Stockholders' equity 597,545 1,708,594 3,442,074 7,662,533 (2,613,360) 762,295 Shares outstanding at period end 474,042,609 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907 Cash dividends -- -- -- -- -- --
4 SELECTED CONSOLIDATED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following selected historical financial data as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited financial statements. The financial data as of and for the three months ended March 31, 2003 is derived from our unaudited consolidated financials included elsewhere in this prospectus. 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
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 1998 -------------- ------------ ------------ ------------ ------------ ------------ Revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656 Costs and Expenses: Research and development 457,910 4,439,592 5,150,869 3,192,551 1,948,937 1,659,456 General and administrative 863,202 2,654,296 4,063,022 2,413,601 1,831,061 1,420,427 Compensation expense -- 755,397 691,404 1,901,927 210,144 -- Depreciation 237,740 977,746 511,216 346,227 230,785 110,120 -------------- ------------ ------------ ------------ ------------ ------------ 1,558,852 8,827,031 10,416,511 7,854,306 4,220,927 3,190,003 -------------- ------------ ------------ ------------ ------------ ------------ Loss from Operations (1,558,852) (8,827,031) (10,398,910) (7,845,943) (4,209,974) (3,189,347) -------------- ------------ ------------ ------------ ------------ ------------ Other Income (Expense): Interest income 6,189 27,659 113,812 161,832 42,744 102,043 Other income -- -- -- -- -- 293 Interest expense (187,139) (1,341,809) (868,856) (1,446,692) (2,007,032) (1,470,699) Severance expense - former directors -- -- (302,500) -- -- -- -------------- ------------ ------------ ------------ ------------ ------------ (180,950) (1,314,150) (1,057,544) (1,284,860) (1,964,288) (1,368,363) -------------- ------------ ------------ ------------ ------------ ------------ Loss from continuing operations (1,739,802) (10,141,181) (11,456,454) (9,130,803) (6,174,262) (4,557,710) Loss from discontinued operations (9,652) (201,154) (259,114) (223,861) n/a n/a -------------- ------------ ------------ ------------ ------------ ------------ Net Loss $ (1,749,454) $(10,342,335) $(11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710) ============== ============ ============ ============ ============ ============ Net Loss Per Share of Common Stock - Basic and Diluted Continuing operations $ (0.00) $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.02) ============== ============ ============ ============ ============ ============ Discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00) n/a n/a ============== ============ ============ ============ ============ ============
5 SELECTED BALANCE SHEET DATA
AS OF AS OF DECEMBER 31, MARCH 31 ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 511,121 $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420 Investments 104,837 -- -- -- -- 821,047 Assets held for sale 162,539 172,601 -- -- -- -- Inventory -- -- -- 19,729 19,729 19,729 Other current assets 68,837 121,895 252,161 34,804 59,734 29,818 ------------- ------------- ------------- ------------- ------------- ------------ Total current assets 847,334 1,770,251 1,751,970 6,017,166 916,339 1,795,014 ------------- ------------- ------------- ------------- ------------- ------------ Property and Equipment, Net 2,006,377 2,244,118 2,818,045 1,944,199 1,375,923 1,049,593 Other Assets 1,011,067 931,660 878,776 847,349 569,312 460,346 ------------- ------------- ------------- ------------- ------------- ------------ Total assets $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 ============= ============= ============= ============= ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Litigation settlement $ 1,098,812 -- -- -- -- -- Accounts payable and accrued liabilities 888,960 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872 $ 279,024 Current portion of capital lease obligation 71,245 104,719 64,197 58,690 50,315 $ 38,335 Current portion of note payable 23,451 25,165 24,246 21,517 19,095 -- ------------- ------------- ------------- ------------- ------------- ------------ Total current liabilities 2,082,468 684,591 1,932,149 983,168 798,282 317,359 ------------- ------------- ------------- ------------- ------------- ------------ Long-Term Debt: Convertible debentures, net 1,184,765 1,658,231 -- -- 4,446,629 1,457,919 Capital lease obligation - long term portion -- 5,834 42,370 106,567 152,059 167,380 Note payable - long term portion -- 4,879 32,198 56,446 77,964 -- ------------- ------------- ------------- ------------- ------------- ----------- Total long-term debt 1,184,765 1,668,944 74,568 163,013 4,676,652 1,625,299 Deposit on Securities Purchase Agreement -- -- -- -- -- 600,000 Common Stock Subscribed but not Issued -- 883,900 -- -- -- -- Stockholders' Equity (Deficiency): Common stock: 1,000,000,000 shares of $.00001 par value authorized, 474,042,609 and 455,523,990 shares issued and outstanding 4,740 4,555 4,033 3,802 3,034 2,964 Additional paid-in capital 56,130,347 57,530,605 47,666,141 39,969,373 17,537,333 14,325,076 Deficit accumulated during development stage (52,887,259) (51,137,805) (40,795,470) (29,079,902) (19,725,238) 13,550,976) Deferred compensation cost -- -- -- -- -- (14,769) Discount on warrants (2,650,283) (4,688,761) (3,432,630) (3,230,740) (428,489) -- ------------- ------------- ------------- ------------- ------------- ------------ Total stockholders' equity (deficiency) 597,545 1,708,594 3,442,074 7,662,533 (2,613,360) 762,295 ------------- ------------- ------------- ------------- ------------- ------------ Total liabilities and stockholders' equity (deficiency) $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 ============= ============= ============= ============= ============= ============ Shares outstanding at period end 474,042,609 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907 ============= ============= ============= ============= ============= ============
6 SUPPLEMENTARY FINANCIAL INFORMATION The following supplementary financial information has been derived from our unaudited financial statements for quarterly periods beginning with the three month period ended March 31, 2001 through the three month period ended March 31, 2003. QUARTERLY INFORMATION FOR FISCAL YEARS 2002 AND 2001 AND FOR THE FIRST QUARTER OF 2003
QUARTERLY INFORMATION Q1 Q4 Q3 Q2 Q1 FOR 2002 AND 2001 2003 2002 2002 2002 2002 - ------------------------ -------------- -------------- -------------- -------------- -------------- Net Sales $ 0 $ -- $ 0 $ 0 $ 0 Costs and Expenses 1,558,852 1,804,517 2,013,652 2,428,521 2,580,341 Income (Loss) (1,749,454) (2,375,110) (2,397,744) (2,695,973) (2,873,508) Income Per Share (0.00) (0.00) (0.01) (0.01) (0.01)
QUARTERLY INFORMATION Q4 Q3 Q2 Q1 FOR 2002 AND 2001 2001 2001 2001 2001 - ------------------------ -------------- -------------- -------------- -------------- Net Sales $ 3,664 $ 2,454 $ 9,118 $ 2,365 Costs and Expenses 3,316,332 2,530,095 1,963,897 2,606,187 Income (Loss) (3,964,015) (2,810,856) (2,198,950) (2,741,747) Income Per Share (0.01) (0.01) (0.01) (0.01)
7 CAPITALIZATION The following table sets forth as of March 31, 2003, Advanced Viral's actual capitalization and pro forma capitalization after giving effect to the issuance of 95,712,595 shares of common stock under the Equity Line of Credit. This information assumes a purchase price under the Equity Line of Credit of $.08 per share resulting in gross proceeds of $7,657,008, less estimated offering expenses of $85,000 and a retention of $382,850, for net proceeds of $7,189,157. This table should be read in conjunction with the information contained in "Management's Discussion and Analysis or Plan of Operation" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.
MARCH 31, 2003 -------------------------------- ACTUAL PROFORMA -------------- -------------- Long-term debt, net of current portion $ 1,184,765 $ 1,184,765 -------------- -------------- Stockholders' equity: Common stock, $0.00001 par value, 1,000,000,000 authorized, 474,042,609 shares issued and outstanding as of March 31, 2003(1) $ 4,740 $ 5,697 Additional paid-in capital: $ 56,130,347 $ 63,318,547 Discount on Warrants $ (2,650,283) $ (2,650,283) Accumulated deficit $ (52,887,259) $ (52,887,259) -------------- -------------- Total stockholders' equity $ 597,545 $ 7,786,702 ============== ==============
(1) Total pro forma shares outstanding equal 569,755,204, which includes 95,712,595 shares of common stock to be issued under the Equity Line of Credit, but does not include: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at an exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 57.6 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 34 million shares are currently exercisable; (iii) approximately 34 million shares of common stock underlying certain outstanding convertible debentures. Some of these equity equivalents include shares of common stock being registered in this offering. 8 RISK FACTORS We are subject to various risks which may materially harm our business, financial condition and results of operations. Before purchasing our shares of common stock, you should carefully consider the risks described below in addition to the other information in this prospectus. If any of these risks or uncertainties actually occur, our business, prospects, financial condition, and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. RISKS SPECIFIC TO ADVANCED VIRAL WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE We have incurred substantial losses since our inception, and anticipate incurring substantial losses for the foreseeable future. We incurred a loss of $1,749,454 in the three months ended March 31, 2003, $10,342,335 in the year ended December 31, 2002, $11,715,568 in the year ended December 31, 2001 and $9,354,664 in the year ended December 31, 2000. Our accumulated deficits were $52,887,259 as of March 31, 2003, $51,137,805 as of December 31, 2002 and $40,795,470 as of December 31, 2001. We had stockholders' equity of $597,545, $1,708,594 and $3,442,074 at March 31, 2003, December 31, 2002 and December 31, 2001, respectively. 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, there is substantial risk that we will never generate operating revenues from the sale of Product R. To succeed, Product R must be approved for sale in the United States or another industrially developed country. To the extent we have available financing, we intend to expend substantial resources to continue clinical trials in Israel for injectable Product R. These research and development expenses must be incurred well in advance of the recognition of revenue. As a result, we may not be able to achieve or sustain profitability. OUR INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR REPORT ON OUR FINANCIAL STATEMENTS WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS The reports of our independent auditors, with respect to our financial statements and the related notes for the period ended March 31, 2003 and the year ended December 31, 2002, indicate that, at the date of their reports, we had suffered recurring losses from operations and our current cash position raised substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The notes to our financial statements state 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. IT IS UNLIKELY THAT WE WILL BE ABLE TO PAY ALL 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 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 other than the convertible debentures and the Equity Line of Credit. We have not secured any other financing as of the date of this filing to fund operations. Our cash balance as of March 31, 2003, is $511,121. Based on current cash balances and operating budgets, we believe we only have enough operating capital to last through July 2003. Since inception we have relied on external financing to fund the costs of maintaining a public listing and other aspects of our operations. Such financing has historically come from a combination of borrowings and the sale of common stock to third parties. We currently do not have the funds needed to begin or continue the planned Phase 2 clinical trials for our current IND for the topical therapy of genital warts in the United States. There can be no assurances that we will continue or complete such clinical trials or maintain operations at current levels, and we may be required to curtail certain of our operations, including the testing and clinical trials of Product R. Our inability to obtain adequate financing will result in the need to reduce the pace of business operations. Any of these events could be materially harmful to our business and may result in a lower stock price. We will need to raise additional capital from either the equity market or from debt sources to fund our current and anticipated future research costs. 9 If capital raised from financing efforts and our financial resources are insufficient we may require additional financing in order to execute on our operating plan and continue as a going concern. In the event that any future financing should take the form of a sale of equity securities, the holders of the common stock may experience additional dilution. However, we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans to repay our debt obligations as they become due or respond to competitive pressures, any of which circumstances could force us to reduce or cease operations or to seek protection from our creditors under the United States Bankruptcy Code or analogous state statutes. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. Penny stocks are stock: o With a price of less than $5.00 per share; o That are not traded on a "recognized" national exchange; o Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or o In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. OUR COMMON STOCK TRADES SPORADICALLY; THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE Our common stock currently trades sporadically on the OTC Bulletin Board. The market for our common stock may continue to be an inactive market. Accordingly, unless and until an active public market develops, you may have difficulty selling your shares of common stock at a price that is attractive to you. From time to time after this offering, the market price of our common stock may experience significant volatility. Our quarterly results, failure to meet analysts expectations, announcements by us or our competitors regarding acquisitions or dispositions, loss of existing clients, new procedures or technology, changes in general conditions in the economy, and general market conditions could cause the market price of the common stock to fluctuate substantially. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many technology companies. These price and volume fluctuations often have been unrelated to the operating performance of the affected companies. WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management, creative, technical, and sales personnel. Competition is intense for these types of personnel from other pharmaceutical companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. Our failure to attract and retain qualified personnel would have a material adverse effect on our business, prospects, financial condition, and results of operations will be materially adversely affected. 10 WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD PUT US AT A COMPETITIVE DISADVANTAGE Our success depends largely on the skills of certain key management and technical personnel, including Shalom Z. Hirschman, M.D., our President, Chief Executive Officer and a member of the Board of Directors. The loss or unavailability to us of the services of Dr. Hirschman could materially harm our business and any potential earning capacity, while we have obtained "key-man" insurance on the life of Dr. Hirschman in the amount of $2,000,000, the loss of Dr. Hirschman would have a severe effect on our ability to proceed with our operations. WE WILL NOT PAY CASH DIVIDENDS AND INVESTORS MAY HAVE TO SELL THEIR SHARES IN ORDER TO REALIZE THEIR INVESTMENT We have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and marketing of our products and services. As a result, investors may have to sell their shares of common stock to realize their investment. RISKS RELATING TO OUR INDUSTRY WE MAY NOT BE ABLE TO COMPLETE THE NECESSARY CLINICAL TRIALS TO COMPLETE DEVELOPMENT OF PRODUCT R 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. Our Phase 1 study was performed in the United States on human volunteers. In March 2002, we completed the Phase 1 trial 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. Currently, we do not have sufficient funds available to pursue the Phase 2 clinical trials of Product R as a topical treatment for genital warts caused by HPV infection. In November 2002 we began testing injectable Product R in the following clinical trials in Israel: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. We believe that Product R may have three major beneficial effects in patients with AIDS. First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS. Second, the mitigation of the toxicity of drugs included in HAART regimens for the treatment of AIDS. Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS. Thus, we believe that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. Our objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, we anticipate that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. However, 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. On July 8, 2002, we extended an 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. Under its provisions the study period is extended to July 7, 11 2003. Total costs incurred in connection with this research are expected to be $138,000, of which payments of $40,000 were made in each of July 2002 and November 2002. In September 2002, we entered into a contract with EnviroGene LLC, an affiliate of the Selikoff Center, to conduct, evaluate and maintain the scientific quality for the 3 clinical studies listed above. Under the terms of this agreement, EnviroGene will (1) finalize all Israeli government and hospital approval documents, (2) complete and organize the 3 clinical trials including establishing a network of scientists to perform said study/trial and initiate recruitment of patients and (3) perform the studies/trials and evaluate the results. Total costs incurred by EnviroGene LLC in connection with these clinical trials are expected to be $1,551,000, of which $875,000 has been paid through July 14, 2003 and $199,000 was paid through the first quarter of 2003. It is anticipated that these trials will support future FDA applications. In the fourth quarter of 2002, we entered into various agreements supporting the clinical trials in Israel aggregating approximately $1,000,000 to be paid over a twelve-month period. These services include the monitoring and auditing of the clinical sites, hospital support and laboratory testing. Approximately $109,000 has been paid through July 14, 2003, of which $53,000 was paid during the first quarter of 2003. In March 2003, we commenced discussions and began to draft protocols to expand the ongoing Israeli clinical trials of Product R for the treatment of AIDS patients (who have failed HAART and remain on HAART therapy) into late Phase II blinded, controlled clinical trials. Whether we will be able to proceed with clinical trials in Israel for injectable Product R is dependent upon our ability to secure sufficient funds. If sufficient funds do not become available, we will have to curtail our operations by, among other things, limiting our clinical trials for Product R. We may not be able to raise the funds we currently need to continue or complete the clinical trials for injectable Product R in Israel. While we continue to attempt to secure funds through the sale of our securities, there is no assurance that such funds will be raised on favorable terms, if at all. WE DO NOT HAVE A "FREE SALE" CERTIFICATE LIMITING OUR ABILITY TO REGISTER PRODUCT R IN OTHER COUNTRIES 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 one of our manufacturing facilities 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. Product R, produced at our Yonkers, New York facility has not been approved for sale in the U.S. by the FDA. 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 have ten issued U.S. patents, some covering the composition of Product R and others covering various uses of the Product R. We have eight pending U.S. patent applications and seventeen pending foreign patent applications. In addition, we have two issued Australian patents covering a use of Product R and one patent granted in China. During April 2002, under the terms of a settlement agreement entered as part of a final judgment on March 25, 2002, we were assigned all rights, title and interest in two issued U.S. patents pertaining to Reticulose(R) technology. As patent applications in the United States are maintained in secrecy until published or 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 12 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 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. We have not conducted any searches or made any independent investigations of the existence of any patents or proprietary rights of other parties. RISKS SPECIFIC TO THIS OFFERING EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF SHARES UNDER THE EQUITY LINE OF CREDIT AND THE SALE OF CONVERTIBLE DEBENTURES The sale of shares pursuant to the Equity Line of Credit and the issuance of shares of common stock pursuant to the conversion of the convertible debentures will have a dilutive impact on our stockholders. As a result, our net loss per share could increase in future periods, and the market price of our common stock could decline. In addition, the lower our stock price is the more shares of common stock we will have to issue under the convertible debentures and under the Equity Line of Credit to draw down the full amount available. If our stock price is lower, then our existing stockholders would experience greater dilution. For example, if we assume that we will issue 95,712,595 shares of common stock under the Equity Line of Credit at an assumed offering price of $.08 (a recent closing bid price), then new shareholders would experience dilution of $0.0681 per share. Dilution per share at prices of $0.06, $0.04 and $0.02 per share would be $0.0513, $0.0345 and $0.0177, respectively. Additionally, Cornell Capital has the right to convert the convertible debentures at a discount of 20% to the lowest closing bid price for the four trading prior to a conversion, or $0.08, whichever is lower. This could also cause dilution for our existing shareholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price, the more shares of common stock we will have to issue under the Equity Line of Credit to draw down the full amount. THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING The price in this offering will fluctuate based on the prevailing market price of the common stock on the OTC Bulletin Board. Accordingly, the price you pay in this offering may be higher or lower than the prices paid by other people participating in this offering. 13 THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE The selling stockholders intend to sell the shares of common stock being registered in this offering in the public market. That means that up to 415,908,375 shares of common stock, the number of shares being registered in this offering may be sold. Such sales may cause our stock price to decline. FUTURE SALES OF COMMON STOCK BY OUR STOCKHOLDERS COULD ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market as a result of this offering, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. As of July 14, 2003, we have 483,484,636 shares of common stock outstanding. Up to 95,712,595 of the shares being registered in this offering underlie our Equity Line of Credit Agreement with Cornell Capital. Under the terms of the agreement, at our discretion, Cornell Capital is obligated to buy up to $500,000 worth of our common stock every seven days at a price equal to 100% of the lowest closing bid price during the five-day period subsequent to delivery by us of an advance notice. Assuming such lowest closing bid price is $.08 on the day this registration statement becomes effective, and that we deliver an advance notice of purchase of $500,000 worth of our common stock, we would issue 6,250,000 shares of our common stock. Remaining shares would become outstanding as we continue to sell them under the Equity Line of Credit, with the number of shares dependent on the market price of our common stock at the time of the put. The number of shares to be issued upon each put is dependent on the stock price and cannot be determined exactly at this time. Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. Of the 483,484,636 shares of common stock outstanding as of July 14, 2003, approximately 370 million shares are, or will be, freely tradable without restriction, unless held by our "affiliates." The remaining 113 million shares of common stock held by existing stockholders are "restricted securities" and may be resold in the public market only if registered or pursuant to an exemption from registration. Some of these shares may be resold under Rule 144. YOU MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS AND WARRANTS ARE EXERCISED As of July 14, 2003, we had outstanding stock options to purchase approximately 61.9 million shares of common stock, warrants to purchase approximately 58.3 million shares of common stock, and approximately 50.0 million shares of common stock underlying certain outstanding convertible debentures. Some of these equity equivalents include shares of common stock being registered in this offering. To the extent such options, warrants or debentures are exercised or converted, there will be further dilution. In addition, in the event that any future financing should be in the form of, be convertible into, or exchangeable for, equity securities, and upon the exercise of options and warrants, investors may experience additional dilution. POSSIBLE LACK OF SUFFICIENT AUTHORIZED SHARES There is a possibility that Advanced Viral may not currently have sufficient authorized shares to convert all of the shares of common stock needed under the Equity Line of Credit and a proposal may be required to be placed before the shareholders to facilitate an increase in the number of authorized shares within the next several years. For example, if the price of our common stock remained at $0.08 per share, we would need 625,000,000 shares available to fully utilize the $50 million available under the Equity Line of Credit. Currently we have authorized 1 billion shares of common stock, and 483,484,636 shares outstanding. Accordingly, we would need to authorize 108,484,636 additional shares, even without issuing any shares upon conversion of the debentures or exercise of any options or warrants, to fully utilize the Equity Line of Credit. We would have to solicit proxies from our shareholders to approve any increase in authorized shares. THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE In many circumstances the provision of an equity line of credit for companies that are traded on the OTCBB has the potential to cause a significant downward pressure on the price of common stock. This is especially the case if the shares being placed into the market exceed the market's ability to take up the increased stock or if Advanced Viral has not performed in such a manner to show that the equity funds raised will be used to grow Advanced Viral. Such an event could 14 place further downward pressure on the price of common stock. Under the terms of our Equity Line of Credit, Advanced Viral may request numerous draw downs. Even if Advanced Viral uses the equity line to increase its business or invest in assets which are materially beneficial to Advanced Viral the opportunity exists for short sellers and others to contribute to the future decline of Advanced Viral's stock price. If there are significant short sales of stock, the price decline that would result from this activity will cause the share price to decline more so which in turn may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market. If there is an imbalance on the sell side of the market for the stock the price will decline. It is not possible to predict if the circumstances where by a short sales could materialize or to what the share price could drop. In some companies that have been subjected to short sales the stock price has dropped to near zero. This could happen to Advanced Viral. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT WHEN NEEDED We are dependent on external financing to fund our operations. Our financing needs are expected to be partially provided from the Equity Line of Credit and the convertible debentures. No assurances can be given that such financing will be available in sufficient amounts or at all when needed, in part, because we are limited to a maximum draw down of $500,000 during any seven trading day period. In addition, based on an assumed offering price of $0.08, we will only be able to draw a total net amount of $7,189,157 under the Equity Line of Credit. This net amount will utilized all of the 95,712,595 shares of our common stock registered for the Equity Line of Credit under this Registration Statement. WE MAY NOT BE ABLE TO DRAW DOWN UNDER THE EQUITY LINE OF CREDIT IF THE INVESTOR HOLDS MORE THAN 9.9% OF OUR COMMON STOCK In the event Cornell Capital holds more than 9.9% of our then-outstanding common stock, we will be unable to draw down on the Equity Line of Credit. Currently, Cornell Capital has beneficial ownership of 3.13% of our common stock and therefore we would be able to draw down on the Equity Line of Credit so long as Cornell Capital's beneficial ownership remains below 10%. If Cornell Capital's beneficial ownership increases above 10%, we would be unable to draw down on the Equity Line of Credit. Because Cornell Capital is not limited by a percentage ownership limitation with respect to converting the convertible debentures, a possibility exists that Cornell Capital Partners may own more than 9.9% of Advanced Viral's outstanding common stock at a time when we would otherwise plan to make an advance under the Equity Line of Credit. In that event, if we are unable to obtain additional external funding or have not generated revenue, we could be forced to curtail or cease our operations. FORWARD-LOOKING STATEMENTS Information included or incorporated by reference in this prospectus may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology. This prospectus contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. These statements may be found under "Management's Discussion and Analysis or Plan of Operations" and "Business," as well as in this prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact occur. 15 USE OF PROCEEDS This prospectus relates to shares of our common stock that may be offered and sold from time to time by certain selling stockholders. There will be no proceeds to us from the sale of shares of common stock in this offering. However, we will receive proceeds from the sale of additional convertible debentures to Cornell Capital and the sale of shares of common stock to Cornell Capital under the Equity Line of Credit. The purchase price for the additional debentures is $2,500,000 less a ten percent discount. The purchase price of the shares purchased by Cornell Capital under the Equity Line of Credit will be equal to 100% of the lowest closing bid price of our common stock on the OTC Bulletin Board for the 5 trading days immediately following the notice date. For illustrative purposes, we have set forth below our intended use of proceeds for the range of net proceeds indicated below to be received from both additional convertible debentures and under the Equity Line of Credit. The table assumes estimated offering expenses of $85,000 and 5% retainage of the gross proceeds raised under the Equity Line of Credit and a 10% discount to the gross proceeds under the convertible debentures. GROSS PROCEEDS(1) $ 3,500,000 $ 10,500,000 NET PROCEEDS $ 3,115,000 $ 9,765,000 USE OF PROCEEDS: Accounts payable 953,000 953,000 General Working Capital 2,162,000 8,832,000 -------------- -------------- TOTAL $ 3,115,000 $ 9,765,000 ============== ==============
(1) Includes $2,500,000 from the sale of additional convertible debentures to Cornell Capital. At an assumed price of $0.08, Advanced Viral would receive gross proceeds of $7,657,008 under the Equity Line of Credit if all of the 95,712,595 shares being registered in this offering were issued by Advanced Viral. Any proceeds received upon exercise of outstanding options and warrants will be used for general working capital purposes. DETERMINATION OF OFFERING PRICE As this registration statement relates to shares of common stock that may be sold from time to time by certain shareholders, and not by Advanced Viral, we cannot determine the actual price at which shares of our common stock will be sold pursuant to this registration statement. As discussed more fully in the "Description of Securities to be Registered" section, Cornell Capital will obtain shares of our common stock under: (1) the convertible debentures, at a conversion price equal to the lower of $0.08 or 80% of the lowest bid price during the four trading days immediately preceding a conversion date; (2) under the Equity Line of Credit, at a price equal to 100% of the lowest closing bid price during the five consecutive trading days immediately following an advanced notice date; and (3) under the warrants at a price of $0.091. While not determined by Advanced Viral, Advanced Viral believes that Cornell Capital, and the other selling stockholders, will sell shares of our common stock at the prevailing market price at the time of sale and that the market price will fluctuate during the time period in which the selling stockholders sell their shares of our common stock. 16 DILUTION The net tangible book value of our company as of March 31, 2003 was $(413,522) or $(0.0009) per share of common stock. Net tangible book value per share is determined by dividing the tangible book value of Advanced Viral (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to Advanced Viral, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the common stock to be issued under the Equity Line of Credit. The amount of dilution will depend on the offering price and number of shares to be issued under the Equity Line of Credit. The following example shows the dilution to new investors at an offering price of $0.08 per share. If we assume that Advanced Viral had issued 95,712,595 shares of common stock under the Equity Line of Credit at an assumed offering price of $0.08 per share (i.e., the maximum number of shares registered in this offering under the Equity Line of Credit), less retention fees of $382,850 and offering expenses of $85,000, our net tangible book value as of March 31, 2003 would have been $6,775,635 or $0.0119 per share. Note that at an offering price of $0.08 per share, Advanced Viral would receive gross proceeds of $7,657,008 or $42,342,992 less than is available under the Equity Line of Credit. Such an offering would represent an immediate increase in net tangible book value to existing stockholders of $0.0128 per share and an immediate dilution to new stockholders of $0.0681 per share. The following table illustrates the per share dilution:
Assumed public offering price per share $ 0.0800 Net tangible book value per share before this offering $ (0.0009) Increase attributable to new investors $ 0.0128 ------------ Net tangible book value per share after this offering $ 0.0119 ------------ Dilution per share to new stockholders $ 0.0681 ============
The offering price of our common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices:
ASSUMED NO. OF SHARES DILUTION PER SHARE OFFERING PRICE TO BE ISSUED(1) TO NEW INVESTORS -------------- --------------- ------------------ $ 0.08 95,712,595 $ 0.0681 $ 0.06 95,712,595 $ 0.0513 $ 0.04 95,712,595 $ 0.0345 $ 0.02 95,712,595 $ 0.0177
- --------------------- (1) This represents the maximum number of shares of common stock that will be registered under the Equity Line of Credit in this offering. 17 SELLING STOCKHOLDERS The following table presents information regarding the selling stockholders. The selling stockholders are categorized in groups based on their relationship to Advanced Viral. Each groups consist of selling shareholders who have assisted in or provided financing to Advanced Viral. A description of each selling stockholder's relationship to Advanced Viral and how each selling stockholder acquired the shares to be sold in this offering is detailed in the information immediately following this table.
PERCENTAGE OF PERCENTAGE OF OUTSTANDING OUTSTANDING PERCENTAGE SHARES SHARES SHARES TO BE SHARES TO BE OF SHARES BENEFICIALLY BENEFICIALLY ACQUIRED UNDER ACQUIRED UNDER SHARES TO BE BENEFICIALLY OWNED BEFORE OWNED BEFORE THE EQUITY THE EQUITY SOLD IN THE OWNED AFTER SELLING STOCKHOLDER OFFERING OFFERING(1) LINE OF CREDIT LINE OF CREDIT OFFERING OFFERING(1) - ----------------------- ------------ ---------------- ---------------- ---------------- ------------ ---------------- Cornell Capital Partners, L.P. 15,625,000(2) 3.13% 95,712,595 16.53% 378,892,473(3) 0% Katalyst Securities LLC 107,527 * -- -- 107,527 0% ======================= ============ ================ ================ ================ ============ ================ TOTAL 15,732,527 3.13% 95,712,595 16.53% 379,000,000 0% ======================= ============ ================ ================ ================ ============ ================
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH HARBOR VIEW AND AVIX THROUGH PRIVATE PLACEMENTS DECEMBER 2002 THROUGH JUNE 2003
PERCENTAGE OF PERCENTAGE OF BENEFICIAL SHARES OUTSTANDING SHARES SHARES SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE BENEFICIALLY OWNED TO BE SOLD IN OWNED AFTER OWNED AFTER INVESTOR NAMES OFFERING BEFORE OFFERING(1) THE OFFERING(4) OFFERING OFFERING(1) - ---------------------- ---------------- -------------------- ---------------- -------------------- -------------------- AVIX, Inc. 468,750 * 468,750 -- * Elliot Bauer 2,800,000 * 2,320,000 480,000 * Michael Berman 2,160,773 * 1,000,000 1,160,773 * Gene Cartwright 1,200,000 * 1,200,000 -- * Henry E. Cartwright 800,000 * 800,000 -- * Dorothy Christofides 880,000 * 640,000 240,000 * Frederick Cohen 160,000 * 160,000 -- * Leonard Cohen 3,480,000 * 1,120,000 2,360,000 * Todd Cohen 1,025,000 * 800,000 225,000 * CSP, Inc. 500,000 * 500,000 -- * James Dicke II 14,420,000 2.93% 5,000,000 9,420,000 1.92% Gerald Director 480,000 * 160,000 320,000 * Charles Ernst 500,000 * 500,000 -- * Eric Goldstein 250,000 * 250,000 -- * Edward Gorkes 5,300,000 1.09% 5,000,000 300,000 * Alan Halpert 320,000 * 320,000 -- * Harbor View Group 11,251,855 2.29% 1,184,000 10,067,855 2.04% Barry L. Johnston 630,000 * 480,000 150,000 * Ira Kent 160,000 * 160,000 -- * Benjamin H. Kirsch 3,960,000 * 2,000,000 960,000 * Frederick Lutz 1,876,363 * 500,000 1,376,363 * Russell Kuhn 5,525,226 1.14% 3,500,000 2,025,226 * Keith Leonard 1,000,000 * 1,000,000 -- * Lawrence Pomerantz 2,650,000 * 2,600,000 50,000 * David Provence 500,000 * 500,000 -- * Michael Rapt 250,000 * 250,000 -- * Allen & Barbara Ross 160,000 * 160,000 -- * David Sass 1,000,000 * 1,000,000 -- * Dean Skillman 1,050,000 * 1,000,000 50,000 * Gerald Smallberg 320,000 * 320,000 -- * Diego Vallone 15,625 * 15,625 -- * Frank Vigliarolo 1,000,000 * 1,000,000 -- * ---------------- -------------------- ---------------- -------------------- -------------------- TOTAL 66,893,592 12.8% 36,908,375 29,185,217 5.7% ================ ==================== ================ ==================== ====================
--------------- * Less than 1%. 18 (1) Applicable percentage of ownership is based on 483,484,636 shares of common stock outstanding as of July 14, 2003, together with securities exercisable or convertible into shares of common stock within 60 days of July 14, 2003, for each stockholder, but excluding: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at an exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 29.1 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 24.1 million shares are currently exercisable; (iii) approximately 18.8 million shares of common stock underlying certain outstanding convertible debentures; and (iv) up to 95,712,595 shares of common stock to be issued under the Equity Line of Credit. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of July 14, 2003 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Note that affiliates are subject to Rule 144 and Insider trading regulations - percentage computation is for form purposes only. (2) Consists of shares of common stock underlying the $1,000,000 of convertible debentures owned by Cornell Capital prior to the filing of this registration statement, at an assumed conversion price of 80% of $0.08. (3) Represents the number of shares being registered under the Equity Line of Credit, plus a good-faith estimate of the shares needed to convert the $1,000,000 of convertible debentures sold to Cornell Capital prior to this registration statement, the total amount of $1,500,000 of convertible debentures Cornell Capital is obligated to purchase within ten (10) business days after the filing of this registration statement, and the $1,000,000 of convertible debentures Cornell Capital is obligated to purchase within twenty (20) business days after this registration statement is declared effective by the Securities and Exchange Commission. Of the 268,179,878 shares being registered under the convertible debenture, 190,054,878 shares were agreed to by Advanced Viral in the investor registration rights agreement dated April 28, 2003 and 78,125,000 shares were agreed to in the investor registration rights agreement dated July 18, 2003. Also includes 15,000,000 underlying warrants issued to Cornell Capital, but not exercisable until six months from the issuance date. (4) Includes warrants to purchase an aggregate of 14,570,875 shares of common stock at an exercise price of $0.12 per share commencing six months after date of issuance and expiring five years from the date of issuance. The following information contains a description of each selling stockholder's relationship to Advanced Viral and how each selling shareholder acquired the shares to be sold in this offering is detailed below. None of the selling stockholders have held a position or office, or had any other material relationship, with Advanced Viral, except as follows: SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH CORNELL CAPITAL CORNELL CAPITAL PARTNERS, L.P. Cornell Capital is the investor under the Equity Line of Credit Agreement and a holder of convertible debentures and warrants. All investment decisions of Cornell Capital are made by its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the investment decisions on behalf of Yorkville Advisors. Cornell Capital acquired all shares being registered in this offering in financing transactions with Advanced Viral. Those transactions are explained below: o EQUITY LINE OF CREDIT. On April 28, 2003, we entered into an Equity Line of Credit with Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital shares of common stock for a total purchase price of up to $50.0 million. For each share of common stock purchased under the Equity Line of Credit, Cornell Capital will pay Advanced Viral 100% of the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the five days immediately following the notice date. Further, Cornell Capital is entitled to a retain 5% of each advance under the Equity Line of Credit. Our obligation to sell our common stock is conditioned, at our option, upon the per share purchase price being equal to or greater than a minimum acceptable price, set by us on the advance notice date, which may not be set any closer than 7.5% below the closing bid price of our common stock the day prior to the notice date. We are registering 95,712,595 shares in this offering that may be issued under the Equity Line of Credit. o CONVERTIBLE DEBENTURES. On April 28, 2003, we entered into a securities purchase agreement with Cornell Capital, whereby Cornell Capital shall purchase up to $2,500,000 of convertible debentures. The debentures accrued interest at a rate of 5% per year and have a five-year term. Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased under the securities purchase agreement dated April 28, 2003. The debentures are convertible at the holder's option any time up to maturity at a conversion price equal to the lower of (i) an amount equal to eight cents ($0.08) or (ii) 80% of the lowest closing bid price of the common stock for the four trading days immediately preceding the conversion date. At maturity, Advanced Viral has the option to either pay the holder the outstanding principal balance and accrued 19 interest or to convert the debentures into shares of common stock at a conversion price equal to the lower of (i) an amount equal to eight cents ($0.08) or (ii) 80% of the lowest closing bid price of the common stock for the four trading days immediately preceding the conversion date. Cornell Capital may only convert $600,000 of all convertible debentures it holds within any thirty (30) day period. Advanced Viral has redemption rights relating to debentures. If Advanced Viral exercises certain of these redemption rights, Advanced Viral shall pay Cornell Capital 115% of the face amount redeemed plus accrued interest and Cornell Capital shall receive warrants to purchase 1,000,000 shares of common stock for each $100,000 of such convertible debentures redeemed. Advanced Viral is registering 190,054,878 shares of common stock in this offering underlying the convertible debentures purchased pursuant to the securities purchase agreement dated April 28, 2003. On July 18, 2003, we entered into an additional securities purchase agreement with Cornell Capital, whereby Cornell Capital shall purchase up to $1,000,000 of secured convertible debentures. Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased under the securities purchase agreement dated July 18, 2003. The debentures accrued interest at a rate of 5% per year and have a five-year term. The convertible debentures are secured by the assets of Advanced Viral until 50 days after the effectiveness of the registration statement of which this prospectus is a part. The debentures are convertible at the holder's option any time up to maturity at a conversion price equal to the lower of (i) an amount equal to eight cents ($0.08) or (ii) 80% of the lowest closing bid price of the common stock for the four trading days immediately preceding the conversion date. Cornell Capital may only convert $600,000 of all convertible debentures it holds within any thirty (30) day period. At maturity, Advanced Viral has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price equal to the lower of (i) an amount equal to eight cents ($0.08) or (ii) 80% of the lowest closing bid price of the common stock for the four trading days immediately preceding the conversion date. Advanced Viral has redemption rights relating to debentures. If Advanced Viral elects to redeem all or part of these convertible debentures, Advanced Viral shall pay Cornell Capital 115% of the face amount redeemed plus accrued interest and Cornell Capital shall receive warrants to purchase 1,000,000 shares of common stock for each $100,000 of convertible debentures redeemed. Advanced Viral is registering 78,125,000 shares of common stock in this offering underlying the convertible debentures purchased pursuant to the securities purchase agreement dated July 18, 2003. o WARRANTS. In connection with the securities purchase agreement dated April 28, 2003, Cornell Capital received warrants to purchase 15,000,000 shares of common stock as a commitment fee on April 28, 2003. The warrants to purchase 15,000,000 shares of our common stock have an exercise price of the higher of 110% of the closing bid price on the closing date or $0.08 per share. Based on the closing bid price on the closing date, the exercise price of the warrants is $0.091 per share. The warrants may not be exercised prior to October 28, 2003 and expire five years after their issuance. Cornell Capital may not exercise the warrants if such an exercise would cause Cornell Capital to beneficially own more than 9.99% of the outstanding shares of Advance Viral's common stock, except within sixty days of the expiration of the warrants. THERE ARE CERTAIN RISKS RELATED TO SALES BY CORNELL CAPITAL, INCLUDING: o Some of the shares issued to Cornell Capital will be issued at a discount to the market rate. As a result, the lower the stock price around the time Cornell Capital is issued shares, the greater chance that Cornell Capital gets more shares. This could result in substantial dilution to the interests of other holders of common stock. o To the extent Cornell Capital sells shares of our common stock, the common stock price may decrease due to the additional shares in the market. Because Cornell Capital receives more shares of our common stock upon conversion of the convertible debentures or upon an advance under the Equity Line of Credit, as the price of our common stock decreases, a decrease in the price of our common stock could allow Cornell Capital to sell greater amounts of common stock. This could further depress the stock price. o The significant downward pressure on the price of the common stock as Cornell Capital sells material amounts of common stocks could encourage short sales by Cornell Capital or others. This could place further downward pressure on the price of the common stock. 20 KATALYST SECURITIES LLC. Katalyst Securities LLC is an unaffiliated registered broker-dealer that has been retained by us. John Fitzpatrick, Katalyst Securities LLC's president, makes the investment decisions on behalf of Katalyst Securities LLC. For its services in connection with the Equity Line of Credit, Katalyst Securities LLC received a fee of 107,527 shares of common stock, which were valued at $10,000. These shares are being registered in this offering. SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH CERTAIN INVESTORS From December 2002 through June 2003, pursuant to securities purchase agreements with various purchasers, we authorized the issuance of and sold 22,025,000 shares of our common stock and warrants to purchase up to 13,215,000 shares of our common stock at $0.08 per share, for an aggregate purchase price of $1,762,000. In connection with the agreement, we paid finders' fees to Harbor View Group and AVIX, Inc consisting of (i) approximately $105,720 and (ii) warrants to purchase 1,168,375 shares of our common stock. All of the aforementioned warrants are exercisable at $0.12 per share commencing six months after the issuance date, for a period of five years. On April 11, 2003 pursuant to a securities purchase agreement with James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000 shares of common stock and warrants to purchase 1,875,000 shares of common stock at an exercise price of $0.12 per share through April 2007, for an aggregate purchase price of $250,000. On April 28, 2003 pursuant to a securities purchase agreement with an investor, we sold 312,500 shares of common stock and warrants to purchase 187,500 shares of common stock at an exercise price of $0.12 per share through April 2007, for an aggregate purchase price of $25,000. In connection with the transaction, we paid a finders' fee consisting of warrants to purchase 15,625 shares of our common stock at an exercise price per share of $0.12 until April 2004. 21 PLAN OF DISTRIBUTION The selling stockholders have advised us that the sale or distribution of our common stock owned by the selling stockholders may be effected directly to purchasers by the selling stockholders or by pledgees, donees, transferees or other successors in interest, as principals or through one or more underwriters, brokers, dealers or agents from time to time in one or more transactions (which may involve crosses or block transactions) (i) on the OTC Bulletin Board or in any other market on which the price of our shares of common stock are quoted or (ii) in transactions otherwise than on the OTC Bulletin Board or in any other market on which the price of our shares of common stock are quoted. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as determined by the selling stockholders or by agreement between the selling stockholders and underwriters, brokers, dealers or agents, or purchasers. If the selling stockholders effect such transactions by selling their shares of common stock to or through underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of common stock for whom they may act as agent (which discounts, concessions or commissions as to particular underwriters, brokers, dealers or agents may be in excess of those customary in the types of transactions involved). The selling stockholders and any brokers, dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters, and any profit on the sale of common stock by them and any discounts, concessions or commissions received by any such underwriters, brokers, dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act. Cornell Capital Partners is an "underwriter" within the meaning of the Securities Act of 1933 in connection with the sale of common stock under the Equity Line of Credit. Cornell Capital Partners will pay us 100% of the lowest closing bid price of our common stock on the OTC Bulletin Board or other principal trading market on which our common stock is traded for the five trading days immediately following the advance date. In addition, Cornell Capital Partners will retain 5% of the proceeds from each advance received by us under the Equity Line of Credit. This 5% retainage is an underwriting discount. In addition, we engaged Katalyst Securities LLC, an unaffiliated registered broker-dealer, to advise us in connection with the Equity Line of Credit. For its services, Katalyst Securities LLC received 107,527 shares of our common stock, which was valued at $10,000. Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware limited partnership. Cornell Capital Partners is a domestic hedge fund in the business of investing in and financing public companies. Cornell Capital Partners does not intend to make or market in Advanced Viral's stock or to otherwise engage in stabilizing or other transactions intended to help support the stock price. Prospective investors should take these factors into consideration before purchasing Advanced Viral's common stock. Under the securities laws of certain states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states. In addition, in certain states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. We will pay all the expenses incident to the registration, offering and sale of the shares of common stock to the public hereunder other than commissions, fees and discounts of underwriters, brokers, dealers and agents. We have agreed to indemnify Cornell Capital Partners and its controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $85,000. In addition, we engaged Katalyst Securities LLC, a registered broker-dealer, to advise us in connection with the Equity Line of Credit. For its services, Katalyst Securities LLC received 107,527 shares of our common stock, which was valued at $10,000. The offering expenses consist of: a SEC registration fee of $3,232.12 printing expenses of $10,000, accounting fees of $4,000, legal fees of $50,000 and miscellaneous expenses of $17,767.88 We will not receive any proceeds from the sale of any of the shares of common stock by the selling stockholders. We will, however, receive proceeds from the sale of common stock under the Equity Line of Credit, the issuance of additional convertible debentures and from the issuance of shares upon the exercise of warrants. The selling stockholders should be aware that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of shares of common stock by the selling stockholders, and that there are restrictions on market-making activities by persons engaged in the distribution of the shares. Under Registration M, the selling stockholders or their agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of our common stock 22 while such selling stockholders are distributing shares covered by this prospectus. Accordingly, except as noted below, the selling stockholders are not permitted to cover short sales by purchasing shares while the distribution is taking place. Cornell Capital Partners can cover any short positions only with shares received from us under the Equity Line of Credit. The selling stockholders are advised that if a particular offer of common stock is to be made on terms constituting a material change from the information set forth above with respect to the Plan of Distribution, then, to the extent required, a post-effective amendment to the accompanying registration statement must be filed with the Securities and Exchange Commission. DESCRIPTION OF SECURITIES TO BE REGISTERED The securities being registered are shares of Advanced Viral's common stock. 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 meeting of shareholders. Cornell Capital and Katalyst Securities acquired, or will be acquiring, their shares of Advanced Viral's common stock as a result of financing transactions with Advanced Viral consummated on April 28, 2003 and June 24, 2003. Pursuant to a securities purchase agreement dated April 28, 2003, Cornell Capital has agreed to purchase $2,500,000 in convertible debentures and has received warrants to purchase 15,000,000 shares of Advanced Viral's common stock. Cornell Capital also entered into an Equity Line of Credit with Advanced Viral, dated April 28, 2003, pursuant to which Cornell Capital agreed to purchase $50 million of Advanced Viral's common stock. Pursuant to a securities purchase agreement dated July 18, 2003, Cornell Capital has agreed to purchase $1,000,000 in additional convertible debentures. The convertible debentures, warrants and Equity Line of Credit are more fully explained below. DEBENTURES On April 28, 2003 we entered into a securities purchase agreement with Cornell Capital to sell up to $2,500,000 of our 5% convertible debentures, due April 28, 2008, of which $1,000,000 was purchased on April 28, 2003; $500,000 of convertible debentures will be purchased within ten business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures; and $1,000,000 of convertible debentures will be purchased within twenty business days from the date the registration statement is declared effective by the SEC. Pursuant to the agreement, Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital, along with warrants to purchase an aggregate of 15,000,000 shares of our common stock at an exercise price of $0.091 commencing on October 28, 2003 through April 28, 2008. Pursuant to the terms of the agreement, commencing July 27, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at Cornell Capital's option in cash or common stock), in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period for all debentures held by Cornell Capital. Advanced Viral has redemption rights. If Advanced Viral exercises certain of these redemption rights, Advanced Viral may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell Capital will receive warrants to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. On July 18, 2003 we entered into an additional securities purchase agreement with Cornell Capital to sell up to $1,000,000 of our 5% secured convertible debentures, due July 17, 2008, which will be purchased within two business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures. Pursuant to the agreement, Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital. The convertible debentures are secured by the assets of Advanced Viral until 50 days after the effectiveness of the registration statement of which this prospectus is a part. Pursuant to the terms of the agreement, commencing October 18, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at Cornell Capital's option in cash or common stock), 23 in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period. Subject to certain exceptions, at our option, we may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell Capital will receive warrants to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. WARRANTS The warrants to purchase 15,000,000 shares of our common stock have an exercise price of the higher of 110% of the closing bid price on the closing date or $0.08 per share. Based on the closing bid price on the closing date, the exercise price of the warrants is $0.091 per share. The warrants may not be exercised prior to October 28, 2003 and expire five years after their issuance. Cornell Capital may not exercise the warrants if such an exercise would cause Cornell Capital to beneficially own more than 9.99% of the outstanding shares of Advance Viral's common stock, except within sixty days of the expiration of the warrants. EQUITY LINE OF CREDIT SUMMARY. On April 28, 2003, we entered into an Equity Line of Credit with Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital shares of common stock for a total purchase price of up to $50.0 million. For each share of common stock purchased under the Equity Line of Credit, Cornell Capital will pay 100% of the lowest closing bid price of our common stock on the OTC Bulletin Board or other principal market on which our common stock is traded for the five trading days immediately following the notice date. Cornell Capital is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital will retain 5% of each advance under the Equity Line of Credit. Our obligation to sell our common stock is conditioned upon the per share purchase price being equal to or greater than a minimum acceptable price, set by us on the advance notice date, which may not be set any closer than 7.5% below the closing bid price of our common stock the day prior to the notice date. For each day during the five days after the notice date that the closing bid price for our common stock is below the Minimum Acceptable Price, the amount of the advance shall decrease by twenty percent (20%) of the amount requested. In addition, we engaged Katalyst Securities LLC, an unaffiliated registered broker-dealer, to advise us in connection with the Equity Line of Credit. For its services, Katalyst Securities LLC received 107,527 shares of our common stock, which was valued at $10,000. The effectiveness of the sale of the shares under the Equity Line of Credit is conditioned upon us registering the shares of common stock with the Securities and Exchange Commission. The costs associated with this registration statement will be borne by us. EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit, we may periodically sell shares of common stock to Cornell Capital to raise capital to fund our working capital needs. The periodic sale of shares is known as an advance. We may request an advance every seven days. A closing will be held not less than six days after such written notice at which time we will deliver shares of common stock and Cornell Capital will pay the advance amount, less the 5% Retainage. We may request advances under the Equity Line of Credit once the underlying shares are registered with the Securities and Exchange Commission. Thereafter, we may continue to request advances until Cornell Capital has advanced $50.0 million or two years after the effective date of the accompanying registration statement, whichever occurs first. However, Advanced Viral may request advances for thirty-six (36) months if Advanced Viral files an amendment to an effective registration statement or files a new registration statement. The amount of each advance is subject to a maximum of $500,000 with a minimum of seven trading days between advances. The amount available under the Equity Line of Credit is not dependent on the price or volume of our common stock. Cornell Capital may not own more than 9.9% of our outstanding common stock at any time. Based on a stock price of $0.08, Cornell Capital's beneficial ownership of shares of our common stock is 3.18%, and, therefore, we would be permitted to make draws under the Equity Line of Credit as long as Cornell Capital's beneficial ownership of our common stock was not more than 9.9%. However, Cornell Capital is not limited by a percentage ownership limitation with respect to converting the convertible debentures, and therefore a possibility exists that Cornell 24 Capital may own more than 9.9% of Advanced Viral's outstanding common stock at a time when we would otherwise plan to make an advance under the Equity Line of Credit. There is a possibility that Advanced Viral may not currently have sufficient authorized shares to convert all of the shares of common stock needed under the Equity Line of Credit and a proposal may be required to be placed before the shareholders to facilitate an increase in the number of authorized shares within the next several years. For example, if the price of our common stock remained at $0.08 per share, we would need 625,000,000 shares available to fully utilize the $50 million available under the Equity Line of Credit. Currently we have authorized 1 billion shares of common stock, and 483,484,636 shares outstanding. Accordingly, we would need to authorize 108,484,636 additional shares, even without issuing any shares upon conversion of the debentures or exercise of any options or warrants, to fully utilize the Equity Line of Credit. We would have to solicit proxies from our shareholders to approve any increase in authorized shares. We cannot predict the actual number of shares of common stock that will be issued pursuant to the Equity Line of Credit, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. Nonetheless, we can estimate the number of shares of our common stock that will be issued using certain assumptions. Assuming we issued 95,712,595 shares to Cornell Capital, based on a recent price of $0.08 per share under the Equity Line of Credit, we would receive gross proceeds of $7,657,008 less estimated offering expenses of $85,000 and a retention of $382,850. These shares would represent 16.53% of our outstanding common stock upon issuance. We expect to incur expenses of approximately $85,000 in connection with this registration, consisting primarily of professional fees. In addition, Cornell Capital will retain 5% from each advance. In addition, we issued 107,527 shares of common stock to Katalyst Securities LLC, an unaffiliated registered broker-dealer, as a placement agent fee, valued at $10,000. There is an inverse relationship between our stock price and the number of shares to be issued under the Equity Line of Credit. That is, as our stock price declines, we would be required to issue a greater number of shares under the Equity Line of Credit for a given advance. This inverse relationship is demonstrated by the following table, which shows the number of shares to be issued and the net proceeds under the Equity Line of Credit at a recent price of $0.08 per share and 25%, 50% and 75% discounts to the recent price.
Purchase Price $ 0.08 $ 0.06 $ 0.04 $ 0.02 No. of Shares(1): 95,712,595 95,712,595 95,712,595 95,712,595 Total Outstanding (2): 579,197,231 579,197,231 579,197,231 579,197,231 Percent Outstanding (3): 16.53% 16.53% 16.53% 16.53% Net Cash to Advanced Viral $ 7,189,157 $ 5,370,618 $ 3,552,079 $ 1,733,539
(1) Represents the number of shares of common stock to be issued to Cornell Capital under the Equity Line of Credit at the prices set forth in the table and are being registered hereunder. (2) Represents the total number of shares of common stock outstanding after the issuance of the shares to Cornell Capital under the Equity Line of Credit, not including shares issued under the convertible debentures, warrants or options. (3) Represents the shares of common stock to be issued as a percentage of the total number shares outstanding. Proceeds used under the Equity Line of Credit will be used in the manner set forth in the "Use of Proceeds" section of this prospectus. We cannot predict the total amount of proceeds to be raised in this transaction because we have not determined the total amount of the advances we intend to draw. INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS The validity of the shares of common stock offered hereby as to their being fully paid, legally issued and non-assessable will be passed upon for us by Kirkpatrick and Lockhart LLP, Miami, Florida. Kirkpatrick & Lockhart LLP does not have any interests in Advanced Viral and has never been employed by Advanced Viral on a contingent basis. The audited consolidated financial statements of Advanced Viral Research Corp. and its subsidiaries for the year ended December 31, 2002, December 31, 2001, and December 31, 2000, included in this prospectus and elsewhere in the registration statement have been audited by Rachlin Cohen & Holtz LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in 25 giving said report. Reference is made to said report, which includes an explanatory paragraph with respect to the uncertainty regarding Advanced Viral's ability to continue as a going concern, as discussed in Note 2 to the financial statements. Rachlin Cohen & Holtz, LLP, does not have any interests in Advanced Viral and has never been employed by Advanced Viral on a contingent basis. DESCRIPTION OF BUSINESS 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). The current formulation of Reticulose is currently known as "Product R." We believe 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. Since our inception in July 1985, we have been engaged primarily in research and development activities. We have not generated significant operating revenues, and as of March 31, 2003 we had incurred a cumulative net loss of $52,887,259. 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. Our operations over the last five years have been limited principally to research, testing and analysis of Product R in the United States, and since November 2002, primarily in Israel, 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 both inside and outside 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. In September 2001, the FDA cleared the IND application to begin Phase 1 clinical trials. Our Phase 1 study was performed in the United States on human volunteers. In March 2002, we completed the Phase 1 trial 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. Currently, we do not have sufficient funds available to pursue the Phase 2 clinical trials of Product R as a topical treatment for genital warts caused by HPV infection. In November 2002 we began testing injectable Product R in the following clinical trials in Israel: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. We believe that Product R may have three major beneficial effects in patients with AIDS. First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS. Second, the mitigation of the toxicity of drugs included in HAART regimens for the treatment of AIDS. Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS. Thus, we believe that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. 26 o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. Our objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, we anticipate that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. In September 2002, we entered into a contract with EnviroGene LLC, an affiliate of the Selikoff Center, to conduct, evaluate and maintain the scientific quality for the three clinical studies listed above. Under the terms of this agreement, EnviroGene will (1) finalize all Israeli government and hospital approval documents, (2) complete and organize the three clinical trials including establishing a network of scientists to perform said study/trial and initiate recruitment of patients and (3) perform the studies/trials and evaluate the results. Total costs incurred by EnviroGene LLC in connection with these clinical trials are expected to be $1,551,000, of which $825,000 has been paid through March 31, 2003, and $199,000 was paid during the first quarter of 2003. It is anticipated that these trials will support future FDA applications. In the fourth quarter of 2002, we entered into various agreements supporting the clinical trials in Israel aggregating approximately $1,000,000 to be paid over a twelve-month period. These services include the monitoring and auditing of the clinical sites, hospital support and laboratory testing. Approximately $76,000 has been paid through March 31, 2003, of which $53,000 was paid during the first quarter of 2003. In March 2003, we commenced discussions and began to draft protocols to expand the ongoing Israeli clinical trials of Product R for the treatment of AIDS patients (who have failed HAART and remain on HAART therapy) into late Phase II blinded, controlled clinical trials. On July 8, 2002, we extended an 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. Under its provisions the study period is extended for another twelve months to July 7, 2003. Total costs incurred in connection with this research are expected to be $138,000, of which payments of $40,000 were made in each of July 2002 and November 2002. Whether we will be able to proceed with clinical trials in Israel for injectable Product R or anywhere else in the world is dependent upon our ability to secure sufficient funds. If sufficient funds do not become available, we will have to curtail our operations by, among other things, limiting our clinical trials for Product R. We may not be able to raise the funds we currently need to continue or complete the clinical trials for injectable Product R in Israel. While we continue to attempt to secure funds through the sale of our securities, there is no assurance that such funds will be raised on favorable terms, if at all. Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this report. 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. 27 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 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. In February 1998, we contracted with GloboMax LLC to advise and assist us in our preparation of the IND that was filed with the FDA in July 2001 and cleared for Phase 1 trials in September 2001, and to otherwise guide us through the FDA process. During 2001 and 2002, 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 28 preparation and manufacture of Product R. Expenses paid during 2001 and 2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant to the agreement with GloboMax, we were obligated to pay for services on an hourly basis, at prescribed rates. GloboMax LLC is no longer providing services to, or representing, Advanced Viral. 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 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. RESEARCH, DEVELOPMENT AND TESTING For the period from inception (February 20, 1984) through December 31, 2002 we expended approximately $18,315,000 on testing and research and development activities either in our laboratories or pursuant to various testing agreements with both domestic and foreign companies. We currently are funding research and testing at several institutes and medical centers in Israel to: o determine the safety and efficacy of Product R on animals and cultured human cells; o determine the effectiveness of Product R in the treatment of cachexia (body wasting) in patients with AIDS taking a multi-drug cocktail (highly active anti-retroviral therapy (HAART)); o determine the effectiveness of Product R in the treatment of cachexia in patients with solid cancers; o determine the effectiveness of Product R in the treatment of cachexia in patients with leukemias and lymphomas; 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. In November 2002 we began testing injectable Product R in the following clinical trials in Israel: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. We believe that Product R may have three major beneficial effects in patients with AIDS. First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS. Second, the mitigation of the toxicity of 29 drugs included in HAART regimens for the treatment of AIDS. Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS. Thus, we believe that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. Our objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, we anticipate that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. Our 12-month agreement formalized in April 2001 with the Selikoff Center in Israel to develop clinical trials in Israel using Product R has concluded. The amount paid under the agreement was $242,000. On July 8, 2002, we extended an 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. Under its provisions the study period is extended for another twelve months to July 7, 2003. Total costs incurred in connection with this research are expected to be $138,000, of which payments of $40,000 were made in each of July 2002 and November 2002. In September 2002, we entered into a contract with EnviroGene LLC, an affiliate of the Selikoff Center, to conduct, evaluate and maintain the scientific quality for the three clinical studies listed above. Under the terms of this agreement, EnviroGene will (1) finalize all Israeli government and hospital approval documents, (2) complete and organize the three clinical trials including establishing a network of scientists to perform said study/trial and initiate recruitment of patients and (3) perform the studies/trials and evaluate the results. Total costs incurred by EnviroGene LLC in connection with these clinical trials are expected to be $1,551,000, of which $875,000 has been paid through July 14, 2003, and $199,000 was paid during the first quarter of 2003. It is anticipated that these trials will support future FDA applications. In the fourth quarter of 2002, we entered into various agreements supporting the clinical trials in Israel aggregating approximately $1,000,000 to be paid over a twelve-month period. These services include the monitoring and auditing of the clinical sites, hospital support and laboratory testing. Approximately $109,000 has been paid through July 14, 2003, of which $53,000 was paid during the first quarter of 2003. In March 2003, we commenced discussions and began to draft protocols to expand the ongoing Israeli clinical trials of Product R for the treatment of AIDS patients (who have failed HAART and remain on HAART therapy) into late Phase 2 blinded, controlled clinical trials. Whether we will be able to proceed with Phase 2 clinical trials of Product R for topical therapy of genital warts and clinical trials in Israel for injectable Product R is dependent upon our ability to secure sufficient funds. If sufficient funds do not become available, we will have to curtail our operations by, among other things, limiting our clinical trials for Product R. We may not be able to raise the funds we currently need to begin or complete the topical Phase 2 for Product R or to continue the clinical trials for injectable Product R in Israel. While we continue to attempt to secure funds through the sale of our securities, there is no assurance that such funds will be raised on favorable terms, if at all. The studies being conducted in Israel are subject to risks associated with the political, economic and military conditions affecting Israel and the Middle East, and recent world events, including terrorism and war, have made it difficult to predict whether or in what manner these problems will be resolved. Our studies detailing the results of the research and testing being conducted in Israel may not positively impact the FDA's decision to approve a new IND for injectable 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. 30 SCIENTIFIC ADVISORY BOARD In January 2002, we formed a Scientific Advisory Board currently consisting of six 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. 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." DR. SIDNEY PESTKA, a recipient of the National Medal of Technology for 2001, is currently Professor and Chairman of the Department of Molecular Genetics, Microbiology and Immunology at New Jersey's Robert Wood Johnson Medical School of the University of Medicine and Dentistry. Previously he was Associate Director of the Roche Institute of Molecular Biology. His work in the development of interferons, which are used clinically for treating a range of diseases, including hepatitis B, multiple sclerosis and hairy cell leukemia, is the basis of several U.S. and more than 100 foreign patents. Dr. Pestka was inducted into the New Jersey Inventor's Hall of Fame in 1993. He has also received the Selman Waksman Award in Microbiology and the Milstein Award from the International Society for Interferon and Cytokine Research. He has served on the National Cancer Institute's Breast Cancer Task Force, the Basic Pharmacology Advisory Committee of the Pharmaceutical Manufacturers Association Foundation and is secretary, and former President, of the International Society of Interferon Research. Dr. Pestka received his undergraduate degree in chemistry from Princeton University in 1957 and his medical degree from the University of Pennsylvania School of Medicine in 1961. Over the past 30 years, he has published several books and written more than 400 research articles for prestigious peer-reviewed scientific journals. PATENTS We believe that patent protection and trade secret protection are important to our business and that our future will depend, in part, on our ability to maintain trade secret protection, obtain patents and operate without infringing the proprietary rights of others both in the United States and abroad. We have ten issued U.S. patents, some covering the 31 composition of Product R and others covering various uses of the Product R. We have eight pending U.S. patent applications and seventeen pending foreign patent applications. In addition, we have two issued Australian patents covering a use of Product R and one patent granted in China. During April 2002, under the terms of a settlement agreement entered as part of a final judgment on March 25, 2002, we were assigned all rights, title and interest in two issued U.S. patents pertaining to Reticulose(R) technology. As patent applications in the United States are maintained in secrecy until published or 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 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. 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. To date, our efforts or the efforts of our representatives have produced no material benefits to us regarding our 32 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. We have made no sales under the distribution agreements other than for testing purposes. 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. 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 a Phase 1 trial 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 Due to limited financial resources, we currently are unable to pursue the Phase 2 clinical trials. Initially we targeted our sales and marketing efforts to those countries where Reticulose was previously marketed by its prior owners for a number of years as an anti-viral agent in the treatment of Asian influenza, viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia, Taiwan, the Philippines and Malta. Registration of 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, 2002, 2001 and 2000, 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." We have produced bulk clinical trial batches for Product R in our facility in Yonkers, New York under current Good Manufacturing Procedures (cGMP) as set forth by the FDA. The FDA has not approved Product R for distribution or sale in the United States, nor has it approved our Yonkers, New York facility. 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 33 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. 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 ten full-time employees, consisting of our two executive officers, two employees involved in operations, two employees responsible for quality assurance and quality control, an assistant controller, a chief information officer and two administrative employees. Dr. Hirschman, our President, Chief Executive Officer and a director, 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, Chairman of the Board of Directors and Secretary, 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." 34 DESCRIPTION OF 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 $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 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. We are currently negotiating the sale of the Bahamian facility, after which sale we intend to manufacture Product R exclusively at our facility in Yonkers, New York. 35 LEGAL PROCEEDINGS In December 2002, we filed suit in the Circuit Court of the 11th Judicial Circuit of Miami-Dade County Florida charging that certain investors "misrepresented their intentions in investing in the Company" and "engaged in a series of manipulative activities to depress the price of Advanced Viral stock." We alleged that the defendants sought to "guarantee they would be issued significantly more shares of our common stock" as a result of warrant repricing provisions of a September 2002 financing agreement. We sought a judgment for damages, interest and costs. The complaint named SDS Merchant Fund, L.P., a Delaware limited partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight Securities, L.P., a limited partnership conducting securities business in Florida; Stonestreet Limited Partnership located in Canada; and Bristol Investment Fund, LTD., whose principal place of business is in Grand Cayman, Cayman Islands, among others. The complaint claimed that the "defendants had each, at times acting individually, and at times acting in concert with at least one or more of each other," engaged in practices that violated sections of the Florida Securities and Investor Protection Act. Also named as a plaintiff in the case was William B. Bregman, a resident of Miami-Dade County, Florida, and one of our largest shareholders. The complaint alleged that Mr. Bregman suffered losses of approximately $3.9 million as a result of the stock manipulation scheme. In January 2003, certain of the defendants removed the case to the U.S. District Court for the Southern District of Florida. The suit related to an agreement, announced September 9, 2002, pursuant to which we issued and sold to certain investors 21,500,000 shares of its common stock for total gross proceeds of $3,010,000, or $0.14 per share. We also issued warrants to purchase an aggregate of 16,125,000 shares of our common stock, which were covered by provisions that allowed for an adjustment of the warrant exercise price. The complaint charged the defendants with manipulating the share price to take favorable advantage of these warrant repricing provisions. Following the initiation of our lawsuit in Florida, three of the purchasers in the September financing (Alpha Capital, A.G., Bristol Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha Plaintiffs"), filed separate lawsuits in the U.S. District Court for the Southern District of New York. The suits sought a preliminary injunction and other relief for breach of contract. The District Court entered an order on February 11, 2003 upon a motion of the Alpha Plaintiffs, that required that (i) we deliver to the Alpha Plaintiffs the shares of our common stock issuable upon exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000 or the market value of the warrant shares, whichever is higher for each group of warrants as of the first and second determination dates; and (iii) all the proceeds from the sale of the warrant shares be placed in escrow pending final resolution of the litigation. Within ten days of the entry of the order, we moved to alter/amend the judgment and/or for reconsideration of the Court's order requesting relief from the Court's order. The Court denied this motion and ordered us to immediately deliver the warrant shares to the Alpha Plaintiffs upon their payment of the exercise price and posting of a bond, without further delay and no later than April 8, 2003. We immediately appealed the order denying the motion for reconsideration. During May 2003, we entered into settlement and mutual release agreements with the parties involved in both the Florida and New York litigation, which, among other things, dismissed the lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in exchange for release by the parties to the lawsuits and certain parties to the September 2002 financing of their rights to exercise the warrants issued in the September 2002 financing, we issued an aggregate of 947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $790,748 has been paid to date, and of which $257,143 shall be paid in four equal monthly installments until September 2003. 680,000 of the shares issued may not be resold until September 2003. 36 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER 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, 2001 and 2002, and for the first and second quarter of 2003. 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 2001 $ 0.285 $ 0.410 Second Quarter 2001 0.265 0.495 Third Quarter 2001 0.171 0.395 Fourth Quarter 2001 0.179 0.400 FIRST QUARTER 2002 0.158 0.285 Second Quarter 2002 0.096 0.300 Third Quarter 2002 0.112 0.220 Fourth Quarter 2002 0.065 0.119 FIRST QUARTER 2003 0.054 0.085 Second Quarter 2003 through July 10, 2003 0.064 0.105
STOCKHOLDERS The approximate number of holders of record of our common stock as of July 14, 2003 is 3,233, inclusive of those brokerage firms and/or clearing houses holding shares of common stock for their clientele (with each such brokerage house and/or clearing house being considered as one holder). DIVIDEND POLICY We have not declared or paid any dividends on our shares of common stock. We intend to retain future earnings, if any, that may be generated from our operations to finance our future operations and expansion and do not plan for the reasonably foreseeable future to pay dividends to holders of our common stock. Any decision as to the future payment of dividends will depend on our results of operations and financial position and such other factors as our board of directors in its discretion deems relevant. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following information should be read in conjunction with the consolidated financial statements of Advanced Viral and the notes thereto appearing elsewhere in this filing. Statements in this Management's Discussion and Analysis or Plan of Operation and elsewhere in this prospectus that are not statements of historical or current fact constitute "forward-looking statements." OVERVIEW Since our inception in July 1985, we have been engaged primarily in research and development activities. We have not generated significant operating revenues, and as of March 31, 2003 we had incurred a cumulative net loss of $52,887,259. 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. Conducting the clinical trials of Product R will require significant cash expenditures. 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. We currently do not have sufficient funds to continue our testing of Product R. We are attempting to secure funds through the sale of our securities. During 2002, the Board of Directors approved a plan to sell Advance Viral Research Ltd. (LTD), the Company's Bahamian subsidiary whose substantial asset is the Company's Bahamian manufacturing facility. The decision was based upon the Company completing construction on its facility in Yonkers, New York capable of providing all functions previously provided by the Freeport, Bahamas plant. The assets of LTD have been classified on the Balance Sheet of the Company at March 31, 2003, December 31, 2002 and 2001 as Assets held for Sale. LTD had no liabilities as of March 31, 2003 and December 31, 2002, except inter-company payables which have been eliminated in consolidation. The operations for LTD have been classified in the Consolidated Statements of Operations for the three months ended March 31, 2003 and for the years ended December 31, 2002, 2001 and 2000 as Loss from Discontinued Operations. The independent certified public accountants' report on our consolidated financial statements for the fiscal year ended December 31, 2002, includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our ability to continue operations is dependent upon the continued sale of our securities and debt financing for funds to meet our cash requirements, which raise substantial doubt about our ability to continue as a going concern. Further, the accountants' report states that the financial statements do not include any adjustments that might result from the outcome of this uncertainty. RESULTS OF OPERATION FOR THE QUARTER ENDED MARCH 31, 2003 AS COMPARED TO THE QUARTER ENDED MARCH 31, 2002 For the three months ended March 31, 2003, we incurred losses from continuing operations of approximately $1,740,000, compared to $2,831,000 for the three months ended March 31, 2002. Our current losses were attributable primarily to: RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses decreased in the three months ended March 31, 2003 to approximately $458,000, compared to approximately $1,661,000 during the three months ended March 31, 2002. We have reduced our research and development activities to include only research performed in Israel. As such, allocations for research and development related expenses such as salaries, benefits, rent and utilities at our headquarters in Yonkers, New York, which were made for the quarter ended March 31, 2002, were not made for the quarter ended March 31, 2003, with the exception of our Chief Scientific Officer, who is also our Chief Executive Officer, who allocates approximately 30% of his time to oversight of our clinical trials and therefore approximately $31,000 of his compensation has been allocated to research and development expense with the balance allocated to general and administrative expense for the quarter ended March 31, 2003. The decrease in research and development expenses primarily resulted from: o allocation of research and development expenditures relating to salaries and benefits of approximately $31,000 were made for the three months ended March 31, 2003, compared to approximately $73,000 for salaries and benefits and approximately $73,000 for rent and utilities allocated to research and development during the first quarter ended March 31, 2002; 38 o expenditures in connection with Product R research in Israel were $412,000 for the three months ended March 31, 2003, compared to $40,000 for the three months ended March 31, 2002, which increase was attributable to payments of approximately $299,000 made to EnviroGene, $44,000 made to Quintiles Israel Ltd. and $40,000 made to the Weizmann Institute of Science; o consulting expenses payable to GloboMax LLC in connection with the preparation and filing with the FDA of the IND for Product R were $0 for the three months ended March 31, 2003, compared to $910,000 for the three months ended March 31, 2002; and o expenditures for laboratory supplies were $0 for the three months ended March 31, 2003, compared to $136,000 for the three months ended March 31, 2002; GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased to approximately $863,000 for the three months ended March 31, 2003, compared to $691,000 for the three months ended March 31, 2002. The increase in general and administrative expenses primarily resulted from: o increased professional fees of approximately $295,000 for the three months ended March 31, 2003, compared to $176,000 for the three months ended March 31, 2002, which increase was primarily attributable to certain legal fees for litigation ($193,000 for the three months ended March 31, 2003 compared to $0 for the three months ended March 31, 2002) (See "Legal Proceedings"); o increased payroll and related expenses of approximately $267,000 for the three months ended March 31, 2003, compared to $223,000 for the three months ended March 31, 2002, which increase is attributable to the allocation of staff from research and development functions. Currently, salaries and benefits are recorded as general and administrative expense with the exception of our Chief Scientific Officer, who is also our Chief Executive Officer, who allocates approximately 30% of his time to oversight of our clinical trials. Therefore, approximately $31,000 of his compensation has been allocated to research and development expense and the balance of $71,000 has been allocated to general and administrative expense for the quarter ended March 31, 2003. Payroll and related expenses for March 31, 2002 before allocation to research and development was approximately $715,000. Before allocations, payroll and related expenses decreased to $298,000 for the three months ended March 31, 2003, compared to $715,000 for the three months ended March 31, 2002 due to a reduction of personnel during 2002 from 35 as of March 31, 2002 to 10 employees as of March 31, 2003; o increased rent and utility expenses of approximately $104,000 for the three months ended March 31, 2003, compared to $18,000 for the three months ended March 31, 2002, which increase is attributable to the allocation of rent and utilities from research and development expense to general and administrative expense. Currently, all rent and utilities expenses are recorded as general and administrative expense. Rent and utility expenses for March 31, 2002 before allocation to research and development was approximately $92,000. DEPRECIATION EXPENSE. Our increased losses are also due to increased depreciation expense of approximately $238,000 for the three months ended March 31, 2003, compared to $228,000 for the three months ended March 31, 2002, for assets acquired during 2002 which are depreciated over a full year. INTEREST INCOME (EXPENSE). Interest income increased to approximately $6,000 for the three months ended March 31, 2003, compared to $2,000 for the three months ended March 31, 2002 due to increased cash balances invested in money market accounts. Our losses during the three months ended March 31, 2003 are also due to interest expense of approximately $187,000, compared to $253,000 for the three months ended March 31, 2002. Included in the interest expense are: o the beneficial conversion feature on certain convertible debentures of approximately $25,000 for the three months ended March 31, 2003, compared to $0 for the three months ended March 31, 2002; o interest expense associated with certain convertible debentures of approximately $15,000 for the three months ended March 31, 2003, compared to $0 for the three months ended March 31, 2002; 39 o amortization of discount on certain warrants of approximately $131,000 for the three months ended March 31, 2003, compared to $242,000 for the three months ended March 31, 2002; and o amortization of loan costs of approximately $13,000, for the three months ended March 31, 2003, compared to $4,000 for the three months ended March 31, 2002. LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for the three months ended March 31, 2003 was approximately $1,740,000, compared to approximately $2,831,000 for the three months ended March 31, 2002. The decrease resulted primarily from a reduction in expenses associated with a reduction of personnel during 2002 from 33 to 10 employees, conclusion of a consulting contract with Globomax relating to research and development, and concentrating all research and development activities on clinical trials and research in Israel. LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations for the three months ended March 31, 2003 were approximately $10,000, compared to approximately $42,000 for the three months ended March 31, 2002, which losses resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd. held for sale. During 2002, our Board of Directors approved a plan to sell Advance Viral Research Ltd. ("AVR Ltd."), our Bahamian subsidiary. The decision was based upon the completion of construction on our facility in Yonkers, New York capable of providing all functions previously provided by the Freeport, Bahamas plant. The assets of AVR Ltd. have been classified on our Consolidated Balance Sheet at March 31, 2003 and December 31, 2002 as Assets held for sale. AVR Ltd. had no liabilities as of March 31, 2003 and December 31, 2002, except inter-company payables, which have been eliminated in consolidation. The operations for AVR Ltd. have been classified in the Consolidated Statements of Operations for the period ended March 31, 2003 and 2002 as Loss from Discontinued Operations. REVENUES. We had no revenues for the three months ended March 31, 2003 or March 31, 2002. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 During the years ended December 31, 2002 and 2001 we incurred losses from continuing operations of approximately $10,141,000 and $11,456,000, respectively. Our losses for the years ended December 31, 2002 and 2001 were attributable primarily to: GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were approximately $2,654,000 and $4,063,000 in 2002 and 2001, respectively. General and administrative expenses decreased by approximately $1,409,000 in 2002 compared to 2001, resulting primarily from: o decreased payroll and related expenses (approximately $866,000 in 2002 compared to increases of $1,039,000 in 2001). The decrease in 2002 was primarily attributable to a reduction in personnel from 35 to 10 employees as a cost cutting measure; o increased insurance costs (approximately $564,000 in 2002 compared to $412,000 in 2001) representing increased premiums for employee medical insurance and additional corporate liability insurance including directors and officers liability coverage; and o decreased professional fees (approximately $501,000 in 2002 compared to $1,431,000 in 2001); and o decreased consulting fees (approximately $34,000 in 2002 compared to $212,000 in 2001). This decrease is primarily due to lower outside computer consultant costs; and o decreased recruiting expenses (approximately $7,000 in 2002 compared to $135,000 in 2001). The 2001 expense was for the hiring of new employees. COMPENSATION AND OTHER OPTIONS AND WARRANTS. Compensation expense was approximately $755,000 in 2002, compared to $691,000 in 2001. 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 $4,440,000 in 2002, compared to $5,151,000 in 2001. The decrease from 2001 to 2002 resulted primarily from research expenses (approximately 40 $1,778,000) relating to the GloboMax agreement in connection with the preparation of our first IND filing and offset by an increase of approximately $749,000 for research expenditures relating to research and testing of Product R in Israel. The approximate costs of rent, personnel, operating costs and laboratory supplies associated with research and development activities at the Yonkers facility for the years ended 2002 and 2001, which were charged to research and development expense, were $2,467,000 and $2,230,000, respectively. DEPRECIATION EXPENSE. Depreciation expense was approximately $978,000 in 2002 compared to $511,000 in 2001. In addition, leasehold improvements were made to the laboratory and production areas during 2002 and 2001. The increase in 2002 over 2001 resulted from equipment and leasehold improvements acquired during 2002 and full year's depreciation expense recorded in 2002 for 2001 additions. INTEREST EXPENSE. Interest expense for the years ended 2002 and 2001 was approximately $1,342,000, and $869,000, respectively. Included in interest expense for these periods was: o the beneficial conversion feature on certain convertible debentures of approximately $137,000 and $0 for the years ended 2002 and 2001, respectively; o interest expense associated with certain convertible debentures of approximately $43,000 and $0 for the years ended 2002 and 2001, respectively; o amortization of discount on certain warrants of approximately $1,102,000 and $989,000 for the years ended 2002 and 2001, respectively; o amortization of loan costs of approximately $34,000 and $15,000 for the years ended 2002 and 2001, respectively; 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. LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for the years ended 2002 and 2001 was approximately $10,141,000 and $11,456,000, respectively. The decrease from 2002 to 2001 resulted primarily from a reduction in general and administrative expenses due to a reduction in legal fees due to the settlement of litigation during 2001 and a reduction of personnel during 2002 from 33 to 10 employees. LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations for the years ended 2002 and 2001 was approximately $201,000 and $259,000, respectively, relating to losses from our 99% owned subsidiary, Advance Viral Research Ltd. REVENUES. There were approximately $0 and $18,000 in sales revenue in 2002 and 2001, respectively. All sales revenue resulted from purchases of Product R for testing purposes. Interest income was approximately $28,000 and $114,000 in 2002 and 2001, respectively. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 During the years ended December 31, 2001 and 2000 we incurred losses from continuing operations of approximately $11,456,000 and $9,131,000, respectively. Our losses for the years ended December 31, 2001 and 2000 were attributable primarily to: GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were approximately $4,063,000 and $2,414,000 in 2001 and 2000, respectively. General and administrative expenses increased by $1,649,000 in 2001 compared to 2000, resulting primarily from: o increased payroll and related expenses (increases of $1,039,000 in 2001 and $717,000 in 2000). The increase in 2001 and 2000 was primarily attributable to increased employee and officer salaries and the addition of two vice presidents for drug development and quality assurance in 2001; 41 o increased insurance costs (approximately $412,000 in 2001 and $299,000 in 2000) representing increased premiums for employee medical insurance and additional corporate liability insurance including directors and officers liability coverage; and o increased professional fees (approximately $1,431,000 in 2001 and $385,000 in 2000). The increase in 2001 is primarily attributable to certain legal proceedings the cost of which was approximately $953,000 in 2001; and o decreased consulting fees (approximately $212,000 in 2001 and $305,000 in 2000). This decrease is primarily due to lower outside computer consultant costs; and o increased recruiting expenses (approximately $135,000 in 2001 compared to $12,000 in 2000). The 2001 expense was for the hiring of new employees. COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS. Compensation expense was approximately $691,000 and $1,902,000 in 2001 and 2000, 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 and $3,193,000 in 2001 and 2000, respectively. The increase from 2000 to 2001 resulted primarily from research expenses related to the GloboMax agreement of approximately $1,417,000. The approximate costs of rent, personnel, operating costs and laboratory supplies associated with research and development activities at the Yonkers facility for the years ended 2001 and 2000, which were charged to research and development expense, were $2,230,000 and $1,696,000, respectively. DEPRECIATION EXPENSE. Depreciation expense was approximately $511,000 and $346,000 in 2001 and 2000, respectively. The increase from 2000 to 2001 resulted primarily from the acquisition of furniture, 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 and 2000. INTEREST EXPENSE. Interest expense for the years ended 2001 and 2000 was approximately $869,000 and $1,447,000, respectively. Included in interest expense for these periods was: o the beneficial conversion feature on certain convertible debentures of approximately $0, and $387,000 for the years ended 2001 and 2000, respectively; o interest expense associated with certain convertible debentures of approximately $0 and $76,000 for the years ended 2001 and 2000, respectively; o amortization of discount on certain warrants of approximately $989,000 and $611,000 for the years ended 2001 and 2000, respectively; o amortization of loan costs of approximately $15,000 and $106,000 for the years ended 2001 and 2000, respectively; o fees of approximately $265,000 in connection with the November 2000 securities purchase agreement with various investors; o additional financing costs related to the 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. LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for the years ended 2001 and 2000 was approximately $11,456,000 and $9,131,000, respectively. 42 LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations for the years ended 2001 and 2000 was approximately $259,000 and $224,000, respectively, relating to losses from our 99% owned subsidiary, Advance Viral Research Ltd. REVENUES. There were approximately $18,000 in sales revenue in 2001, compared to $8,000 in sales revenues for 2000. All sales revenue resulted from purchases of Product R for testing purposes. Interest income was approximately $114,000 in 2001, compared to approximately $162,000 in 2000. LIQUIDITY AS OF MARCH 31, 2003 AND MARCH 31, 2002 As of March 31, 2003, we had current assets of approximately $847,000, compared to approximately $1,770,000 as of December 31, 2002. We had total assets of approximately $3,865,000 and $4,946,000 at March 31, 2003 and December 31, 2002, respectively. The decrease in current and total assets was primarily attributable to less cash on hand resulting from the use of cash for funding operating expenditures. As of March 31, 2003, we had current liabilities of approximately $2,082,000, compared to approximately $685,000 as of December 31, 2002. The increase in current liabilities was primarily attributable to a litigation settlement of approximately $1,099,000. (See "Legal Proceedings"). During the three months ended March 31, 2003, we used cash of approximately $1,133,000 for operating activities, as compared to approximately $2,571,000 during the three months ended March 31, 2002. During the three months ended March 31, 2003, our expenses included: o approximately $298,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers; o approximately $295,000 for other professional and consulting fees, including $193,000 for legal fees relating to litigation. (See "Legal Proceedings"); o approximately $91,000 for insurance costs; o approximately $104,000 for rent and utilities for our Yonkers facility; and o approximately $402,000 for expenditures for Product R research in Israel. During the three months ended March 31, 2003, cash flows provided by financing activities were from the sale of our securities of approximately $210,000 offset by principal payments of $46,000 on equipment obligations. During the three months ended March 31, 2003, cash flow provided by investing activities reflected the sale of an automobile located at our facility in the Bahamas. On February 9, 2001 we entered into an equity line of credit agreement with Cornell Capital, an institutional investor. 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. Under the terms of a registration rights agreement entered in connection with the equity line of credit, in February 2001 we filed with the Securities and Exchange Commission a registration statement to register the resale of shares of common stock purchased by Cornell Capital upon the exercise of each put option and related warrants, which registration statement was declared effective by the Commission. To date, we have not drawn down on the equity line of credit. On April 28, 2003, we entered into an equity line of credit agreement with Cornell. The equity line agreement provides, generally, that Cornell has committed to purchase up to $50 million of our common stock over a three-year period, with the timing and amount of such purchases, if any, at our discretion, provided, however, that the maximum amount of each advance is $500,000, and the date of each advance shall be no less than six trading days after our notification to Cornell of its obligation to purchase shares. Any shares of common stock sold under the equity line will be priced at the lowest closing bid price of our common stock during the five consecutive trading days following our notification to Cornell requesting an advance under the equity line. In addition, at the time of each advance, we are obligated to pay Cornell a fee equal to five percent (5%) of the amount of each advance. However, Cornell's obligation to purchase and our obligation to sell our common stock is conditioned upon the per share purchase price being equal to or greater than a price we set on the advance notice date, the minimum acceptable price, which may not be set any closer than 7.5% percent below the closing bid price of the common stock the day prior to the date we notify Cornell of its obligation to purchase shares. In addition, there are certain other conditions applicable to our ability to draw down on the equity line including the filing and effectiveness of a registration statement registering the resale of all shares of common stock that may be issued to Cornell under the equity line and our adherence with certain covenants. There can be no assurance of the amount of proceeds we will receive, if any, under the equity line of credit with Cornell. In connection with this agreement, we issued 107,527 shares of our common stock to Katalyst LLC in consideration for its exclusive placement agent services. 43 We adopted a 401(k) plan that allows eligible employees to contribute up to 20% of their salary, subject to annual limits, which were $11,000 in 2002 and $11,000 in 2003. We match 50% of the first 6% of the employee contributions with our common stock and may from time to time, at our discretion, make additional contributions based upon earnings. In May 2002 we funded our matching contribution of approximately $33,000 for the year ended December 31, 2001 by purchasing our common stock in open market transactions. At December 31, 2002 we accrued $40,675 to fund the 401k plan representing our match for the plan year 2002. We intend to purchase our common stock in the open market at prevailing market prices to satisfy our 2002 matching contribution obligations. In March 2003, we amended the terms of the 401(k) plan to terminate our obligation to make matching contributions. To reduce operating costs, in November 2002 we reduced our personnel from 33 to 10 employees. This should allow us to focus on the completion of our clinical studies and maintain the critical functions and scientific personnel to manage the clinical trials and continue operations. The severance cost for these employees was approximately $54,000 which was expensed during the fourth quarter of 2002. AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001 As of December 31, 2002, we had current assets of approximately $1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and 2001, respectively. Total asset levels did not change materially but total assets declined due to the increase in fixed asset depreciation for property and equipment acquisitions. During 2002, we used cash of approximately $8,701,000 for operating activities, as compared to approximately $8,577,000 in 2001. During 2002, we incurred expenses of: o approximately $2,809,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers; o approximately $904,000 in consulting fees to GloboMax and its subcontractors; o approximately $395,000 for rent and utilities for our Yonkers facility; o approximately $295,000 for laboratory supplies; o approximately $986,000 in expenditures on Product R research in Israel; o approximately $573,000 for insurance costs and approximately $501,000 for other professional fees. During the year ended December 31, 2002, cash flows provided by financing activities was primarily due to the proceeds from the sale of common stock of approximately $7,114,000 and $2,000,000 in convertible debentures, offset by principal payments of approximately $169,000 on equipment obligations. This compares to the year ended December 31, 2001 where funds of approximately $5,783,000 were provided by the sale of common stock offset by principal payments of approximately $80,000 on equipment obligations. During the year ended December 31, 2002, cash flow used by investing activities were used for expenditures of approximately $268,000 for leasehold improvements and research and laboratory equipment at our Yonkers, New York facility. CAPITAL RESOURCES We have and continue to be 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 over the last two years. 44
PURCHASE PRICE/ CONVERTIBLE/ CONVERSION PRICE/ EXPIRATION DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE DATE - ----------- -------------- --------------- ------------------------ --------------------- ----------- Jul-2001 $1,000,000 common stock 3,125,000 shares $ 0.32 per share n/a Jul-2001 $ 490,000 common stock 1,225,000 shares $ 0.40 per share n/a warrants 367,500 shares $ 0.48 per share 7/27/2006 367,500 shares $ 0.56 per share Aug-2001 $ 600,000 common stock 2,000,000 shares $ 0.30 per share n/a Sep-2001 $1,000,000 common stock 6,666,667 shares $ 0.15 per share n/a Dec-2001 $2,000,000 common stock 7,407,407 shares $ 0.27 per share n/a Dec-2001 $ 410,000 common stock 1,518,519 shares $ 0.27 per share n/a Dec-2001 $ 200,000 common stock 740,741 shares $ 0.27 per share n/a Feb-2002 $ 500,000 common stock 3,333,333 shares $ 0.15 per share n/a Feb-2002 $ 500,000 common stock 3,333,333 shares $ 0.15 per share n/a Mar-2002 $ 500,000 common stock 3,333,333 shares $ 0.15 per share n/a Apr-2002 $1,939,000 common stock 17,486,491 shares $0.11089 per share n/a May-2002 $ 500,000 convertible debenture Approx. 4,412,000 shares(1) 5/30/2004 consulting warrants 1,000,000 shares $ 0.18 per share 5/30/2008 May-2002 services Jul-2002 $1,000,000 convertible debenture Approx. 9,350,000 shares(2) 7/3/2004 Jul-2002 $ 500,000 convertible debenture Approx. 4,588,000 shares(3) 7/15/2004 Sep-2002 $3,010,000 common stock 21,500,000 shares(4) $ 0.14 per share n/a common stock 947,000 shares(5) $ 0.08 per share n/a Dec-2002 & Mar-2003 $1,100,000 common stock 13,750,000 shares $ 0.08 per share n/a 12/2007- warrants 9,075,000 shares $ 0.12 per share 3/2008 Apr-May 2003 $ 562,000 common stock 7,337,500 shares $ 0.08 per share n/a warrants 4,652,125 shares $ 0.12 per share 4/2004- 4/2008 Apr-2003 $1,000,000 convertible debenture Approx. 15,625,000(6) shares 4/2008 warrants 15,000,000 shares $ 0.091 per share 4/2008(7) June 2003 $ 125,000 common stock 1,562,500 shares $ 0.08 per share n/a warrants 1,031,250 warrants $ 0.12 per share 6/2003 July 2003 $1,000,000 convertible debenture Approx. 15,625,000(8) shares -- 7/2008
--------------- (1) $0.11 per share for the first 20% of the principal balance of the Debenture, thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the average closing bid price for the five trading days prior to the conversion date (the "Market Price"); or (ii) ten cents ($0.10) which amount is subject to certain adjustments. (2) $0.1539 per share for the first 20% of the principal balance of the Debenture, thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the Market Price; or (ii) ten cents ($0.10) which amount is subject to certain adjustments. (3) $0.1818 per share for the first 20% of the principal balance of the Debenture, thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the Market Price; or (ii) ten cents ($0.10) which amount is subject to certain adjustments. (4) Does not include an additional 1,032,000 shares of common stock issued to H.C. Wainwright & Co. as part of the finder's fee for the transaction. (5) Represents shares issued in connection with certain settlement and mutual release agreements entered in May 2003, pursuant to which, among other things, warrants to purchase 16,125,000 shares of our common stock were cancelled, we will issue an aggregate of 947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $790,748 has been paid to date, and of which $257,143 shall be paid in four equal monthly installments until September 2003. See "Legal Proceedings." (6) The debentures are convertible commencing July 27, 2003 at a conversion price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. The holder may not convert more than $600,000 in any thirty-day calendar period. (7) The warrants are exercisable commencing October 28, 2003. (8) The debentures are convertible commencing October 13, 2003 at a conversion price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. The holder may not convert more than $600,000 in any thirty-day calendar period. On March 31, 2000, we filed a shelf registration statement on Form S-3 with the SEC relating to the offering of shares of our common stock to be used in connection with financings. As of March 31, 2003, we had issued and sold 45 approximately 59 million shares of our common stock and received gross proceeds of approximately $11.2 million under the shelf registration statement. The shelf registration statement is no longer available for our use. 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. On May 30, 2002 we entered into an agreement with Harbor View Group, Inc to terminate a consulting agreement effective as of December 31, 2001. The consultant continued to perform services after the termination date and as full compensation we granted warrants to purchase 1,000,000 shares of our common stock at an exercise price of $0.18 per share. The warrants are exercisable in whole or in part at any time and from time to time prior to May 30, 2008. During the second quarter of 2002, we issued to certain investors an aggregate of $2,000,000 principal amount of our 5% convertible debentures at par in several private placements. Under the terms of each 5% convertible debenture, 20% of the original issue is convertible on the original date of issue at a price equal to the closing bid price quoted on the OTC Bulletin Board on the trading day immediately preceding the original issue date (except for the $500,000 of the debentures which had an initial conversion price of $0.11 per share). Thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the average closing bid price for the five trading days prior to the conversion date; or (ii) ten cents ($0.10) which amount is subject to certain adjustments. The convertible debentures, including interest accrued thereon, are payable by Advanced Viral in shares of common stock and mature two years from the date of issuance. The shares issued upon conversion of the debentures cannot be sold or transferred for a period of one year from the applicable vesting date of the convertible portion of the debentures. As of March 31, 2003, principal and interest on the debentures in the amount of $812,904 had been converted into 6,877,255 shares of our common stock. On September 10, 2002, we issued and sold an aggregate of 21,500,000 shares of our common stock pursuant to a securities purchase agreement with certain investors for total proceeds of approximately $3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000 shares of our common stock at an exercise price of $0.25 per share, subject to adjustment, as described below. In addition, pursuant to a placement agent agreement with H.C. Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and issued to HCW 1,032,000 shares of our common stock. An adjustment provision in the warrants provided that at 60 and 120 trading days following the original issue date of the warrants, a certain number of warrants shall become exercisable at $0.001. The number of shares for which the warrants are exercisable at $0.001 per share is equal to the positive difference, if any, between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of our common stock for the 60 trading days preceding the applicable determination date and (ii) 21,500,000, provided however, that no adjustment will be made in the event that the VWAP for the 60 trading day period preceding the applicable determination date is $0.14 or greater. In December 2002 we filed suit against certain of the investors in connection with the warrant repricing provisions of the agreement, and during May 2003, we entered into settlement and mutual release agreements with the parties involved in both the Florida and New York litigation, which, among other things, dismissed the lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in exchange for release by the parties to the lawsuits and certain parties to the September 2002 financing of their right to exercise the warrants issued in the September 2002 financing, we issued an aggregate of 947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $790,748 has been paid to date, and of which $257,143 shall be paid in four equal monthly installments until September 2003. 680,000 of the shares issued are subject to a 145-day lock-up agreement. (See "Legal Proceedings"). From December 2002 through June 2003, pursuant to securities purchase agreements with various purchasers, we authorized the issuance of and sold 22,025,000 shares of our common stock and warrants to purchase up to 13,215,000 shares of our common stock at $0.08 per share, for an aggregate purchase price of $1,762,000. In connection with the agreement, we paid finders' fees to Harbor View Group and AVIX, Inc consisting of (i) approximately $105,720 and (ii) warrants to purchase 1,168,375 shares of our common stock. All of the aforementioned warrants are exercisable at $0.12 per share commencing six months after the issuance date, for a period of five years. As of the date of this report, none of such warrants had been exercised. 46 On April 11, 2003 pursuant to a securities purchase agreement with James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000 shares of common stock and warrants to purchase 1,875,000 shares of common stock at an exercise price of $0.12 per share through April 2007, for an aggregate purchase price of $250,000. On April 28, 2003 pursuant to a securities purchase agreement with an investor, we sold 312,500 shares of common stock and warrants to purchase 187,500 shares of common stock at an exercise price of $0.12 per share through April 2007, for an aggregate purchase price of $25,000. In connection with the transaction, we paid a finders' fee consisting of warrants to purchase 15,625 shares of our common stock at an exercise price per share of $0.12 until April 2004. On April 28, 2003 we entered into a securities purchase agreement with Cornell Capital to sell up to $2,500,000 of our 5% convertible debentures, due April 28, 2008, of which $1,000,000 was purchased on April 28, 2003; $500,000 of convertible debentures will be purchased within 10 business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures; and $1,000,000 of convertible debentures will be purchased within 20 business days from the date the registration statement is declared effective by the SEC. Pursuant to the agreement, Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital, along with warrants to purchase an aggregate of 15,000,000 shares of our common stock at an exercise price of $0.091 commencing on October 28, 2003 through April 28, 2008. Pursuant to the terms of the agreement, commencing July 27, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at Cornell Capital's option in cash or common stock), in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period. Advanced Viral has redemption rights. If Advanced Viral exercises certain of these redemption rights, Advanced Viral may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell Capital will receive a warrant to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. In addition, in connection with the securities purchase agreement, we issued to Cornell Capital a warrant to purchase 15,000,000 shares of our common stock exercisable for 5 years at an exercise price of $0.091. The warrant is not exercisable prior to October 28, 2003. On April 28, 2003, we entered into an equity line of credit agreement with Cornell. The equity line agreement provides, generally, that Cornell has committed to purchase up to $50 million of our common stock over a three-year period, with the timing and amount of such purchases, if any, at our discretion, provided, however, that the maximum amount of each advance is $500,000, and the date of each advance shall be no less than six trading days after our notification to Cornell of its obligation to purchase shares. Any shares of common stock sold under the equity line will be priced at the lowest closing bid price of our common stock during the five consecutive trading days following our notification to Cornell requesting an advance under the equity line. In addition, at the time of each advance, we are obligated to pay Cornell a fee equal to five percent (5%) of the amount of each advance. However, Cornell's obligation to purchase and our obligation to sell our common stock is conditioned upon the per share purchase price being equal to or greater than a price we set on the advance notice date, the minimum acceptable price, which may not be set any closer than 7.5% percent below the closing bid price of the common stock the day prior to the date we notify Cornell of its obligation to purchase shares. In addition, there are certain other conditions applicable to our ability to draw down on the equity line including the filing and effectiveness of a registration statement registering the resale of all shares of common stock that may be issued to Cornell under the equity line and our adherence with certain covenants. There can be no assurance of the amount of proceeds we will receive, if any, under the equity line of credit with Cornell. In connection with this agreement, we issued 107,527 shares of our common stock to Katalyst LLC in consideration for its exclusive placement agent services. On July 18, 2003 we entered into an additional securities purchase agreement with Cornell Capital to sell up to $1,000,000 of our 5% secured convertible debentures, due July 17, 2008, which will be purchased within two business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures. 47 Pursuant to the agreement, Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital. The convertible debentures are secured by the assets of Advanced Viral until 50 days after the effectiveness of the registration statement of which this prospectus is a part. Pursuant to the terms of the agreement, commencing October 18, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at Cornell Capital's option in cash or common stock), in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period. Subject to certain exceptions, at our option, we may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell Capital will receive warrants to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. OUTSTANDING SECURITIES As of July 14, 2003, in addition to the 483,484,636 shares of our common stock currently outstanding, we have: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 58.7 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 43.7 million shares are currently exercisable; (iii) approximately 50.0 million shares of common stock underlying certain outstanding convertible debentures. The foregoing does not include shares issuable pursuant to the equity line of credit agreements. If all of the foregoing were fully issued, exercised and/or converted, as the case may be, we would receive proceeds of approximately $30.3 million, and we would have approximately 654.1 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 available to meet our anticipated expenditures. We are currently seeking additional financing. We anticipate that we can continue operations through July 2003 with our current liquid assets, if none of our outstanding options or warrants is exercised or additional securities sold. Any proceeds received from the exercise of outstanding options or warrants will contribute to working capital and increase our budget for research and development and clinical trials and testing, assuming Product R receives subsequent approvals 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 options or warrants. As such, recent trading levels may not be sustained nor may any additional options or warrants be exercised. If none of the outstanding options or warrants is exercised, and we obtain no other additional financing, in order for us to achieve the level of operations contemplated by management, management anticipates that we will have to materially limit operations. We anticipate that we will be required to sell additional securities to obtain the funds necessary to continue operations and 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 will never be able to sell Product R commercially. GOING CONCERN The independent certified public accountants' reports on our consolidated financial statements for the fiscal year ended December 31, 2002 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our ability to continue operations is dependent upon the continued sale of our securities and debt financing for funds to meet our cash requirements, which raise substantial doubt about our ability to continue as a going concern. Further, the accountants' report states that the financial statements do not include any adjustments that might result from the outcome of this uncertainty. 48 CRITICAL ACCOUNTING POLICIES 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. STOCK-BASED COMPENSATION Advanced Viral 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 Advanced Viral'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. Advanced Viral follows SFAS No. 123 in accounting for stock options issued to non-employees. RECENT ACCOUNTING PRONOUNCEMENTS On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS 123. The standard provides additional transition guidance for companies that elect to voluntarily adopt the accounting provisions of SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123 that permits entities to continue to apply the intrinsic value method of APB 25, Accounting for Stock Issued to Employees. As Advanced Viral continues to follow APB 25, its accounting for stock-based compensation will not change as a result of SFAS 148. SFAS 148 does require certain new disclosures in both annual and interim financial statements. The required annual disclosures are effective immediately and have been included in Advanced Viral's consolidated financial statements. The new interim disclosure provisions will be effective in the first quarter of 2003. In November 2002 the FASB issued FASB Interpretation No., or FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees that were issued before the date of FIN 45's initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. Advanced Viral is not a guarantor under any significant guarantees and thus this interpretation is not expected to have a significant effect on Advanced Viral's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Advanced Viral does not expect the adoption of this standard to have any impact on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 is effective for fiscal years beginning after May 15, 2002. Advanced Viral has not determined the impact that SFAS 145 will have, if any, on its financial statements. 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. Advanced Viral adopted SFAS 144 on January 1, 2002. 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 49 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 Advanced Viral 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. Advanced Viral adopted SFAS 142 on January 1, 2002 and there was no impact on the results of operations or financial position of Advanced Viral. 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 non-compensatory 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. Advanced Viral adopted FIN 44 in the third quarter of 2000 and there was no material impact on Advanced Viral's results of operations or financial position. 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, Advanced Viral 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. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS There have been no changes to, or disagreements with, our accountants, Rachlin Cohen & Holtz LLP, during the past two fiscal years. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Advanced Viral does not own any securities or instruments subject to market risk for which disclosure is required. MANAGEMENT DIRECTORS AND OFFICERS Our directors and executive officers, their respective ages, and their positions held with us are as follows:
NAME AGE POSITION - ---- --- -------- Shalom Z. Hirschman, M.D. 66 President, Chief Executive Officer, Chief Scientific Officer and Director Eli Wilner 47 Secretary and Chairman of the Board Alan V. Gallantar 45 Chief Financial Officer and Treasurer David Seligman 64 Director Nancy J. Van Sant 53 Director Roy S. Walzer 55 Director
The following is certain summary information with respect to the directors and executive officers of Advanced Viral. There are no family relationships between or among the directors, executive officers or any other person. None of Advanced Viral's directors or executive officers is a director of any company that files reports with the SEC. None of the Advanced Viral's directors have been involved in any bankruptcy or criminal proceeding (excluding traffic or other minor offenses), nor has been enjoined from engaging in any business. SHALOM Z. HIRSCHMAN, M.D., has been President, Chief Executive Officer and a director since October 1996, and was Chairman of the Board from December 2001 until May 2002. Dr. Hirschman was Director of the Division of Infectious 50 Diseases and Professor of Medicine at Mount Sinai School of Medicine, New York, New York, from May 1969 until October 1996. ELI WILNER, our Secretary and Chairman of the Board of Directors, has been a director since December 2001 and Chairman of the Board since May 2002. He 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. ALAN V. GALLANTAR has been Chief Financial Officer since October 1999 and Treasurer since December 2001. Mr. Gallantar was treasurer and controller from 1998 to 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. DAVID SELIGMAN, a 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, a New Jersey based law firm. 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 Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey State Bar Associations, and sits on the boards of Oxford Pharmaceutical Services, 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. NANCY J. VAN SANT, ESQ., a director since May 2002, has been a director of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley, Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977 through 1990, Ms. Van Sant was an attorney with the SEC serving as Regional Trial Counsel and Chief of the Branch of Investigations and Enforcement. ROY S. WALZER was appointed to the Board of Directors in June 2002. Since 1987, Mr. Walzer has been the President of the private investment firms Litchfield Partners, Ltd. and the Managing Partner of Litchfield Partners I since 1999, which firms invest in pharmaceuticals, biotech and technology companies. Prior to founding Litchfield Partners, Mr. Walzer served as Executive Vice President and General Counsel with Sealy Connecticut from 1976 to 1986. ELECTION OF DIRECTORS AND OFFICERS Directors are elected at each annual meeting of stockholders and hold office until the next succeeding annual meeting and the election and qualification of their respective successors. Officers are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. Advanced Viral's By-Laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of shareholders and the due election and qualification of his successor. MEETINGS OF THE BOARD OF DIRECTORS During our fiscal year ended December 31, 2002, our Board of Directors held 20 meetings. All members of the Board of Directors attended at least 75% of such meetings. Advanced Viral does not pay directors for their attendance at meetings, but may revisit this position in the future. RESIGNATIONS OF MEMBERS OF THE BOARD OF DIRECTORS Richard Kent, MD resigned as a member of our Board of Directors in February 2003. 51 COMMITTEES OF THE BOARD OF DIRECTORS Advanced Viral's Board of Directors has an Executive Management Committee, Audit Committee, Compensation Committee and an Investment Analysis Committee. The Board of Directors does not have a standing Nominating Committee. EXECUTIVE MANAGEMENT COMMITTEE. The Executive Management Committee has been delegated the authority to oversee the strategic management of Advanced Viral. Eli Wilner, David Seligman and Shalom Z. Hirschman serve as members of the Executive Management Committee. AUDIT COMMITTEE. The Audit Committee is responsible for nominating Advanced Viral's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit with Advanced Viral's independent accountants, and reviewing the financial statements, audit practices and internal controls of Advanced Viral. The current members of the Audit Committee are David Seligman (Chairman), Eli Wilner and Roy A. Walzer. During 2002, the Audit Committee held one meeting. COMPENSATION COMMITTEE. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of Advanced Viral to the Board of Directors. The current members of the Compensation Committee are Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer. INVESTMENT ANALYSIS COMMITTEE. The Investment Analysis Committee has been delegated the authority to analyze financing and investment alternatives for Advanced Viral. Roy A. Walzer serves as the sole member of this committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors currently consists of Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer. During the last fiscal year, no interlocking relationship existed between Advanced Viral's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company. AUDIT COMMITTEE REPORT The Audit Committee for the last fiscal year consisted of two nonemployee Directors. The Board of Directors has determined that none of the members of the Audit Committee has a relationship to Advanced Viral that may interfere with his independence from Advanced Viral and its management. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial reports and other financial information provided by Advanced Viral to any governmental body or the public, Advanced Viral's systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board of Directors have established, and Advanced Viral's auditing, accounting and financial processes generally. The Audit Committee annually recommends to the Board of Directors the appointment of a firm of independent auditors to audit the financial statements of Advanced Viral and meets with such personnel of Advanced Viral to review the scope and the results of the annual audit, the amount of audit fees, Advanced Viral's internal accounting controls, Advanced Viral's financial statements contained in Advanced Viral's Annual Report to Stockholders and other related matters. The Audit Committee has reviewed and discussed with management the financial statements for fiscal year 2002 audited by Rachlin Cohen, Advanced Viral's independent auditors. The Audit Committee has discussed with Rachlin Cohen various matters related to the financial statements, including those matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU Section 380). The Audit Committee has also received the written disclosures and the letter from Rachlin Cohen required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), and has discussed with the firm its independence. Based upon such review and discussions the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Advanced Viral's Annual Report on Form 10-K for the fiscal year ending December, 2002 for filing with the Securities and Exchange Commission. The report of the Audit Committee shall not be deemed incorporated by reference by any general statement incorporating by reference this prospectus or registration statement into any filing under the Securities Act of 1933 or under 52 the Securities Exchange Act of 1934, except to the extent that the filing specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. 53 EXECUTIVE COMPENSATION EXECUTIVE OFFICERS 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 us during the years indicated. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------------------- ------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4) - ------------------------------------------- ------ ---------- ---------- --------------- ------------ --------------- Shalom Z. Hirschman, MD, 2002 $ 361,000 $ 25,000 $ 26,800 $ 17,865 Chairman December 2001 to May 2002, 2001 $ 361,000 $ 25,000 $ 30,192 -- $ 21,270 President, Chief Executive Officer and 2000 $ 361,000 $ 0 $ 30,775 -- $ 4,540 Chief Scientific Officer since October 1996 and consultant from May 24, 1995 until October 1996 Alan V. Gallantar, 2002 $ 223,000 $ 22,500 $ 6,000 -- -- Chief Financial Officer since October 2001 $ 225,000 $ 25,000 $ 6,000 -- -- 1999; Treasurer since December 2001 2000 $ 200,000 $ 25,000 $ 21,000 -- -- William Bregman, 2002 n/a n/a n/a n/a n/a Secretary and director from 1985 until 2001 $ 70,000 -- -- -- $ 150,000(5) December 2001, treasurer from 1985 to 1999 2000 $ 60,000 -- -- -- $ 2,500(4) Bernard Friedland, 2002 n/a n/a n/a n/a n/a Chairman of Advanced Viral and 2001 $ 70,000 -- -- -- $ 150,000(5) President of subsidiary Advance Viral 2000 $ 60,000 -- -- -- $ 1,800(4) Research Ltd. from 1985 to December 2001
- --------------- (1) With respect to Dr. Hirschman, 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 $50,000 due has been accrued as of December 31, 2002. (2) 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. (3) Includes all options granted during fiscal years shown. No stock appreciation rights were granted with any options. (4) 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. (5) 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, 2002 held by the Named Executive Officers. No options were exercised during the year ended December 31, 2002 by the Named Executive Officers. 54 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END NAME ON EXERCISE(#) VALUE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - -------------------------- ---------------- ----------------- ---------------------------- ---------------------------- Shalom Z. Hirschman, M.D 0 N/A 39,100,000 / 0 $0 / $0 (2)(3) Alan V. Gallantar 0 N/A 4,547,880 / 0 $0 / $0 (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, 2002, $0.08, and the exercise or base price of in-the-money stock options. (3) As of December 31, 2002, 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, 2002, Mr. Gallantar held options to purchase 4,547,880 shares of common stock at $0.24255 per share, all of which 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 for one-year periods, unless either we or Dr. Hirschman gives the other notice at least two years in advance that such one year automatic extension shall be vitiated. In July 2002, we gave Dr. Hirschman notice that the agreement would not be extended after December 2004. 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 55 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 $50,000 of the $100,000 bonus described above has been paid to Dr. Hirschman, and $50,000 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 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). 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 elected, 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 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, 56 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)) Advanced Viral has adopted a 401(k) plan that allows eligible employees to contribute up to 20% of their salary, subject to annual limits, prescribed for in the Internal Revenue Code. We match 50% of the first 6% of the employee contributions with our common stock and may from time to time, at our discretion, make additional contributions based upon earnings. In May 2002 we funded our matching contribution of approximately $33,000 for the year ended December 31, 2001 by purchasing our common stock in open market transactions. At December 31, 2002 the Company accrued $40,675 to fund the 401k plan representing the Company's match for the plan year 2002. We intend to purchase our common stock in the open market at prevailing market prices to satisfy our 2002 matching contribution obligations. In March 2003, we amended the terms of the 401(k) plan to terminate our obligation to make matching contributions. COMPARATIVE STOCK PERFORMANCE SEC rules require that a line graph performance presentation be provided comparing cumulative total stockholder return with a performance indicator of a broad market index and a nationally recognized industry index. The graph and table set forth below compare the cumulative total stockholder return on Advanced Viral's Common Stock for 1997 through 2002 with the Dow Jones Pharmaceuticals Index and the Dow Jones Equity Market Index for the same period. The graph and table assume an investment of $100 in the Common Stock and each index on December 31, 1996 and the reinvestment of all dividends, if any. 5-YEAR CUMULATIVE TOTAL RETURN
12/97 12/98 12/99 12/00 12/01 12/02 ---------- ---------- ---------- ---------- ---------- ---------- Advanced Viral Research Corp. 100.00 109.61 98.70 168.83 137.66 41.56 Dow Jones Pharmaceuticals 100.00 124.90 153.28 139.07 122.50 95.45 Dow Jones Equity Market 100.00 148.67 133.94 185.78 155.22 123.59
57 (GRAPHIC OMITTED)(GRAPHIC OMITTED) 58 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the common shares of Advanced Viral owned as of July 14, 2003: (i) by each person who beneficially owns more than 5% of the common shares, (ii) by each of our directors, (iii) by each of our Named Executive Officers identified in the Summary Compensation Table above and (iv) by all directors and executive officers of Advanced Viral as a group. Except as otherwise indicated, each person listed below has sole voting and investment power with respect to such common shares.
PERCENTAGE NAME OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP(1) - ------------------------ ---------------- ---------------- Bernard Friedland(2, 3) 28,541,730 5.9% William Bregman(2, 4) 38,146,988 7.9% Shalom Z. Hirschman, MD(5) 39,100,000 7.5% Eli Wilner(7) 4,500,000 * Alan V. Gallantar(6) 4,547,880 * David Seligman(8) 1,887,500 * Nancy J. Van Sant(8) 937,500 * Roy Walzer(8) 1,041,300 * ---------------- ---------------- All directors and executive officers as a group (6 persons) 52,014,180 9.7% ================ ================
--------------- * Represents less than 1%. (1) Based on 483,484,636 shares of common stock outstanding on July 14, 2003, but excluding: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at an exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 58.7 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 43.7 million shares are currently exercisable; (iii) approximately 50.0 million shares of common stock underlying certain outstanding convertible debentures; and (iv) up to 95,712,595 shares of common stock to be issued under the Equity Line of Credit. Shares beneficially owned include shares that may be acquired pursuant to the exercise of outstanding stock options that are exercisable within 60 days of July 14, 2003. (2) Pursuant to their severance agreements with Advanced Viral, each of Messrs. Bregman and Friedland have granted to Advanced Viral, 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. (3) Includes 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. (4) Includes 21,758,614 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. (5) Represents 39,100,000 shares that may be acquired pursuant to currently exercisable options to purchase common stock. Dr. Hirschman is the President, CEO and a Director of Advanced Viral Research Corp. (6) Represents shares that may be acquired pursuant to currently exercisable stock options. Mr. Gallantar is the CFO and Treasurer of Advanced Viral Research Corp. (7) Includes (i) 750,000 shares issuable pursuant to currently exercisable outstanding warrants; (ii) 2,087,500 shares that may be acquired pursuant to currently exercisable stock options; (iii) 362,500 shares beneficially owned by his wife Barbara Ann Brennan; and (iv) 50,000 shares beneficially owned by his step-daughter Celia Conaway. Mr. Wilner is the Secretary and Chairman of the Board of Directors of Advanced Viral Research Corp. (8) Represents shares that may be acquired pursuant to currently exercisable stock options. The persons listed are Directors of Advanced Viral Research Corp. 59 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 an employment agreement with our chief executive officer, 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 November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley, Hartman, Terzo & Waldman, P.A., a law firm of which Ms. Van Sant is a partner, to provide legal services in connection with certain legal proceedings. For the fiscal year ended December 2002 we were billed and paid approximately $69,000 to date. From January through July 14, 2003, we were billed approximately $244,000 and have paid approximately $109,000 to date In April 2003, Advanced Viral entered into a six-month consulting agreement with Robert Nowinski, Ph.D. Pursuant to the agreement, Mr. Nowinski is a consultant to the Board of Directors and as such his consulting assignments are prescribed by the Board. To date, Mr. Nowinski has advised Advanced Viral in the areas of fund raising, strategic partnerships and operations. Pursuant to the consulting agreement, Mr. Nowinski is entitled to receive approximately $22,500 monthly, which amount was increased in July 2003 from $15,700. In addition, Mr. Nowinski is entitled to receive 5% in cash and 5% in warrants of any net proceeds received by Advanced Viral from the sale by Advanced Viral of Advanced Viral's securities during the period of time Mr. Nowinski is a consultant to the Company. Article 9 of our Certificate of Incorporation contains the following provision with respect to indemnification of directors and officers: "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." 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 Delaware General Corporation Law ("DGCL"). Our Certificate of Incorporation was amended on December 30, 1987, to limit or eliminate director liability by incorporating new Article 11, 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. Pursuant to the foregoing, we currently maintain directors and officers insurance coverage. We may be required to indemnify certain officers and directors against liabilities that arise by reason of their status or service as officers or directors. In certain circumstances, we may be required to advance the expenses an officer or director incurs in legal proceedings. We believe that the provisions in our Certificate of Incorporation are necessary to attract and retain qualified persons as directors and officers. 61 We believe that all of the above transactions were conducted at "arm's length", representing what we believe to be fair market value for those services. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires Advanced Viral's officers and directors, and persons who own more than ten percent of a registered class of Advanced Viral's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish Advanced Viral with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to Advanced Viral, Advanced Viral believes that during 2002 there was no delinquency in the Section 16(a) filing obligations of Advanced Viral's officers, directors and ten percent beneficial owners. DESCRIPTION OF SECURITIES Our Certificate of Incorporation authorizes us to issue 1,000,000,000 shares of common stock, par value $0.00001 per share. As of July 14, 2003, there were outstanding 483,484,636 shares of common stock, all of which are fully paid for and non-assessable. OUTSTANDING SECURITIES As of July 14, 2003, in addition to the 483,484,636 shares of our common stock currently outstanding, we have: (i) outstanding stock options to purchase an aggregate of approximately 61.9 million shares of common stock at exercise prices ranging from $0.08 to $0.36, of which approximately 56.3 million are currently exercisable; (ii) outstanding warrants to purchase an aggregate of approximately 58.7 million shares of common stock at prices ranging from $0.091 to $1.00, of which warrants to purchase 43.7 million shares are currently exercisable; (iii) approximately 50.0 million shares of common stock underlying certain outstanding convertible debentures. The foregoing does not include shares issuable pursuant to the 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 $30.3 million, and we would have approximately 654.1 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. TRANSFER AGENT The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, located in Brooklyn, New York. The transfer agent's phone number is 718-921-8120. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Delaware General Corporation Law ("DGCL"), we have included in Article 9 of our Certificate of Incorporation the following with respect to indemnification of directors and officers: "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." 62 Delaware law also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the corporation has the power to indemnify him against that liability under Section 145 of the DGCL. Our Certificate of Incorporation was amended on December 30, 1987, to limit or eliminate director liability by incorporating new Article 11, 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 DGCL, or (iv) for any transaction from which the director derived an improper personal benefit." Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers or controlling persons of Advanced Viral pursuant to the foregoing provisions, or otherwise, Advanced Viral 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. HOW TO GET MORE INFORMATION We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission. You may read and copy any document we file at the SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the operation of the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov where certain information regarding issuers, including Advanced Viral, may be found. Our Web site is http://www.neom.com. This prospectus is part of a registration statement that we filed with the SEC. The registration statement contains more information than this prospectus regarding Advanced Viral and its common stock, including certain exhibits and schedules. You can get a copy of the registration statement from the SEC at the address listed above or from its Internet site, www.sec.gov. 63 ADVANCED VIRAL RESEARCH CORP. INDEX TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 30, 2002, 2001, AND 2000
Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Years Ended 2002, 2001 and 2000 Balance Sheets, December 31, 2002 and 2001 F-3 Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 and from Inception (February 20, 1984) to December 31, 2002 F-4 Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 2002 F-5 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 and from Inception (February 20, 1984) to December 31, 2002 F-16 Notes to Consolidated Financial Statements F-17
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
Consolidated Financial Statements Three Months Ended March 31, 2003 Balance Sheets, March 31, 2003 and December 31, 2002 F-44 Statements of Operations for the Three Months Ended March 31, 2003 and 2002 and from Inception (February 20, 1984) to March 31, 2003 F-45 Statements of Stockholders' Equity from Inception (February 20, 1984) to March 31, 2003 F-46 Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 and from Inception (February 20, 1984) to March 31, 2003 F-58 Notes to Consolidated Financial Statements F-59
F-1 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, 2002 and 2001, 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, 2002 and for the period from inception (February 20, 1984) to December 31, 2002. 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, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002 and for the period from inception (February 20, 1984) to December 31, 2002 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered accumulated losses from operations since its inception and its cash position may be inadequate to fund the full range of testing required by the FDA in order to approve Product R for sale. These issues raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. RACHLIN COHEN & HOLTZ LLP Miami, Florida February 21, 2003 F-2 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
2002 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 1,475,755 $ 1,499,809 Prepaid insurance 86,368 51,702 Assets held for sale 172,601 188,999 Other current assets 35,527 11,460 ------------ ------------ Total current assets 1,770,251 1,751,970 Property and Equipment, Net 2,244,118 2,818,045 Other Assets 931,660 878,776 ------------ ------------ Total assets $ 4,946,029 $ 5,448,791 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 417,061 $ 1,620,150 Accrued liabilities 137,646 223,556 Current portion of capital lease obligation 104,719 64,197 Current portion of note payable 25,165 24,246 ------------ ------------ Total current liabilities 684,591 1,932,149 ------------ ------------ Long-Term Debt: Convertible debenture, net 1,658,231 -- Capital lease obligation 5,834 42,370 Note payable 4,879 32,198 ------------ ------------ Total long-term debt 1,668,944 74,568 ------------ ------------ Common Stock Subscribed but not Issued 883,900 -- ------------ ------------ Commitments, Contingencies and Subsequent Events -- -- ------------ ------------ Stockholders' Equity: Common stock; 1,000,000,000 shares of $.00001 par value authorized, 455,523,990 and 403,296,863 shares issued and outstanding 4,555 4,033 Additional paid-in capital 57,530,605 47,666,141 Deficit accumulated during the development stage (51,137,805) (40,795,470) Discount on warrants (4,688,761) (3,432,630) ------------ ------------ Total stockholders' equity 1,708,594 3,442,074 ------------ ------------ Total liabilities and stockholders' equity $ 4,946,029 $ 5,448,791 ============ ============
See notes to consolidated financial statements. F-3 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS
INCEPTION (FEBRUARY 20, YEAR ENDED DECEMBER 31, 1984) TO ----------------------------------------------------------- DECEMBER 31, 2002 2001 2000 2002 ------------- ------------- ------------- ------------ Revenues $ -- $ 17,601 $ 8,363 $ 231,892 ------------- ------------- ------------- ------------ Costs and Expenses: Research and development 4,439,592 5,150,869 3,192,551 18,315,416 General and administrative 2,654,296 4,063,022 2,413,601 17,594,477 Compensation and other expense for options and warrants 755,397 691,404 1,901,927 3,558,872 Depreciation 977,746 511,216 346,227 2,167,189 ------------- ------------- ------------- ------------ 8,827,031 10,416,511 7,854,306 41,635,954 ------------- ------------- ------------- ------------ Loss from Operations (8,827,031) (10,398,910) (7,845,943) (41,404,062) ------------- ------------- ------------- ------------ Other Income (Expense): Interest income 27,659 113,812 161,832 901,435 Other income -- -- -- 120,093 Interest expense (1,341,809) (868,856) (1,446,692) (8,875,578) Severance expense - former directors -- (302,500) -- (302,500) ------------- ------------- ------------- ------------ (1,314,150) (1,057,544) (1,284,860) (8,156,550) ------------- ------------- ------------- ------------ Loss from Continuing Operations (10,141,181) (11,456,454) (9,130,803) (49,560,612) Loss from Discontinued Operations (201,154) (259,114) (223,861) (1,577,193) ------------- ------------- ------------- ------------ Net Loss $ (10,342,335) $ (11,715,568) $ (9,354,664) $(51,137,805) ============= ============= ============= ============ Net Loss Per Common Share Basic and Diluted: Continuing operations $ (0.02) $ (0.03) $ (0.03) Discontinued operations (0.00) (0.00) (0.00) ------------- ------------- ------------- Net loss $ (0.02) $ (0.03) $ (0.03) ============= ============= ============= Weighted Average Number of Common Shares Outstanding 439,009,322 389,435,324 362,549,690 ============= ============= =============
See notes to consolidated financial statements. F-4 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-5 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-6 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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 0.06 500,000 5 27,495 -- Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 -- Issuance of common stock, for testing 0.04 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-7 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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 0 236,276,991 $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-8 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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 267,031,058 159 2,529,988 (19,000) 3,321,135 (473,159) ----------- ------ ---------- -------- ----------- ---------
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, 2002
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 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 -- -- 413,793 -- -- -- Beneficial conversion feature, October debenture -- -- 1,350,000 -- -- -- Warrant costs, February debenture -- -- 37,242 -- -- -- Warrant costs, October debenture -- -- 291,555 -- -- -- Amortization of deferred compensation cost -- -- -- -- -- 399,322 Imputed interest on convertible debenture -- -- 4,768 -- -- -- Net loss, year ended December 31, 1997 -- -- -- -- (4,141,729) -- ----------- ------ ----------- -------- ----------- --------- Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837) ----------- ------ ----------- -------- ----------- ---------
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, 2002
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-11 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-12 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-13 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-14 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
COMMON STOCK ----------------------------------- DEFICIT ACCUMULATED AMOUNT ADDITIONAL DURING THE DISCOUNT PER PAID-IN DEVELOPMENT ON SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS ---------- ----------- ------ ------------ ------------ ----------- Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630) Sale of common stock, for cash $0.1109 17,486,491 175 1,938,813 Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- -- Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 Issuance of common stock, conversion of debt 0.1100 909,091 9 99,991 -- -- Issuance of common stock, conversion of debt 0.1539 1,299,545 13 199,987 -- -- Warrant costs, termination agreement -- -- 190,757 -- -- Warrant costs, issued with sale of common stock, for cash -- -- 2,358,033 -- (2,358,033) Expenses of stock issuance -- -- (50,160) -- -- Warrants granted for consulting services -- -- 386,677 -- -- Credit arising from modification of option terms -- -- 177,963 -- -- Amortization of warrant costs, securities purchase agreements -- -- -- -- 1,101,902 Beneficial conversion feature, May debenture -- -- 55,413 -- -- Beneficial conversion feature, July debentures -- -- 166,515 -- -- Net loss, year ended December 31, 2002 -- -- -- (10,342,335) -- ----------- ------ ------------ ------------ ----------- Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761) =========== ====== ============ ============ ===========
See notes to consolidated financial statements. F-15 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION (FEBRUARY 20, YEAR ENDED DECEMBER 31, 1984) TO ------------------------------------------- DECEMBER 31, 2002 2001 2000 2002 ------------ ------------ ------------ ------------ Cash Flows from Operating Activities: Net loss $(10,342,335) $(11,715,568) $ (9,354,664) $(51,137,805) ------------ ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 997,874 532,264 362,392 2,438,663 Amortization of debt issuance costs 34,078 15,344 106,030 828,637 Amortization of deferred interest cost on beneficial conversion feature of convertible debenture 136,734 -- 386,909 3,955,397 Amortization of discount on warrants 1,101,902 985,705 611,134 3,137,300 Amortization of discount on warrants - consulting services -- -- 230,249 230,249 Amortization of deferred compensation cost -- -- -- 760,500 Issuance of common stock for debenture interest 43,425 -- 76,212 119,637 Issuance of common stock for services -- 35,000 46,500 1,586,000 Compensation expense for options and warrants 755,397 691,404 1,901,927 3,558,872 Changes in operating assets and liabilities: Increase in other current assets (52,155) (28,358) (5,063) (145,311) Decrease in inventory -- 19,729 -- -- Increase in other assets (86,962) (53,232) (278,037) (1,635,189) Increase (decrease) in accounts payable and accrued liabilities (1,288,999) 940,745 174,089 560,907 ------------ ------------ ------------ ------------ Total adjustments 1,641,294 3,138,601 3,612,342 15,395,662 ------------ ------------ ------------ ------------ Net cash used by operating activities (8,701,041) (8,576,967) (5,742,322) (35,742,143) ------------ ------------ ------------ ------------ Cash Flows from Investing Activities: Purchase of investments -- -- -- (6,292,979) Proceeds from sale of investments -- -- -- 6,292,979 Acquisition of property and equipment (267,715) (1,588,648) (917,471) (4,323,384) ------------ ------------ ------------ ------------ Net cash used by investing activities (267,715) (1,588,648) (917,471) (4,323,384) ------------ ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from issuance of convertible debt 2,000,000 -- 1,000,000 11,500,000 Proceeds from sale of securities, net of issuance costs 6,229,628 5,783,000 10,835,970 29,529,686 Proceeds from common stock subscribed but not issued 883,900 -- -- 883,900 Payments under capital lease (142,426) (58,690) (50,324) (310,028) Payments on note payable (26,400) (21,519) (19,096) (81,276) Recovery of subscription receivable written off -- -- 19,000 19,000 ------------ ------------ ------------ ------------ Net cash provided by financing activities 8,944,702 5,702,791 11,785,550 41,541,282 ------------ ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (24,054) (4,462,824) 5,125,757 1,475,755 Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 836,876 -- ------------ ------------ ------------ ------------ Cash and Cash Equivalents, Ending $ 1,475,755 $ 1,499,809 $ 5,962,633 1,475,755 ============ ============ ============ ============ Supplemental Disclosure of Non-Cash Financing Activities: Cash paid during the year for interest $ 25,669 $ 20,556 $ 36,681 ============ ============ ============ Supplemental Schedule of Non-Cash Investing and Financing Activities: A capital lease obligation of approximately $140,000 was incurred during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements. F-16 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 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." 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. LTD is presented in the financial statements under "Discontinued Operations" (See Notes 5 and 15). 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. F-17 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred by the Company. IMPAIRMENT OF LONG-LIVED ASSETS The Company regularly evaluates its long-lived assets for indicators of possible impairment, whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. 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 7). 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, 2002 and 2001. 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, 2002 and 2001 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. F-18 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. There were no sales for the year ended December 31, 2002. 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. F-19 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) RECLASSIFICATIONS Certain amounts in the financial statements have been reclassified to conform to 2002 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002 the FASB issued FASB Interpretation No., or FIN 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees that were issued before the date of FIN 45's initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. The Company is not a guarantor under any significant guarantees and thus this interpretation is not expected to have a significant effect on the Company's financial position or results of operations. On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS 123. The standard provides additional transition guidance for companies that elect to voluntarily adopt the accounting provisions of SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 does not change the provisions of SFAS 123 that permits entities to continue to apply the intrinsic value method of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As the Company continues to follow APB 25, its accounting for stock-based compensation will not change as a result of SFAS 148. SFAS 148 does require certain new disclosures in both annual and interim financial statements. The required annual disclosures are effective immediately and have been included in Note 10 of the Company's consolidated financial statements. The new interim disclosure provisions will be effective in the first quarter of 2003. In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of this standard to have any impact on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company has not determined the impact that SFAS 145 will have, if any, on its financial statements. F-20 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 (Continued) 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 adopted SFAS 144 on January 1, 2002 (see Notes 5 and 15). 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 adopted SFAS 142 on January 1, 2002 and there was no impact on the results of operations or financial position of the Company. 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 non-compensatory 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. 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. F-21 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. GOING CONCERN As indicated in the accompanying financial statements, the Company has suffered accumulated net losses of $51,137,805 since inception and 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 operations and 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. The foregoing issues raise substantial doubt about the Company's ability to continue as a going concern. 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. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL LIVES (YEARS) 2002 2001 ------------------------------ ---- ---- Land and improvements 15 $ 34,550 $ 34,550 Building and improvements 30 1,410,165 1,233,524 Machinery and equipment 5 3,394,431 3,170,759 ---------- ---------- 4,839,146 4,438,833 Less accumulated depreciation 2,433,185 1,438,250 ---------- ---------- 2,405,961 3,000,583 Less property and equipment included in assets held for sale, net (Note 5) 161,843 182,538 ---------- ---------- $2,244,118 $2,818,045 ========== ==========
The Company maintains certain property and equipment in Freeport, Bahamas. This property and equipment amounted to $429,782 as of December 31, 2002 and $433,119 as of December 31, 2001. Included with machinery and equipment is equipment purchased under capital leases of $135,537 during 2002. Depreciation expense for equipment under the capital leases was approximately $27,488, $10,368 and $7,729 in 2002, 2001 and 2000, respectively. These amounts are included above. F-22 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. OTHER ASSETS
2002 2001 -------- -------- Patent development costs $897,385 $765,388 Loan costs, net of accumulated amortization of $828,637 and $794,559 34,275 68,353 Other 6,461 51,496 -------- -------- 938,121 885,237 Less other assets included in assets held for sale, net (Note 5) 6,461 6,461 -------- -------- $931,660 $878,776 ======== ========
NOTE 5. ASSETS HELD FOR SALE During 2002, the Board of Directors approved a plan to sell Advance Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. The Company decided to sell LTD due to the fact that the Company has completed construction of the facility in Yonkers, New York, which facility is capable to provide all functions previously provided by the Freeport, Bahamas plant. As required under SFAS 144, the net book values of the assets (LTD had no liabilities as of December 31, 2002 other than an inter-company payable that has been eliminated) have been reflected on the balance sheet as held for sale and the operations have been included in discontinued operations for the years ended December 31, 2002, 2001 and 2000 (see Note 15). Although no formal contract has been executed, management believes that the estimated selling price less estimated cost to sell exceeds the net book value of LTD and therefore there is no impairment loss charged to discontinued operations. NOTE 6. ACCRUED LIABILITIES Accrued bonus $ 50,000 $100,000 Accrued 401k contribution 40,675 32,717 Accrued payroll 35,157 81,181 Other 11,814 9,658 -------- -------- $137,646 $223,556 ======== ========
F-23 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, including interest at 12% per annum, with a final installment in February 2004. The aggregate maturities of the installment purchase agreement are as follows:
Year ending December 31: 2003 $25,165 2004 4,879 -------- 30,044 Less current portion 25,165 -------- Note payable - long-term portion $ 4,879 =======
NOTE 8. SECURITIES PURCHASE AGREEMENTS CONVERTIBLE DEBENTURES AND WARRANTS The Company issued warrants to purchase common stock in connection with the issuance of several convertible debentures sold during the years 1997 to 2000, which debentures have all been fully converted. As of December 31, 2002, warrants to purchase approximately 3.2 million shares of the Company's common stock relating to these fully converted debentures were outstanding with expiration dates through 2009 at exercise prices ranging from $.199 to $.864. During the second and third quarters of 2002, the Company issued to certain investors an aggregate of $2,000,000 principal amount of its 5% convertible debentures at par in several private placements. Under the terms of each 5% convertible debenture, 20% of the original issue is convertible on the original date of issue at a price equal to the closing bid price quoted on the OTC Bulletin Board on the trading day immediately preceding the original issue date (except for the Rushing/Simoni issuance detailed below which had an initial conversion price of $0.11 per share). Thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the average closing bid price for the five trading days prior to the conversion date (the "Market Price"); or (ii) ten cents ($0.10) which amount is subject to certain adjustments. The convertible debentures, including interest accrued thereon, are payable by Advanced Viral in shares of common stock and mature two years from the date of issuance. The shares issued upon conversion of the debentures cannot be sold or transferred for a period of one year from the applicable vesting date of the convertible portion of the debentures. The Company issued its 5% convertible debentures as follows: F-24 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued) CONVERTIBLE DEBENTURES AND WARRANTS (Continued) o On May 30, 2002, the Company sold to O. Frank Rushing and Justine Simoni, as joint tenants, $500,000 principal amount of its 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $55,000, which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $36,000 has been amortized to interest expense at December 31, 2002. On June 3, 2002, these investors converted the first 20% ($100,000) into 909,091 shares of common stock at a conversion price of $0.11 per share. In January 2003, the holder converted the second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares of common stock at a conversion price of $.10 per share. o On July 3, 2002, the Company sold to James F. Dicke II, who was then a member of its Board of Directors, $1,000,000 principal amount of its 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $111,000 which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $68,000 has been amortized to interest expense at December 31, 2002. On July 3, 2002, Mr. Dicke converted the first 20% of the debenture ($200,000) for 1,299,545 shares of common stock at a conversion price of $0.1539 per share. . In January 2003, the holder converted the second 20% ($200,000 plus interest of $5,041) of the debenture into 2,050,411 shares of common stock at a conversion price of $.10 per share. o On July 15, 2002, the Company sold to Peter Lunder $500,000 principal amount of the Company's 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $55,000, which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $32,000 has been amortized to interest expense at December 31, 2002. In January 2003, the holder converted 40% ($200,000 plus interest of $4,822) of the debenture into 1,587,797 shares of common stock, the first 20% of which was converted at a conversion price of $.1818 per share, and the second 20% of which was converted at a conversion price of $.10 per share. F-25 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued) STOCK PURCHASE AGREEMENTS Pursuant to certain securities purchase agreements, the Company issued warrants to purchase common stock in connection with the sale of approximately 61,500,000 shares of common stock during the years 1998 to 2001 for cash consideration of approximately $16,900,000. As of December 31, 2002, warrants to purchase approximately 16.5 million shares of the Company's common stock relating to these securities purchase agreements were outstanding with expiration dates through 2006. During the quarter ended March 31, 2002, under several stock purchase agreements, the Company sold an aggregate of 9,999,999 shares of its common stock at $0.15 per share, for cash consideration of $1,500,000. On April 12, 2002, pursuant to stock purchase agreements with various institutional investors, the Company issued 17,486,491 shares of its common stock at a market price of $0.11089 per share and received net proceeds of approximately $1,939,000. On September 10, 2002, the Company issued and sold an aggregate of 21,500,000 shares of its common stock pursuant to a securities purchase agreement with certain institutional investors for total proceeds of approximately $3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000 shares of the Company's common stock at an exercise price of $0.25 per share, subject to adjustment, as described below. In addition, pursuant to a placement agent agreement with H. C. Wainwright & Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500 cash and issued to HCW 1,032,000 shares of its common stock. An adjustment provision in the warrants provides that 60 trading days following the original issue date of the warrants (the "First Determination Date"), a certain number of warrants shall become exercisable at $0.001. The number of shares for which the warrants are exercisable at $0.001 per share is equal to the positive difference, if any, between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of the Company's common stock for the 60 trading days preceding the First Determination Date and (ii) 21,500,000. Upon 120 trading days following the original issue date of the warrants (the "Second Determination Date"), a certain number of remaining warrants shall become exercisable at $0.001. The number of shares for which the Warrants are exercisable at $.001 per share is equal to the positive difference, if any, between (i) $3,010,000 divided by the VWAP of the Company's common stock for the 60 trading days preceding the Second Determination Date and (ii) 21,500,000. No adjustment will be made in the event that the VWAP for the 60 trading day period preceding the applicable determination date is $0.14 or greater (see Note 12). On December 16, 2002, the Company entered into securities purchase agreements with various investors, pursuant to which the Company sold an aggregate of 10,450,000 shares of its common stock for total proceeds of approximately $836,000, or $0.08 per share. The shares of common stock were issued by the Company on January 2, 2003 along with warrants issued in December 2002 to purchase 6,270,000 shares of common stock at an exercise price of $0.12 per share until December 2007. In connection with these agreements, finders fees of approximately $50,000 were paid in December 2002 and 627,000 warrants were issued during January 2003. The fair F-26 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued) STOCK PURCHASE AGREEMENTS (Continued) value of all warrants issued under this agreement was estimated to be $368,000 (price per warrant ranging from $0.0485 to $0.0598 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. This amount is being amortized to interest expense in the accompanying consolidated financial statements. On December 23, 2002 the Company received an additional $40,000 from various investors representing 500,000 shares of common stock or $0.08 per share. These shares of common stock were issued during January 2003 along with warrants dated January 2003 to purchase 300,000 shares of common stock at an exercise price of $0.12 per share until January 2008. The fair value of all warrants issued under this agreement was estimated to be $16,000 (price per warrant $0.0528 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. This amount is being amortized to interest expense in the accompanying consolidated financial statements. In connection with this transaction the Company paid a finders fee of $2,400 during January 2003 and issued warrants to purchase 30,000 shares of common stock with an exercise price of $.12 for a period of five years. 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 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. F-27 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued) SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS During January 2003, pursuant to a Stock Purchase Agreement with various investors, the Company issued 1,550,000 shares of common stock at a negotiated price of $0.08 per share, for a total purchase price of $124,000 along with warrants to purchase 930,000 shares of common stock at an exercise price of $0.12 per share until January 2008. In connection with this transaction the Company paid a finders fee of $7,440 during January 2003 and issued warrants to purchase 93,000 shares of common stock with an exercise price of $.12 for a period of five years. During March 2003, pursuant to a Stock Purchase Agreement with various investors, the Company issued 1,250,000 shares of common stock at a negotiated price of $0.08 per share, for a total purchase price of $100,000 along with warrants to purchase 750,000 shares of common stock at an exercise price of $0.12 per share through March 2008. In connection with this transaction the Company paid a finders fee of $6,000 during March 2003 and issued warrants to purchase 75,000 shares of common stock with an exercise price of $.12 for a period of five years. NOTE 9. COMMON STOCK SUBSCRIBED BUT NOT ISSUED Represents cash received during December 2002 pursuant to several private placements of securities with various investors ($876,000) for 10,950,000 shares of common stock at a negotiated price of $0.08 per share. These shares of common stock were issued during January 2003. In addition, 100,000 shares of common stock were issued during January 2003 pursuant to an employment agreement. The value of these shares on the date of issue was $7,900, which was recorded as compensation expense. NOTE 10. 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. During November 2002, the Company secured $3,000,000 of product liability coverage at a cost of approximately $24,000 per annum. In addition, during October 2002, the Company secured $3,000,000 in liability coverage for each of the three clinical trials in Israel at a cost of approximately $16,000. There can be no assurance that the F-28 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) GENERAL (Continued) PRODUCT LIABILITY Company will be able to secure additional insurance in adequate amounts or at reasonable premiums if it determined to do so. Should the Company be unable to secure additional 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 10 issued U.S. patents, two issued Australian patents and one granted China patent for the use of Product R. The Company currently has 10 patent applications pending with the U.S. Patent Office and 15 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. 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. On April 12, 2002, the Company successfully completed Phase 1 trials. Phase 2 trials are pivotal clinical investigations designed to establish the efficacy and safety of Product R. Currently, the Company does not have sufficient funds available to pursue the Phase 2 clinical trials of Product R as a topical treatment for genital warts caused by HPV infection. F-29 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) STATUS OF ISRAEL CLINICAL TRIALS In June 2002 the Israeli Ministry of Health approved the testing of Product R in the following clinical trials using injectable Product R, which began during November 2002: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. The Company believes that Product R may have three major beneficial effects in patients with AIDS: o First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS: o Second, the mitigation of the toxicity of drugs included in HAART regimens for the treatment of AIDS: o Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS: The Company believe that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. The Company's objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, the Company anticipate that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. 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. As of December 31, 2002, the Company paid $242,000 for such research. In September 2002, the Company entered into a contract with EnviroGene LLC, an affiliate of the Selikoff Center, to conduct, evaluate and maintain the scientific quality for the 3 clinical studies listed above. Under the terms of this agreement, EnviroGene will (1) finalize all Israeli government and hospital approval documents, (2) complete and organize the 3 clinical trials including establishing a network of scientists to perform said study/trial and initiate recruitment F-30 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) STATUS OF ISRAEL CLINICAL TRIALS (Continued) of patients and (3) perform the studies/trials and evaluate the results. Total costs incurred by EnviroGene LLC in connection with these clinical trials are expected to be $1,551,000, of which $625,000 has been paid through December 31, 2002. In the fourth quarter of 2002, the Company entered into various agreements supporting the clinical trials in Israel aggregating approximately $1,000,000 to be paid over a twelve-month period. These services include the monitoring and auditing of the clinical sites, hospital support and laboratory testing. In March 2003, the Company commenced discussions and began to draft protocols to expand the ongoing Israeli clinical trials of Product R for the treatment of AIDS patients (who have failed HAART and remain on HAART therapy) into late Phase II blinded, controlled clinical trials. On July 8, 2002, the Company extended an 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. Under its provisions the study period is extended for another twelve months to July 7, 2003. Total costs incurred in connection with this research are expected to be $138,000, of which payments of $40,000 were made in July 2002 and November 2002. CONSULTING AND EMPLOYMENT AGREEMENTS HIRSCHMAN AGREEMENT In May 1995, the Company entered into a consulting agreement with Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of Medicine, New York, New York and Director of Mt. Sinai's Division of Infectious Diseases, whereby Dr. Hirschman was to provide consulting services to the Company through May 1997. The consulting services included the development and location of pharmacological and biotechnology companies and assisting the Company in seeking joint ventures with and financing of companies in such industries. In connection with the consulting agreement, the Company issued to Dr. Hirschman 1,000,000 shares of the Company's common stock and the option to acquire 5,000,000 shares of the Company's common stock for a period of three years as per the vesting schedule as referred to in the agreement, at a purchase price of $0.18 per share. As of September 30, 2002, 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; (ii) options to F-31 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) HIRSCHMAN AGREEMENT (Continued) 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; 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. 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. Dr. Hirschman assigned to third parties unaffiliated with the Company options to acquire an aggregate of three million shares of the Company's common stock, all of which assigned options have expired and are no longer exercisable. 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 for options and warrants during the year ended December 31, 2001. Effective June 30, 2002, the remaining unexercised $0.27 and $0.36 options were extended to December 31, 2002. As a result of this modification of the option terms, the fair value of the options was estimated to be $3,895 based on a financial analysis of the terms of the options using the Black-Scholes pricing model with the following assumptions: expected volatility of 117%; risk free interest rate of 1.7%. This amount has been charged to compensation expense for options and warrants during the quarter ended June 30, 2002. 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, provided, however, the Agreement is extended automatically by one year, each year, unless notice of termination has been given by either Dr. Hirschman or the Company. In July 2002, the Company notified Dr. Hirschman that the Agreement will not be extended subsequent to December 31, 2004. 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 the Company 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 with an additional $25,000 paid through September 30, 2002. F-32 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) HIRSCHMAN AGREEMENT (Continued) 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 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). OTHER EMPLOYEES In connection with the employment of its Chief Financial Officer, the Company granted Alan 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 commencing October 1, 1999 through September 30, 2009 and have an exercise price of $0.24255 per share. These options are fully vested. 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 has recognized the $376,126 fair value of the options as compensation costs on a pro-forma basis over a three year service period. 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 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). F-33 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) OTHER EMPLOYEES (Continued) In May 2002, the Company granted to certain of its employees options to purchase 274,000 shares of the Company's common stock. Such options have an exercise price of $0.17 per share, vest in 20% increments over a five-year period commencing January 2003 through January 2012. The fair value of the these options was estimated to be $43,922 ($0.1603 per option share) and based upon a financial analysis of the terms of the options using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 117%; a risk free interest rate of 4.38%; an expected life of approximately 10 years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over approximately 10 years (the term of the options). OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS MEMBERS OF ADVISORY BOARDS In May 2002, the Company granted to members of its of the Scientific Advisory Board and Business Advisory Board options to purchase an aggregate of 2,250,000 shares of common stock at an exercise price of $0.12 per share, which options are exercisable 25% immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002 through May 5, 2010. The fair value of the options was estimated to be $246,822 ($0.1097 per option) based upon a financial analysis of the terms of the warrants using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 115%; a risk free) interest rate of 4.88% and an expected holding period of eight years. This amount was charged to compensation expense for options and warrants during the year ended December 31, 2002. The Business Advisory Board was dissolved during December 2002. In September 2002, the Company granted to Sidney Pestka, M.D., a member of the Scientific Advisory Board, options to purchase 250,000 shares of common stock at an exercise price of $0.14 per share, which options are exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18, 2003 and 25% on June 18, 2003 through September 17, 2010. The fair value of the options was estimated to be $30,462 ($0.1218 per option) based upon a financial analysis of the terms of the warrants using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 127%; a risk free interest rate of 4.38% and an expected holding period of eight years. This amount was charged to compensation expense for options and warrants during the year ended December 31, 2002. In December 2002, the Company granted to members of its Scientific Advisory Board options to purchase an additional 1,500,000 shares of common stock at an exercise price of $0.075 per share, which options are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003 through December 20, 2010. The fair value of the options was estimated to be $109,393 ($0.0729 per option) based upon a financial analysis of the terms of the options using the Black-Scholes Pricing Model with the following F-34 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued) assumptions: expected volatility of 114%; a risk free interest rate of 4.14% and an expected holding period of eight years. This amount was charged to compensation expense for options and warrants during the year ended December 31, 2002. BOARD OF DIRECTORS In May 2002, the Company granted an aggregate of 4,150,000 options to purchase shares of the Company's Common stock to certain Members of the Board of Directors and various committees of the Board of Directors. The exercise price was $0.12 per share exercisable 25% immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002 through May 5, 2010. The fair value of the these options was estimated to be $455,249 ($0.1097 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 115%; a risk free interest rate of 4.88% and an expected life of eight years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over an eight year period (the term of the options). In June 2002, the Company granted to Roy S. Walzer, upon his becoming a member of the Board of Directors and member of various committees of the Board, options to purchase 528,800 shares of common stock at an exercise price of $0.295 per share, which options are exercisable 25% immediately, 25% on September 10, 2002, 25% on December 10, 2002 and 25% on March 10, 2003 through June 9, 2010. The fair value of the these options was estimated to be $140,608 ($0.2659 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 115%; a risk free interest rate of 4.88% and an expected life of eight years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over an eight year period (the term of the options). In July 2002, the Company granted to Paul Bishop, upon his becoming a member of the Board of Directors, options to purchase 238,356 shares of common stock at an exercise price of $0.17 per share,) which options are exercisable 25% immediately, 25% on October 29, 2002, 25% on January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The fair value of the these options was estimated to be $38,509 ($0.1616 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 133%; a risk free interest rate of 4.38% and an expected life of eight years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over an eight year period (the term of the options). F-35 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued) In September 2002, the Company granted to Richard Kent, upon his becoming a member of the Board of Directors, and member of various committees of the Board, options to purchase 241,096 shares of common stock at an exercise price of $0.14 per share, which options are exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24, 2003 and 25% on June 24, 2003 through September 23, 2010. The fair value of the these options was estimated to be $29,377 ($0.1218 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 127%; a risk free interest rate of 4.38% and an expected life of eight years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over an eight year period (the term of the options). In December 2002, the Company granted an aggregate of 10,600,000 options to purchase shares of the Company's Common stock to certain Members of the Board of Directors and various committees of the Board of Directors. The exercise price was $0.075 per share are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003 through December 20, 2010. The fair value of the options was estimated to be $773,042 ($0.0729 per option) based upon a financial analysis of the terms of the options using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 114%; a risk free interest rate of 4.14% and an expected holding period of eight years. The Company will recognize the fair value of the options as compensation costs on a pro forma basis over an eight-year period (the term of the options). Financial reporting of options granted to the Board of Directors, Hirschman, Gallantar and other employees 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. F-36 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Net loss as reported $(10,342,335) $(11,715,568) $ (9,354,664) Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (2,016,132) (2,374,643) (1,799,827) ------------ ------------ ------------ Pro forma net loss $(12,358,467) $(14,090,211) $(11,154,491) ============ ============ ============ Earnings per share - basic and diluted: As reported $ (0.02) $ (0.03) $ (0.03) ============ ============ ============ Pro forma $ (0.03) $ (0.04) $ (0.03) ============ ============ ============
There were no other options outstanding that would require pro forma presentation. On November 4, 2002, Paul Bishop resigned from the Company's Board of Directors. Under the terms of his option agreement he is entitled to exercise options to purchase 119,178 shares of the Company's common stock until November 3, 2005. On November 4, 2002, James F. Dicke, II resigned from the Company's Board of Directors. Under the terms of his option agreement, he is entitled to exercise options to purchase 600,000 shares of the Company's common stock until November 3, 2005. On November 6, 2002, Jozef Straus resigned from the Company's Business Advisory Board. Under the terms of his option agreement he is entitled to exercise options to purchase 187,500 shares of the Company's common stock until November 5, 2005. During February 2003, Richard S. Kent resigned from the Company's Board of Directors. Under the terms of his option agreements he is entitled to exercise options to purchase 394,437 shares of the Company's common stock until February 2006. 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 mutual consent of both parties. The Company has paid approximately $5,031,000 for services rendered and reimbursement of expenses by GloboMax and its subcontractors through December 31, 2002. F-37 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) 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 was amortized to consulting expense during the year ended December 31, 2000. In May 2002, the Company entered into an agreement with Harbor View Group, Inc., which terminated all consulting agreements with Harbor View Group, Inc. as of December 31, 2001. In consideration for consulting services provided by Harbor View to the Company from January 2002 to May 2002, the Company granted to Harbor View warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.18 per share. The warrants are exercisable in whole or in part at any time and from time to time prior to May 30, 2008. The fair value of the warrants was estimated to be $190,757 ($0.1908 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 117%; a risk free interest rate of 4.38% and an expected holding period of six years. This amount was charged to compensation expense for options and warrants during the year ended December 31, 2002. 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. F-38 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued) 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. During 2002, additional costs were incurred to complete leasehold improvements for research and development purposes of approximately $222,000, which has not been paid at December 31, 2002. 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 was incurred and was capitalized as an additional element of cost of the computer equipment. 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. 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. During 2002, the Company entered into a purchase lease agreement for equipment totaling $146,672. The lease calls for monthly payments of $5,903 for 24 months commencing in February 2002 and expiring in January 2004. Future minimum capital lease payments and the net present value of the future minimum lease payments at December 31, 2002 are as follows:
Year ending December 31: 2003 $ 108,764 2004 5,903 --------- Total minimum lease payments 114,667 Less amount representing interest 4,114 --------- Net present value of future minimum lease payments 110,553 Less current maturities 104,719 --------- $ 5,834 =========
F-39 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. 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 39 months at $711 per month expiring in January 2003. The Company entered into a new 39 month lease for $716 per month, starting in February 2003 and expiring in April 2006. Total lease expense for the years ended December 31, 2002, 2001 and 2000 amounted to $298,763, $263,609 and $296,064, respectively. Future minimum lease commitments as of December 31, 2002 are as follows:
Year ending December 31: 2003 $ 299,000 2004 299,000 2005 105,000 --------- Total $ 703,000 =========
NOTE 11. SEVERANCE AGREEMENTS On December 3, 2001, William Bregman, Bernard Friedland and Louis Silver resigned as officers and directors of the Company upon the terms 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. The note was repaid on December 17, 2001. F-40 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. LITIGATION In December 2002 the Company filed suit in the Circuit Court of the 11th Judicial Circuit of Florida charging that certain investors "misrepresented their intentions in investing in the Company" and "engaged in a series of manipulative activities to depress the price of Advanced Viral stock." The Company alleges that the defendants sought to "guarantee they would be issued significantly more shares of ADVR common stock" as a result of warrant repricing provisions of a September 2002 financing agreement. The Company is seeking a judgment for damages, interest and costs. The complaint names SDS Merchant Fund, L.P., a Delaware limited partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight Securities, L.P., a limited partnership conducting securities business in Florida; Stonestreet Limited Partnership located in Canada; and Bristol Investment Fund, LTD., whose principal place of business is in Grand Cayman, Cayman Islands, among others. The complaint claims that the "defendants have each, at times acting individually, and at times acting in concert with at least one or more of each other," engaged in practices that violate sections of the Florida Securities and Investor Protection Act. Also named as a plaintiff in the case is William B. Bregman, a resident of Miami-Dade County, Florida, and one of the largest shareholders of the Company. The complaint alleges that Mr. Bregman suffered losses of approximately $3.9 million as a result of the stock manipulation scheme. The suit is related to an agreement, announced September 9, 2002, pursuant to which the Company issued and sold to certain investors 21,500,000 shares of its common stock for total gross proceeds of $3,010,000, or $.14 per share. The Company also issued warrants to purchase an aggregate of 16,125,002 shares of the Company's common stock, which were covered by provisions that allowed for an adjustment of the warrant exercise price. The complaint charges the defendants with manipulating the share price to take favorable advantage of these warrant pricing provisions. Following the initiation of the Company's lawsuit in Florida, three of the purchasers in the September financing (Alpha Capital, A.G., Bristol Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha Plaintiffs") filed separate lawsuits in the U.S. District Court for the Southern District of New York. The suits sought a preliminary injunction and other relief for breach of contract. The District Court entered an order on February 11, 2003 upon a motion of the Alpha Plaintiffs, that required that (i) the Company deliver to the Alpha Plaintiffs the shares of Company common stock issuable upon exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000 or the market value of the warrant shares, whichever is higher for each group of warrants as of the first and second determination dates; and (iii) all the proceeds from the sale of the warrant shares be placed in escrow pending final resolution of the litigation. Within ten days of the entry of the order, the Company moved to alter/amend the judgment and/or reconsideration of the Court's order requesting relief from the Court's order. The Court denied this motion and ordered the Company to immediately deliver the warrant shares to the Alpha Plaintiffs upon their payment of the exercise price and posting of a bond, without further delay and no later than April 8, 2003. The Company has appealed the order denying the motion for reconsideration. The Company continues to consider and pursue all of its options relating to the litigation, including resolution through settlement. F-41 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. STOCKHOLDERS' EQUITY 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. During 2002, Company issued 52,227,127 shares of common stock for an aggregate consideration of $6,529,608. The amounts were comprised of the issuance of 50,018,491 shares of common stock for cash of $6,229,608 and issuance of 2,208,636 shares of common stock upon conversion of $300,000 of convertible debentures. NOTE 14. 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, 2002 and 2001, the Company had net operating loss carryforwards for Federal income tax reporting purposes amounting to approximately $40,100,000 and $31,000,000, which expire in varying amounts to 2021. 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, 2002 and 2001 were as follows:
2002 2001 ----------- ----------- Benefit of net operating loss carryforwards $13,634,000 $11,730,000 Less valuation allowance 13,634,000 11,730,000 ----------- ----------- Net deferred tax asset $ -- $ -- =========== ===========
As of December 31, 2002 and 2001, 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 in the ownership of the Company from the exercise of options and warrants or other future issuances of common stock. F-42 ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. DISCONTINUED OPERATIONS SFAS No. 144 requires the operating results of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. See Note 1 and Note 5 for more detail regarding the planed sale of LTD and classification as held for sale during 2002. The following table details the amounts reclassified to discontinued operations:
INCEPTION (FEBRUARY 20, YEAR ENDED DECEMBER 31, 1984) TO ---------------------------------------------- DECEMBER 31, 2002 2001 2000 2002 ----------- ----------- ----------- ----------- Revenues $ -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- Costs and Expenses: General and administrative 181,348 238,311 207,941 1,310,350 Depreciation 20,062 21,048 16,165 271,498 ----------- ----------- ----------- ----------- 201,410 259,359 224,106 1,581,848 ----------- ----------- ----------- ----------- Loss from Operations (201,410) (259,359) (224,106) (1,581,848) Other Income 256 245 245 4,655 ----------- ----------- ----------- ----------- Discontinued operations $ (201,154) $ (259,114) $ (223,861) $(1,577,193) =========== =========== =========== ===========
NOTE 16. 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 common stock and may, at its discretion, make additional contributions based upon earnings. In March 2001, the Company funded the 401(k) plan with $23,757 to enable the 401(k) plan to purchase shares of common stock on the open market to contribute to the 401(k) plan for the employer match for the year ended December 31, 2001. At December 31, 2002 the Company accrued $40,675 to fund the 401k plan representing the Company's match for the plan year 2002. The Company intends to purchase common stock in the open market at prevailing market prices to satisfy its 2002 matching contribution obligations. In March 2003, the Company amended the terms of the Company's 401(k) plan to terminate the obligation to make matching contributions. F-43 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2003 2002 ------------ ------------ (Unaudited) (Audited) ASSETS Current Assets: Cash and cash equivalents $ 511,121 $ 1,475,755 Prepaid insurance 104,837 86,368 Assets held for sale 162,539 172,601 Other current assets 68,837 35,527 ------------ ------------ Total current assets 847,334 1,770,251 Property and Equipment, Net 2,006,377 2,244,118 Other Assets 1,011,067 931,660 ------------ ------------ Total assets $ 3,864,778 $ 4,946,029 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Litigation settlement $ 1,098,812 $ -- Accounts payable 711,047 417,061 Accrued liabilities 177,913 137,646 Current portion of capital lease obligation 71,245 104,719 Current portion of note payable 23,451 25,165 ------------ ------------ Total current liabilities 2,082,468 684,591 ------------ ------------ Long-Term Debt: Convertible debenture, net 1,184,765 1,658,231 Capital lease obligation -- 5,834 Note payable -- 4,879 ------------ ------------ Total long-term debt 1,184,765 1,668,944 ------------ ------------ Common Stock Subscribed but not Issued -- 883,900 ------------ ------------ Commitments, Contingencies and Subsequent Events -- -- ------------ ------------ Stockholders' Equity: Common stock; 1,000,000,000 shares of $.00001 par value authorized, 474,042,609 and 455,523,990 shares issued and outstanding 4,740 4,555 Additional paid-in capital 56,130,347 57,530,605 Deficit accumulated during the development stage (52,887,259) (51,137,805) Discount on warrants (2,650,283) (4,688,761) ------------ ------------ Total stockholders' equity 597,545 1,708,594 ------------ ------------ Total liabilities and stockholders' equity $ 3,864,778 $ 4,946,029 ============ ============
See notes to consolidated financial statements. F-44 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Inception Three Months Ended (February 20, March 31, 1984) to -------------------------------- March 31, 2003 2002 2003 ------------- ------------- ------------- Revenues $ -- $ -- $ 231,892 ------------- ------------- ------------- Costs and Expenses: Research and development 457,910 1,661,173 18,773,326 General and administrative 863,202 691,071 18,457,679 Compensation and other expense for options and warrants -- -- 3,558,872 Depreciation 237,740 228,097 2,404,929 ------------- ------------- ------------- 1,558,852 2,580,341 43,194,806 ------------- ------------- ------------- Loss from Operations (1,558,852) (2,580,341) (42,962,914) ------------- ------------- ------------- Other Income (Expense): Interest income 6,189 2,071 907,624 Other income -- -- 120,093 Interest expense (187,139) (252,802) (9,062,717) Severance expense - former directors -- -- (302,500) ------------- ------------- ------------- (180,950) (250,731) (8,337,500) ------------- ------------- ------------- Loss from Continuing Operations (1,739,802) (2,831,072) (51,300,414) Loss from Discontinued Operations (9,652) (42,436) (1,586,845) ------------- ------------- ------------- Net Loss $ (1,749,454) $ (2,873,508) $ (52,887,259) ============= ============= ============= Net Loss Per Common Share Basic and Diluted: Continuing operations $ (0.00) $ (0.01) Discontinued operations (0.00) (0.00) ------------- ------------- Net loss $ (0.00) $ (0.01) ============= ============= Weighted Average Number of Common Shares Outstanding 469,468,368 406,815,381 ============= =============
See notes to consolidated financial statements. F-45 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-46 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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 offer on "B" warrants 0.05 6,729,850 67 336,475 -- 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-47 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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 0.06 500,000 5 27,495 -- Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 -- Issuance of common stock, for testing 0.04 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-48 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit ------------ Accumulated Deferred Amount Additional during the Compen- Per Paid-In Subscription Development sation 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-49 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-50 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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 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 -- -- 413,793 -- -- -- Beneficial conversion feature, October debenture -- -- 1,350,000 -- -- -- Warrant costs, February debenture -- -- 37,242 -- -- -- Warrant costs, October debenture -- -- 291,555 -- -- -- Amortization of deferred compensation cost -- -- -- -- -- 399,322 Imputed interest on convertible debenture -- -- 4,768 -- -- -- Net loss, year ended December 31, 1997 -- -- -- -- (4,141,729) -- ----------- ------ ----------- -------- ----------- --------- Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837) ----------- ------ ----------- -------- ----------- ---------
See notes to consolidated financial statements. F-51 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-52 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-53 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-54 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-55 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit -------------------------------- Accumulated Amount Additional during the Discount Per Paid-In Development on Share Shares Amount Capital Stage Warrants ------ ----------- ------ ------------ ------------ ----------- Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630) Sale of common stock, for cash $0.1109 17,486,491 175 1,938,813 -- -- Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- -- Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 -- -- Issuance of common stock, conversion of debt 0.1100 909,091 9 99,991 -- -- Issuance of common stock, conversion of debt 0.1539 1,299,545 13 199,987 -- -- Warrant costs, termination agreement -- -- 190,757 -- -- Warrant costs, issued with sale of common stock, for cash -- -- 2,358,033 -- (2,358,033) Expenses of stock issuance -- -- (50,160) -- -- Warrants granted for consulting services -- -- 386,677 -- -- Credit arising from modification of option terms -- -- 177,963 -- -- Amortization of warrant costs, securities purchase agreements -- -- -- -- 1,101,902 Beneficial conversion feature, May debenture -- -- 55,413 -- -- Beneficial conversion feature, July debentures -- -- 166,515 -- -- Net loss, year ended December 31, 2002 -- -- -- (10,342,335) -- ----------- ------ ------------ ------------ ----------- Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761) =========== ====== ============ ============ ===========
See notes to consolidated financial statements. F-56 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit ------------------------------------ Accumulated Amount Additional during the Discount Per Paid-In Development on Share Shares Amount Capital Stage Warrants ------------ ----------- ------ ------------ ------------ ----------- Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761) Sale of common stock, for cash $ 0.0800 13,750,000 137 1,099,863 Issuance of common stock, conversion of debt 0.1000 4,105,754 41 410,685 -- -- Issuance of common stock, conversion of debt 0.1818 562,865 6 102,323 -- -- Issuance of common stock, for services rendered 0.0790 100,000 1 7,899 Warrant costs, issued with sale of common stock, for cash -- -- 102,700 -- (102,700) Expenses of stock issuance -- -- (52,227) -- 36,385 Amortization of warrant costs, securities purchase agreements -- -- -- -- 354,430 Litigation settlement - warrants cancelled-original issue discount reversed (1,974,094) 1,974,094 Litigation settlement - amortization reversed (223,731) Litigation settlement -- cash and stock (1,097,407) Net loss, Three Months Ended March 31, 2003 -- -- -- (1,749,454) -- ----------- ------ ------------ ------------ ----------- Balance, March 31, 2003 (unaudited) 474,042,609 $4,740 $ 56,130,347 $(52,887,259) $(2,650,283) =========== ====== ============ ============ ===========
See notes to consolidated financial statements. F-57 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception Three Months Ended (February 20, March 31, 1984) to --------------------------- March 31, 2003 2002 2003 ----------- ----------- ------------ Cash Flows from Operating Activities: Net loss $(1,749,454) $(2,873,508) $(52,887,259) ----------- ----------- ------------ Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 241,701 233,309 2,680,364 Amortization of debt issuance costs 12,854 4,185 841,491 Amortization of deferred interest cost on beneficial conversion feature of convertible debenture 24,794 -- 3,980,191 Amortization of discount on warrants 130,699 241,807 3,498,248 Amortization of deferred compensation cost -- -- 760,500 Issuance of common stock for debenture interest 14,795 -- 134,432 Issuance of common stock for services -- -- 1,586,000 Compensation expense for options and warrants -- -- 3,558,872 Changes in operating assets and liabilities: Increase in other current assets (50,607) (41,748) (195,918) Increase in other assets (92,261) (54,876) (1,727,450) Increase (decrease) in accounts payable and accrued liabilities 334,252 (80,015) 895,159 ----------- ----------- ------------ Total adjustments 616,227 302,662 16,011,889 ----------- ----------- ------------ Net cash used by operating activities (1,133,227) (2,570,846) (36,875,370) ----------- ----------- ------------ Cash Flows from Investing Activities: Purchase of investments -- -- (6,292,979) Proceeds from sale of investments -- -- 6,292,979 Disposal (Acquisition) of property and equipment 4,929 (42,835) (4,318,455) ----------- ----------- ------------ Net cash provided (used) by investing activities 4,929 (42,835) (4,318,455) ----------- ----------- ------------ Cash Flows from Financing Activities: Proceeds from issuance of convertible debt -- 1,500,000 11,500,000 Proceeds from sale of securities, net of issuance costs 1,093,465 -- 30,623,151 Proceeds from common stock subscribed but not issued (883,900) -- -- Payments under capital lease (39,308) (45,622) (349,336) Payments on note payable (6,593) (5,793) (87,869) Recovery of subscription receivable written off -- -- 19,000 ----------- ----------- ------------ Net cash provided by financing activities 163,664 1,448,585 41,704,946 ----------- ----------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents (964,634) (1,165,096) 511,121 Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 -- ----------- ----------- ------------ Cash and Cash Equivalents, Ending $ 511,121 $ 334,713 $ 511,121 =========== =========== ============ Supplemental Disclosure of Non-Cash Financing Activities: Cash paid during the period for interest $ 6,810 $ 3,997 =========== =========== Supplemental Schedule of Non-Cash Investing and Financing Activities: A capital lease obligation of approximately $140,000 was incurred during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements. F-58 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements at March 31 2003 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on Form 10-Q and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position as of March 31 2003 and results of operations for the three months ended March 31, 2003 and 2002 and cash flows for the three months ended March 31, 2003 and 2002. All such adjustments are of a normal recurring nature. Certain general and administrative expenses from inception relating to consulting services were reclassified to compensation expense for options and warrants to be consistent with current presentation. The Company has discontinued allocating certain of its general and administrative expenses to research and development. This change, effective in the first quarter ending March 31, 2003, was necessary to reflect current operating costs relating to the Company's Yonkers, New York facility which are recorded as general and administrative expenses in line with the Company's operations in New York and no longer allocated to research and development expense. The Company's Chief Scientific Officer, who is also Chief Executive Officer, allocates approximately 30% of his time to oversight of the Company's clinical trials and therefore this percentage of his total compensation has been allocated to research and development expense with the balance allocated to general and administrative expense. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. NOTE 2. GOING CONCERN As indicated in the accompanying financial statements, the Company has suffered accumulated net losses of $52,887,259 since inception and is dependent upon registration of Product R for sale before it can begin commercial operations. The Company's cash position is inadequate to pay all the costs associated with operations and 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. The foregoing issues raise substantial doubt about the Company's ability to continue as a going concern. 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. F-59 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES GENERAL POTENTIAL CLAIM FOR ROYALTIES The Company may be subject to claims from certain third parties for royalties due on sales of the Company's product. 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. During November 2002, the Company secured $3,000,000 of product liability coverage at a cost of approximately $24,000 per annum. In addition, during October 2002, the Company secured $3,000,000 in liability coverage for each of the three clinical trials in Israel at a cost of approximately $16,000. There can be no assurance that the Company will be able to secure additional insurance in adequate amounts or at reasonable premiums if it determined to do so. Should the Company be unable to secure additional 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 nine issued U.S. patents, some covering the composition of Product R and others covering various uses of Product R. In addition, the Company has two issued Australian patents covering the use of Product R. Additionally, the Company has 14 pending U.S. patent applications and 17 pending 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 issued patents as well as patents that may result from pending applications will be enforceable. 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. On April 12, 2002, the Company successfully completed Phase 1 trials. Phase 2 trials are pivotal clinical investigations designed to establish the efficacy and safety of Product R. Currently, the Company does not have sufficient funds available to pursue the Phase 2 clinical trials of Product R as a topical treatment for genital warts caused by HPV infection. F-60 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) GENERAL (Continued) STATUS OF ISRAEL CLINICAL TRIALS In November 2002 the Company began testing injectable Product R in the following clinical trials in Israel: o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. These patients have failed highly active anti-retroviral therapy (HAART), remain on HAART, and require salvage therapy. The Company believes that Product R may have three major beneficial effects in patients with AIDS. First, its therapeutic effects on body wasting (cachexia) seen in patients with AIDS. Second, the mitigation of the toxicity of drugs included in HAART regimens for the treatment of AIDS. Third, the synergistic activity with drugs used in HAART regimens to suppress the replication of HIV and increase the CD4 and CD8 cell counts in patients with AIDS. The Company believes that Product R may prove to be an important "enabler" drug in the treatment of AIDS. o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA. Included are patients with acute lymphocytic leukemia, multiple Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma. o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are patients with solid tumors such as colonic, lung, breast, stomach and kidney cancers. The Company's objective for the three Israeli trials is to determine the safety, tolerance and metabolic characteristics of Product R. Although there can be no assurances, the Company anticipates that the clinical trials in Israel will help facilitate the planned investigational new drug (IND) application process for injectable Product R with the FDA. The Company's 12-month agreement formalized in April 2001 with the Selikoff Center in Israel to develop clinical trials in Israel using Product R has concluded. The Company paid $242,000 under this agreement. In September 2002, the Company entered into a contract with EnviroGene LLC, an affiliate of the Selikoff Center, to conduct, evaluate and maintain the scientific quality for the three clinical studies listed above. Under the terms of this agreement, EnviroGene will (1) finalize all Israeli government and hospital approval documents, (2) complete and organize the three clinical trials including establishing a network of scientists to perform said study/trial and initiate recruitment of patients and (3) perform the studies/trials and evaluate the results. Total costs incurred by EnviroGene LLC in connection with these clinical trials are expected to be $1,551,000. $825,000 has been paid through March 31, 2003, of which $199,000 was paid during the first quarter of 2003. It is anticipated that these trials will support future FDA applications. F-61 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) GENERAL (Continued) STATUS OF ISRAEL CLINICAL TRIALS (Continued) In the fourth quarter of 2002, the Company entered into various agreements supporting the clinical trials in Israel aggregating approximately $1,000,000 to be paid over a twelve-month period. These services include the monitoring and auditing of the clinical sites, hospital support and laboratory testing. Approximately $76,000 has been paid through March 31, 2003, of which $53,000 was paid during the first quarter of 2003. In March 2003, the Company commenced discussions and began to draft protocols to expand the ongoing Israeli clinical trials of Product R for the treatment of AIDS patients (who have failed HAART and remain on HAART therapy) into late Phase II blinded, controlled clinical trials. On July 8, 2002, the Company extended an 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. Under its provisions the study period is extended for another twelve months to July 7, 2003. Total costs incurred in connection with this research are expected to be $138,000, of which payments of $40,000 each were made in July 2002 and November 2002. CONSULTING AND EMPLOYMENT AGREEMENTS HIRSCHMAN AGREEMENT In May 1995, the Company entered into a consulting agreement with Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of Medicine, New York, New York and Director of Mt. Sinai's Division of Infectious Diseases, whereby Dr. Hirschman was to provide consulting services to the Company through May 1997. The consulting services included the development and location of pharmacological and biotechnology companies and assisting the Company in seeking joint ventures with and financing of companies in such industries. In connection with the consulting agreement, the Company issued to Dr. Hirschman 1,000,000 shares of the Company's common stock and the option to acquire 5,000,000 shares of the Company's common stock for a period of three years as per the vesting schedule as referred to in the agreement, at a purchase price of $0.18 per share. As of March 31, 2003, 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 F-62 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) HIRSCHMAN AGREEMENT (Continued) 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; (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; 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. 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. Dr. Hirschman assigned to third parties unaffiliated with the Company options to acquire an aggregate of three million shares of the Company's common stock, all of which assigned options have expired and are no longer exercisable. 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 for options and warrants during the year ended December 31, 2001. Effective June 30, 2002, the remaining unexercised $0.27 and $0.36 options were extended to December 31, 2002. As a result of this modification of the option terms, the fair value of the options was estimated to be $3,895 based on a financial analysis of the terms of the options using the Black-Scholes pricing model with the following assumptions: expected volatility of 117%; risk free interest rate of 1.7%. This amount has been charged to compensation expense for options and warrants during the quarter ended June 30, 2002. 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, provided, however, the Agreement is extended automatically by one year, each year, unless notice of termination has been given by either Dr. Hirschman or the Company. In July 2002, the Company notified Dr. Hirschman that the Agreement will not be extended subsequent to December 31, 2004. 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 F-63 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) HIRSCHMAN AGREEMENT (Continued) an agreement relating to co-marketing pursuant to which one or more third parties commit to make payments to the Company 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 with an additional $25,000 paid through September 30, 2002. No further payments have been made to date. 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 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). OTHER EMPLOYEES In connection with the employment of its Chief Financial Officer, the Company granted Alan 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 commencing October 1, 1999 through September 30, 2009 and have an exercise price of $0.24255 per share. These options are fully vested. 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 has recognized the $376,126 fair value of the options as compensation expense on a pro-forma basis over a three year service period. 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 termination rate of 10%. The Company will recognize the fair value of the options as compensation expense on a pro-forma basis over a one year service period (the term of the employment agreements). F-64 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) CONSULTING AND EMPLOYMENT AGREEMENTS (Continued) OTHER EMPLOYEES (Continued) In May 2002, the Company granted to certain of its employees options to purchase 274,000 shares of the Company's common stock. Such options have an exercise price of $0.17 per share, vest in 20% increments over a five year period commencing January 2003 through January 2012. The fair value of the these options was estimated to be $43,922 ($0.1603 per option share) and based upon a financial analysis of the terms of the options using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 117%; a risk free interest rate of 4.38%; an expected life of approximately 10 years. The Company will recognize the fair value of the options as compensation expense on a pro-forma basis over approximately 10 years (the term of the options). OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS MEMBERS OF ADVISORY BOARDS In May 2002, the Company granted to members of its Scientific Advisory Board and Business Advisory Board options to purchase an aggregate of 2,250,000 shares of common stock at an exercise price of $0.12 per share, which options are exercisable 25% immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002 through May 5, 2010. The fair value of the options was estimated to be $246,822 ($0.1097 per option) based upon a financial analysis of the terms of the warrants using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 115%; a risk free interest rate of 4.88% and an expected holding period of eight years. This amount was charged to compensation expense for options and warrants during the quarter ended June 30, 2002. The Business Advisory Board was dissolved during December 2002. In September 2002, the Company granted to Sidney Pestka, M.D., a member of the Scientific Advisory Board, options to purchase 250,000 shares of common stock at an exercise price of $0.14 per share, which options are exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18. 2003 and 25% on June 18, 2003 through September 17, 2010. The fair value of the options was estimated to be $30,462 ($0.1218 per option) based upon a financial analysis of the terms of the warrants using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 127%; a risk free interest rate of 4.38% and an expected holding period of eight years. This amount was charged to compensation and other expense for options and warrants during the quarter ended September 30, 2002. In December 2002, the Company granted to members of its Scientific Advisory Board options to purchase an additional 1,500,000 shares of common stock at an exercise price of $0.075 per share, which options are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003 through December 20, 2010. The fair value of the options was estimated to be $109,393 ($0.0729 per option) based upon a financial analysis of the terms of the F-65 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued) MEMBERS OF ADVISORY BOARDS (Continued) options using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 114%; a risk free interest rate of 4.14% and an expected holding period of eight years. This amount was charged to compensation expense for options and warrants during the year ended December 31, 2002. BOARD OF DIRECTORS In May 2002, the Company granted an aggregate of 4,150,000 options to purchase shares of the Company's Common stock to certain Members of the Board of Directors and various committees of the Board of Directors. The exercise price was $0.12 per share exercisable 25% immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002 through May 5, 2010. The fair value of the these options was estimated to be $455,249 ($0.1097 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 115%; a risk free interest rate of 4.88% and an expected life of eight years. The Company will recognize the fair value of the options as compensation expense on a pro-forma basis over an eight year period (the term of the options). In June 2002, the Company granted to Roy S. Walzer, a member of the Board of Directors and member of various committees of the Board, options to purchase 528,800 shares of common stock at an exercise price of $0.295 per share, which options are exercisable 25% immediately, 25% on September 10, 2002, 25% on December 10, 2002 and 25% on March 10, 2003 through June 9, 2010. The fair value of the these options was estimated to be $140,608 ($0.2659 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 115%; a risk free interest rate of 4.88% and an expected life of eight years. The Company will recognize the fair value of the options as compensation expense on a pro-forma basis over an eight year period (the term of the options). In July 2002, the Company granted to Paul Bishop, a member of the Board of Directors, options to purchase 238,356 shares of common stock at an exercise price of $0.17 per share, which options are exercisable 25% immediately, 25% on October 29, 2002, 25% on January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The fair value of the these options was estimated to be $38,509 ($0.1616 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 133%; a risk free interest rate of 4.38% and an expected life of eight years. The Company will recognize the fair value of the options as compensation costs on a pro-forma basis over an eight year period (the term of the options). F-66 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued) BOARD OF DIRECTORS (Continued) In September 2002, the Company granted to Richard Kent, a member of the Board of Directors, and member of various committees of the Board options to purchase 241,096 shares of common stock at an exercise price of $0.14 per share, which options are exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24, 2003 and 25% on June 24 2003 through September 23, 2010. The fair value of the these options was estimated to be $29,377 ($0.1218 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 127%; a risk free interest rate of 4.38% and an expected life of eight years. The Company will recognize the fair value of the options as compensation expense on a pro-forma basis over an eight-year period (the term of the options). During February 2003, Richard S. Kent resigned from the Company's Board of Directors. Under the terms of his option agreements he is entitled to exercise options to purchase 394,437 shares of the Company's common stock until February 2006. In December 2002, the Company granted an aggregate of 10,600,000 options to purchase shares of the Company's Common stock to certain Members of the Board of Directors and various committees of the Board of Directors. The exercise price was $0.075 per share are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003 through December 20, 2010. The fair value of the options was estimated to be $773,042 ($0.0729 per option) based upon a financial analysis of the terms of the options using the Black-Scholes Pricing Model with the following assumptions: expected volatility of 114%; a risk free interest rate of 4.14% and an expected holding period of eight years. The Company will recognize the fair value of the options as compensation costs on a pro forma basis over an eight-year period (the term of the options). Financial reporting of the options granted to Hirschman, Gallantar, other employees and Members of the Board of Directors and committees of the Board of Directors has been prepared pursuant to the Company's policy of following APB No. 25, and related interpretations. Accordingly, the following pro-forma financial information is presented to reflect amortization of the fair value of the options. F-67 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY BOARDS (Continued) BOARD OF DIRECTORS (Continued)
Three Months Ended March 31, --------------------------- 2003 2002 ----------- ----------- Net loss as reported $(1,749,454) $(2,873,508) Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (45,998) (564,188) ----------- ----------- Pro forma net loss $(1,795,452) $(3,437,696) =========== =========== Earnings per share - basic and diluted: As reported ($ 0.00) ($ 0.01) =========== =========== Pro forma ($ 0.00) ($ 0.01) =========== ===========
There were no other options outstanding that would require pro forma presentation. 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 mutual consent of both parties. The Company has paid approximately $5,031,000 for services rendered and reimbursement of expenses by GloboMax and its subcontractors through December 31, 2002. Globomax is no longer providing services or representing the Company. HARBOR VIEW AGREEMENTS 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 F-68 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) HARBOR VIEW AGREEMENTS (Continued) $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 was amortized to consulting expense during the year ended December 31, 2000. In May 2002, the Company entered into an agreement with Harbor View Group, Inc., which terminated all consulting agreements with Harbor View Group, Inc. as of December 31, 2001. In consideration for consulting services provided by Harbor View to the Company from January 2002 to May 2002, the Company granted to Harbor View warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.18 per share. The warrants are exercisable in whole or in part at any time and from time to time prior to May 30, 2008. The fair value of the warrants was estimated to be $190,757 ($0.1908 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 117%; a risk free interest rate of 4.38% and an expected holding period of six years. This amount was charged to compensation expense for options and warrants during the quarter ended June 30, 2002. 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. During 2002, additional costs were incurred to complete leasehold improvements for research and development purposes of approximately $222,000, of which $93,000 has been paid at March 31, 2003. Additional payments are scheduled through August 2003. F-69 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) LITIGATION In December 2002 the Company filed suit in the Circuit Court of the 11th Judicial Circuit of Florida charging that certain investors "misrepresented their intentions in investing in the Company" and "engaged in a series of manipulative activities to depress the price of Advanced Viral stock." The Company alleged that the defendants sought to "guarantee they would be issued significantly more shares of ADVR common stock" as a result of warrant repricing provisions of a September 2002 financing agreement. The Company sought a judgment for damages, interest and costs. The complaint named SDS Merchant Fund, L.P., a Delaware limited partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight Securities, L.P., a limited partnership conducting securities business in Florida; Stonestreet Limited Partnership located in Canada; and Bristol Investment Fund, LTD., whose principal place of business is in Grand Cayman, Cayman Islands, among others. The complaint claimed that the "defendants had each, at times acting individually, and at times acting in concert with at least one or more of each other," engaged in practices that violate sections of the Florida Securities and Investor Protection Act. Also named as a plaintiff in the case is William B. Bregman, a resident of Miami-Dade County, Florida, and one of the largest shareholders of the Company. The complaint alleged that Mr. Bregman suffered losses of approximately $3.9 million as a result of the stock manipulation scheme. The suit is related to an agreement, announced September 9, 2002, pursuant to which the Company issued and sold to certain investors 21,500,000 shares of its common stock for total gross proceeds of $3,010,000, or $0.14 per share. The Company also issued warrants to purchase an aggregate of 16,125,000 shares of the Company's common stock, which were covered by provisions that allowed for an adjustment of the warrant exercise price. The complaint charged the defendants with manipulating the share price to take favorable advantage of these warrant pricing provisions. Following the initiation of the Company's lawsuit in Florida, three of the purchasers in the September financing (Alpha Capital, A.G., Bristol Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha Plaintiffs") filed separate lawsuits against the Company in the U.S. District Court for the Southern District of New York. The suits sought a preliminary injunction and other relief for breach of contract. The District Court entered an order on February 11, 2003 upon a motion of the Alpha Plaintiffs, that required that (i) the Company deliver to the Alpha Plaintiffs the shares of Company common stock issuable upon exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000 or the market value of the warrant shares, whichever is higher for each group of warrants as of the first and second determination dates; and (iii) all the proceeds from the sale of the warrant shares be placed in escrow pending final resolution of the litigation. Within ten days of the entry of the order, the Company moved to alter/amend the judgment and/or reconsideration of the Court's order requesting relief from the Court's order. The Court denied this motion and ordered the Company to immediately deliver the warrant shares to the Alpha Plaintiffs upon their payment of the exercise price and posting of a bond, without further delay and no later than April 8, 2003. The Company appealed the order denying the motion for reconsideration. F-70 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued) LITIGATION (Continued) During May 2003, the Company entered into settlement and mutual release agreements with the parties involved in both the Florida and New York litigation, which, among other things, dismissed the lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in exchange for release by the parties to the lawsuits and certain parties to the September financing of their rights to exercise the warrants issued in the September 2002 financing, we issued an aggregate of 947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $25,000 was paid as of March 31, 2003, $701,463 was paid subsequent to quarter end, and of which $321,428 shall be paid in five equal monthly installments until September 2003. NOTE 4. SECURITIES PURCHASE AGREEMENTS CONVERTIBLE DEBENTURES AND WARRANTS The Company issued warrants to purchase common stock in connection with the issuance of several convertible debentures sold during the years 1997 to 2000, which debentures have all been fully converted. As of December 31, 2002, warrants to purchase approximately 3.2 million shares of the Company's common stock relating to these fully converted debentures were outstanding with expiration dates through 2009 at exercise prices ranging from $0.199 to $0.864. During the second and third quarters of 2002, the Company issued to certain investors an aggregate of $2,000,000 principal amount of its 5% convertible debentures at par in private placements. Under the terms of each 5% convertible debenture, 20% of the original issue is convertible on the original date of issue at a price equal to the closing bid price quoted on the OTC Bulletin Board on the trading day immediately preceding the original issue date (except for the Rushing/Simoni issuance detailed below which had an initial conversion price of $0.11 per share). Thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the average closing bid price for the five trading days prior to the conversion date (the "Market Price"); or (ii) ten cents ($0.10) which amount is subject to certain adjustments. The convertible debentures, including interest accrued thereon, are payable by Advanced Viral in shares of common stock and mature two years from the date of issuance. The shares issued upon conversion of the debentures cannot be sold or transferred for a period of one year from the applicable vesting date of the convertible portion of the debentures. The Company issued its 5% convertible debentures as follows: F-71 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) CONVERTIBLE DEBENTURES AND WARRANTS (Continued) o On May 30, 2002, the Company sold to O. Frank Rushing and Justine Simoni, as joint tenants, $500,000 principal amount of its 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $55,000, which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $42,000 has been amortized to interest expense through March 31, 2003. On June 3, 2002, these investors converted the first 20% ($100,000) into 909,091 shares of common stock at a conversion price of $0.11 per share. In January 2003, the holders converted the second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares of common stock at a conversion price of $0.10 per share. o On July 3, 2002, the Company sold to James F. Dicke II, who was then a member of its Board of Directors, $1,000,000 principal amount of its 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $111,000 which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $80,000 has been amortized to interest expense through March 31, 2003. On July 3, 2002, Mr. Dicke converted the first 20% of the debenture ($200,000) for 1,299,545 shares of common stock at a conversion price of $0.1539 per share. In January 2003, Mr. Dicke converted the second 20% ($200,000 plus interest of $5,041) of the debenture into 2,050,411 shares of common stock at a conversion price of $0.10 per share. o On July 15, 2002, the Company sold to Peter Lunder $500,000 principal amount of the Company's 5% convertible debenture. Based on the terms for conversion associated with this debenture, there was an intrinsic value associated with the beneficial conversion feature of approximately $55,000, which was recorded as deferred interest expense and is presented as a discount on the convertible debenture. This amount will be amortized over an expected holding period of two years. Of this amount, $39,000 has been amortized to interest expense through March 31, 2003. In January 2003, Mr. Lunder converted 40% ($200,000 plus interest of $4,822) of the debenture into 1,587,797 shares of common stock, the first 20% of which was converted at a conversion price of $0.1818 per share, and the second 20% of which was converted at a conversion price of $0.10 per share. F-72 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) SECURITIES PURCHASE AGREEMENTS Pursuant to certain securities purchase agreements, the Company issued warrants to purchase common stock in connection with the sale of approximately 61,500,000 shares of common stock during the years 1998 to 2001 for cash consideration of approximately $16,900,000. As of March 31, 2003, warrants to purchase approximately 16.5 million shares of the Company's common stock relating to these securities purchase agreements were outstanding with expiration dates through 2006. During the quarter ended March 31, 2002, under several securities purchase agreements, the Company sold an aggregate of 9,999,999 shares of its common stock at $0.15 per share, for cash consideration of $1,500,000. On April 12, 2002, pursuant to securities purchase agreements with various institutional investors, the Company issued 17,486,491 shares of its common stock at a market price of $0.11089 per share and received net proceeds of approximately $1,939,000. On September 10, 2002, the Company issued and sold an aggregate of 21,500,000 shares of its common stock pursuant to a securities purchase agreement with certain institutional investors for total proceeds of approximately $3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000 shares of the Company's common stock at an exercise price of $0.25 per share, subject to adjustment, as described below. In addition, pursuant to a placement agent agreement with H. C. Wainwright & Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500 cash and issued to HCW 1,032,000 shares of its common stock. An adjustment provision in the warrants provides that at 60 and 120 trading days following the original issue date of the Warrants, a certain number of warrants shall become exercisable at $0.001. The number of shares for which the warrants are exercisable at $0.001 per share is equal to the positive difference, if any, between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of the Company's common stock for the 60 trading days preceding the First Determination Date and (ii) 21,500,000; provided however, that no adjustment will be made in the event that the VWAP for the 60 trading day period preceding the applicable determination date is $0.14 or greater. In December 2002, the Company filed suite against certain of the investors in connection with the warrant repricing provisions of the agreement (see Note 3 "LITIGATION"). During May 2003, the Company entered into a settlement and mutual release agreements with the parties involved in both the Florida and New York litigation, which, among other things, dismissed the lawsuits with prejudice. Pursuant to the agreements, in exchange for release by the parties to the lawsuits of their rights to exercise the warrants issued in the September 2002 financing, the Company issued an aggregate of 947,000 shares of common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $25,000 was paid as of March 31, 2003, $701,463 was paid subsequent to quarter end, and of which $321,428 shall be paid in five equal monthly installments until September 2003. The Company recorded a settlement of litigation liability at March 31, 2003 of $1,098,812 which represents cash to be paid to litigants of $1,022,891 and 947,000 shares of common stock to be issued at $0.08 per share totaling $75,921. (See Note 3 "LITIGATION"). F-73 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) SECURITIES PURCHASE AGREEMENTS (Continued) On December 16, 2002, the Company entered into securities purchase agreements with various investors, pursuant to which the Company sold an aggregate of 10,450,000 shares of its common stock for total gross proceeds of approximately $836,000, or $0.08 per share. The shares of common stock were issued by the Company on January 2, 2003 along with warrants issued in December 2002 to purchase 6,270,000 shares of common stock at an exercise price of $0.12 per share until December 2007. In connection with these agreements, the Company paid finders' fees to Harbor View and AVIX consisting of (i) approximately $50,000 and (ii) warrants to purchase 627,000 shares of the Company common stock at an exercise price of $0.12 per share through December 2007. The fair value of all warrants issued under this agreement was estimated to be $368,000 (price per warrant ranging from $0.0485 to $0.0598 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. This amount is being amortized to interest expense in the accompanying consolidated financial statements. On December 23, 2002, the Company entered into a securities purchase agreement pursuant to which the Company sold to various investors 500,000 shares of common stock at $0.08 per share, for an aggregate purchase price of $40,000. These shares of common stock were issued during January 2003 along with warrants dated January 2003 to purchase 300,000 shares of common stock at an exercise price of $0.12 per share until January 2008. The fair value of all warrants issued under this agreement was estimated to be $16,000 (price per warrant $0.0528 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. This amount is being amortized to interest expense in the accompanying consolidated financial statements. In connection with this transaction the Company paid finders' fees to AVIX consisting of (i) $2,400 and (ii) warrants to purchase 30,000 shares of common stock at an exercise price per share of $0.12 until January 2008. During January 2003, pursuant to a securities purchase agreement with various investors, the Company issued 1,550,000 shares of common stock at a price of $0.08 per share, for a total purchase price of $124,000, along with warrants to purchase 930,000 shares of common stock at an exercise price of $0.12 per share until January 2008. The fair value of all warrants issued under this agreement was estimated to be $57,000 (price per warrant of $0.0598 to $0.0624 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. This amount is being amortized to interest expense in the accompanying consolidated financial statements In connection with this transaction the Company paid a finders' fee to AVIX consisting of (i) $7,440 and (ii) issued warrants to purchase 93,000 shares of common stock at an exercise price per share of $0.12 until January 2008. F-74 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) SECURITIES PURCHASE AGREEMENTS (Continued) During March 2003, pursuant to a securities purchase agreement with various investors, the Company issued 1,250,000 shares of common stock at $0.08 per share, for a total purchase price of $100,000, along with warrants to purchase 750,000 shares of common stock at an exercise price of $0.12 per share through March 2008. The fair value of all warrants issued under this agreement was estimated to be $46,000 (price per warrant of $0.0572 to $0.0624 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 114%; a risk free interest rate of 3.1% and an expected holding period of five years. In connection with this transaction the Company paid finders' fees to Harbor View consisting of (i) $6,000 and (ii) warrants to purchase 75,000 shares of common stock at an exercise price per share of $0.12 until March 2008. SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE DEBENTURE In April and May 2003, pursuant to securities purchase agreements with various investors, the Company sold 3,587,500 shares of common stock at a price of $0.08 per share and issued warrants to purchase 2,152,000 shares of common stock at an exercise price per share of $0.12 for a period of five years, for an aggregate purchase price $287,000. In connection with this transaction, the Company paid a finders' fee to Harbor View consisting of (i) $17,000 and (ii) warrants to purchase 215,250 shares of common stock at an exercise price per share of $0.12 for a period of five years. On April 11, 2003, pursuant to a securities purchase agreement with James F. Dicke II, a former member of the Company's Board of Directors, the Company sold 3,125,000 shares of common stock at $0.08 per share for a total purchase price of $250,000, along with warrants to purchase 1,875,000 shares of common stock at an exercise price per share of $0.12 for a period of five years. On April 28, 2003, pursuant to a securities purchase agreement with an investor, the Company sold 312,500 shares of common stock at $0.08 per share for a total purchase price of $25,000, along with warrants to purchase 187,500 shares of common stock at an exercise price per share of $0.12 for a period of five years. In connection with this transaction, the Company paid a finders' fee consisting of warrants to purchase 15,625 shares of common stock at an exercise price per share of $0.12 per until April 2004. F-75 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE DEBENTURE (Continued) On April 28, 2003, the Company entered into a securities purchase agreement with Cornell Capital Partners, LP, an institutional investor ("Cornell") to sell up to $2,500,000 of 5% convertible debentures, due April 28, 2008; of which $1,000,000 was purchased on April 28, 2003; $500,000 of convertible debentures will be purchased within 10 business days of the filing of the registration statement with the SEC to register the underlying shares; and $1,000,000 of convertible debentures will be purchased within 20 business days from the date the registration statement is declared effective by the SEC. In the event the closing bid price of the common stock on the date the Company's registration statement is declared effective by the SEC is less than $0.10, then the Company shall have the right to redeem the last $1,000,000 convertible debenture. The redemption price is the face amount of the convertible debenture. A 10% fee is paid to Cornell on each sale. Commencing July 27, 2003, Cornell may convert the debenture plus accrued interest, (which may be taken at Cornell's option in cash or common stock), into shares of the Company's common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of the Company's common stock for the 4 trading days immediately preceding the conversion date. Cornell may convert no greater than $600,000 in any thirty day calendar period. At the Company's option the Company may redeem a portion or all of the outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell will receive a warrant to purchase 1,000,000 shares of the Company's stock for every $100,000 redeemed. Cornell received a warrant to purchase 15,000,000 shares of our common stock exercisable for 5 years at an exercise price per share of $0.097. The warrant is not exercisable prior to October 28, 2003. The legal expenses associated with this transaction are estimated to be approximately $50,000 of which $42,500 has been paid as of April 28, 2003. F-76 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued) EQUITY LINE OF CREDIT On February 9, 2001, the Company entered into an equity line of credit agreement with Cornell to sell up to $50,000,000 of the Company's common stock. The line of credit expires August 14, 2003. 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 (60) months from the date of issuance. As of March 31, 2003, the Company has not drawn on the equity line of credit. 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. On April 28, 2003, the Company entered into an equity line of credit agreement with Cornell. The equity line agreement provides, generally, that Cornell has committed to purchase up to $50 million of the Company's common stock over a three-year period, with the timing and amount of such purchases, if any, at the Company's discretion, provided, however, that the maximum amount of each advance is $500,000, and the date of each advance shall be no less than six trading days after the Company's notification to Cornell of their obligation to purchase shares. Any shares of common stock sold under the equity line will be priced at the lowest closing bid price of our common stock during the five consecutive trading days following the Company's notification to Cornell requesting an advance under the equity line. In addition, at the time of each advance, the Company is obligated to pay Cornell a fee equal to five percent (5%) of the amount of each advance. However, the Company's obligation to sell the common stock is conditioned upon the per share purchase price being equal to or greater than a price the Company sets on the advance notice date, the minimum acceptable price, which may not be set any closer than 7.5% percent below the closing bid price of the common stock the day prior to the advance notice date. In addition, there are certain other conditions applicable to the Company's ability to draw down on the equity line including the filing and effectiveness of a registration statement registering the resale of all shares of common stock that may be issued to Cornell under the equity line and the Company's adherence with certain covenants. In connection with this agreement, the Company issued 116,279 shares of our common stock to Katalyst LLC in consideration for its exclusive placement agent services. F-77 ADVANCED VIRAL RESEARCH CORP. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5. DISCONTINUED OPERATIONS During 2002, the Board of Directors approved a plan to sell Advance Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. SFAS No. 144 requires the operating results of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented was reclassified as discontinued operations. The following table details the amounts reclassified to discontinued operations:
Inception Three Months (February 20, Ended March 31, 1984) to ----------------------- March 31, 2003 2002 2003 -------- ----------- ----------- Revenues $ -- $ -- $ -- -------- ----------- ----------- Costs and Expenses: General and administrative 5,691 37,224 1,316,041 Depreciation 3,961 5,212 275,459 -------- ----------- ----------- 9,652 42,436 1,591,500 -------- ----------- ----------- Loss from Operations (9,652) (42,436) (1,591,500) Other Income -- -- 4,655 -------- ----------- ----------- Discontinued operations $ (9,652) $ (42,436) $(1,586,845) ======== =========== ===========
F-78 WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT ADVANCED VIRAL RESEARCH CORP. EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE. ---------- This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy any securities: - except the common stock offered by this prospectus; ---------------------- - in any jurisdiction in which the offer or solicitation is not PROSPECTUS authorized; --------------------- - in any jurisdiction where the dealer or other salesperson is not qualified to make the offer or solicitation; - to any person to whom it is unlawful to make the offer or solicitation; or 415,908,375 SHARES OF COMMON STOCK - to any person who is not a United States resident or who is outside the jurisdiction of the United States. ADVANCED VIRAL RESEARCH CORP. The delivery of this prospectus or any accompanying sale does not imply that: - there have been no changes in the affairs of Advanced Viral USA, Inc. after the date of this prospectus; or - the information contained in this prospectus is correct after the date of this prospectus. ______________, 2003
---------- Until _________, 2003, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters. PART II INFORMATION NOT REQUIRED IN PROSPECTUS INDEMNIFICATION OF DIRECTORS AND OFFICERS Our Certificate of Incorporation include an indemnification provision under which we have agreed to indemnify directors and officers of Advanced Viral from and against certain claims arising from or related to future acts or omissions as a director or officer of Advanced Viral. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Advanced Viral pursuant to the foregoing, or otherwise, Advanced Viral has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth estimated expenses expected to be incurred in connection with the issuance and distribution of the securities being registered. Advanced Viral will pay all expenses in connection with this offering. Securities and Exchange Commission Registration Fee $ 2,726 Printing and Engraving Expenses $ 10,000 Accounting Fees and Expenses $ 4,000 Legal Fees and Expenses $ 50,000 Miscellaneous $ 18,274 TOTAL $ 85,000
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 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. 2. 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. 3. 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. 4. 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. 5. 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 II-1 the investor from time to time to raise up to $20,000,000, subject to certain 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. 6. 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. 7. 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. 8. 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. 9. In June 2001 we issued 60,000 shares of our common stock pursuant to the exercise of certain options. 10. 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. 11. During the year 2001, we issued approximately 76,000 shares upon the cashless exercise of warrants, and 60,000 shares upon exercise of options. 12. During the second quarter of 2002, we issued to certain three investors an aggregate of $2,000,000 principal amount of our 5% convertible debentures at par in several private placements. Under the terms of each 5% convertible debenture, 20% of the original issue is convertible on the original date of issue at a price equal to the closing bid price quoted on the OTC Bulletin Board on the preceding trading day (except for $500,000 of the debentures which had an initial conversion price of $0.11 per share). Thereafter, 20% of the principal balance may be converted at six-month intervals at a conversion price equal to the higher of (i) 90% of the average closing bid price for the five trading days prior to the conversion date; or (ii) ten cents ($0.10) which amount is subject to certain adjustments. The convertible debentures, including interest accrued thereon, are payable by Advanced Viral in shares of common stock and mature two years from the date of issuance. The shares issued upon conversion of the debentures cannot be sold or transferred for a period of one year from the applicable vesting date of the convertible portion of the debentures. 13. On September 10, 2002, we issued and sold an aggregate of 21,500,000 shares of our common stock pursuant to a securities purchase agreement with certain investors for total proceeds of approximately $3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000 shares of our common stock at an exercise price of $0.25 per share, subject to adjustment, as described below. In addition, pursuant to a placement agent agreement with H. C. Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and issued to HCW 1,032,000 shares of our common stock. An adjustment provision in the Warrants provides that 60 trading days following the original issue date of the Warrants (the "First Determination Date"), a certain number of Warrants shall become exercisable at $.001. The number of shares for which the Warrants are exercisable at $.001 per share is equal to the positive difference, if any, II-2 between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of our common stock for the 60 trading days preceding the First Determination Date and (ii) 21,500,000. Upon 120 trading days following the original issue date of the Warrants (the "Second Determination Date"), a certain number of remaining Warrants shall become exercisable at $.001. The number of shares for which the Warrants are exercisable at $.001 per share is equal to the positive difference, if any, between (i) $3,010,000 divided by the VWAP of our common stock for the 60 trading days preceding the Second Determination Date and (ii) 21,500,000. No adjustment will be made in the event that the VWAP for the 60 trading day period preceding the applicable determination date is $.14 or greater. In December 2002 we filed suit against certain of the investors in connection with the warrant repricing provisions of the agreement, and during May 2003, we entered into settlement and mutual release agreements with the parties involved in both the Florida and New York litigation, which, among other things, dismissed the lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in exchange for release by the parties to the lawsuits and certain parties to the September 2002 financing of their right to exercise the warrants issued in the September 2002 financing, we issued an aggregate of 947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891 to such parties, of which $790,748 has been paid to date, and of which $321,428 shall be paid in five equal monthly installments until September 2003. 680,000 of the shares issued may not be resold until September 2003. 14. From December 2002 through June 2003, pursuant to securities purchase agreements with various purchasers, we authorized the issuance of and sold 22,025,000 shares of our common stock and warrants to purchase up to 13,215,000 shares of our common stock at $0.08 per share, for an aggregate purchase price of $1,762,000. In connection with the agreement, we paid finders' fees to Harbor View Group and AVIX, Inc consisting of (i) approximately $105,720 and (ii) warrants to purchase 1,168,375 shares of our common stock. All of the aforementioned warrants are exercisable at $0.12 per share commencing six months after the issuance date, for a period of five years. 15. On April 11, 2003 pursuant to a securities purchase agreement with an investor, we sold 3,125,000 shares of common stock and warrants to purchase 1,875,000 shares of common stock at an exercise price of $0.12 per share through April 2007, for an aggregate purchase price of $250,000. 16. On April 28, 2003 we entered into a securities purchase agreement with an Cornell Capital to sell up to $2,500,000 of our 5% convertible debentures, due April 28, 2008, of which $1,000,000 was purchased on April 28, 2003; $500,000 of convertible debentures will be purchased within 10 business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures; and $1,000,000 of convertible debentures will be purchased within 20 business days from the date the registration statement is declared effective by the SEC. Pursuant to the agreement, the investor or its assignees will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital, along with warrants to purchase an aggregate of 15,000,000 shares of our common stock at an exercise price of $0.091 commencing on October 28, 2003 through April 28, 2008. Pursuant to the terms of the agreement, commencing July 27, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at investor's option in cash or common stock), in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period of any of the convertible debentures held by Cornell Capital. Advance Viral has redemption rights. If Advanced Viral exercises certain of these redemption rights, Advanced Viral may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and investor will receive a warrant to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. 17. On April 28, 2003, we entered into an equity line of credit agreement with Cornell. The equity line agreement provides, generally, that Cornell has committed to purchase up to $50 million of our common stock over a three-year period, with the timing and amount of such purchases, if any, at our discretion, provided, however, that the maximum amount of each advance is $500,000, and the date of each advance shall be no less than six trading days after our notification to Cornell of its obligation to purchase shares. Any shares of common stock sold under the equity line will be priced at the lowest closing bid price of our common stock during the five consecutive trading days following our notification to Cornell requesting an advance under the equity line. In addition, at the time of each advance, we are obligated to pay Cornell a fee equal to five percent (5%) of the amount of each advance. However, Cornell's obligation to purchase and our obligation to sell our common stock is conditioned upon the per share purchase price being equal to or greater than a price we set on the advance notice date, the minimum acceptable price, which may not be set any closer than 7.5% percent below the closing bid price of the common stock the day prior to the date we notify Cornell of its obligation to purchase shares. In addition, there are certain other conditions applicable to our ability to draw down on the equity line including the filing and effectiveness of a registration statement registering the resale of all shares of common stock that may be issued to Cornell under the equity line and our adherence with certain covenants. There can be no assurance of the amount of proceeds we will receive, if any, under the equity line of credit with Cornell. In connection with this agreement, we issued 107,527 shares of our common stock to Katalyst LLC in consideration for its exclusive placement agent services. II-3 18. On July 18, 2003 we entered into an additional securities purchase agreement with Cornell Capital to sell up to $1,000,000 of our 5% secured convertible debentures, due July 17, 2008, which will be purchased within two business days of the filing of the registration statement with the SEC covering the registration of shares underlying the convertible debentures. Pursuant to the agreement, Cornell Capital will receive a 10% discount to the purchase price of the convertible debentures purchased by Cornell Capital. The convertible debentures are secured by the assets of Advanced Viral until 50 days after the effectiveness of the registration statement of which this prospectus is a part. Pursuant to the terms of the agreement, commencing October 18, 2003, Cornell Capital may convert the debenture plus accrued interest, (which may be taken at Cornell Capital's option in cash or common stock), in shares of our common stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our common stock for the four trading days immediately preceding the conversion date. No more than $600,000 may be converted in any thirty-day period for all of the convertible debentures held by Cornell Capital. Advanced Viral has redemption rights. If Advanced Viral exercises certain of these redemption rights, Advanced Viral may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest and Cornell Capital will receive warrants to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant shall be exercisable on a cash basis and have an exercisable price of the higher of 110% of the closing bid price of our common stock on the closing date or $0.08. The warrant shall have "piggy back" registration rights and shall survive for 5 years from the closing date. We relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. We made a determination in each case that the person to whom the securities were issued did not need the protection that registration would afford. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and our transfer agent was instructed not to permit transfers unless directed to do so by us, after approval by our legal counsel. We believe that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. We also believe that the investors had access to the same type of information as would be contained in a registration statement. II-4 INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Certificate of Incorporation of Advanced Viral Research Corp. ("ADVR"). (2) 3.2 Bylaws of ADVR, as amended. (1) 3.3 Amendment to Certificate 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, MD 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)
II-5
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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: Legality. (Provided herewith.) 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, MD and ADVR. (11)(b)
II-6
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and ADVR. (12) 10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c) 10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR. (11)(d) 10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and ADVR, as amended. (11)(e) 10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel Islands and ADVR. (11)(f) 10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver. (9) 10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z. Hirschman, MD. (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, MD. (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, MD. (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)
II-7
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development Agreement, dated March 4, 1998, between National Institute of Health, Food and Drug Administration and the Centers for Disease Control and Prevention. (13) 10.29 Amended and Restated Employment Agreement dated July 8, 1998 between ADVR and Shalom Z. Hirschman, MD. (11)(n) 10.30 Agreement between ADVR and Angelo Chinnici, MD 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, MD. (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) 10.47 Registration Rights Agreement dated as of February 9, 2001 between ADVR and Cornell Capital Partners, LP. (21)
II-8
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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 V. 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) 10.59 Termination Agreement dated May 30, 2002 between ADVR and Harbor View Group, Inc. (25) 10.60 Securities Purchase Agreement dated May 30, 2002 between ADVR and O. Frank Rushing and Justine Simoni, as joint tenants. (25) 10.61 Securities Purchase Agreement dated July 3, 2002 between ADVR and James F. Dicke III. (25) 10.62 Securities Purchase Agreement dated July 15, 2002 between ADVR and Peter Lunder. (25) 10.63 Securities Purchase Agreement dated September 9, 2002 between ADVR and various investors. 11(q) 10.64 Form of Warrant dated September 9, 2002 between ADVR and various investors. 11(q) 10.65 Registration Rights Agreement dated September 9, 2002 between ADVR and various investors. 11(q) 10.66 Agreement dated May 1, 2002 (effective September 2002) between Advanced Viral Research Corp. and EnviroGene LLC. (26) 10.67 Agreement dated October 8, 2002 between Advanced Viral Research Corp. and Quintiles Israel Ltd. (26) 10.68 Securities Purchase Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital Partners, LP. (27) 10.69 5% Convertible Debenture dated April 28, 2003. (27)
II-9
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.70 Warrant dated April 28, 2003 to purchase 15,000,000 shares of common stock at an exercise price of $0.091 per share. (27) 10.71 Registration Rights Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital Partners, LP. (27) 10.72 Equity Line of Credit Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital Partners, LP. (27) 10.73 Registration Rights Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital Partners, LP. (27) 10.74 Consulting Agreement dated April 22, 2003 between Registrant and Robert Nowinski, Ph.D. (Provided herewith) 10.75 Securities Purchase Agreement dated as of July 18, 2003 between the Registrant and Cornell Capital Partners, LP. (Provided herewith) 10.76 5% Convertible Debenture dated July 18, 2003. (Provided herewith) 10.77 Investor Registration Rights Agreement dated as of July 18, 2003 between the Registrant and Cornell Capital Partners, LP. (Provided herewith) 10.78 Escrow Agreement dated July 18, 2003, between Registrant and Butler Gonzalez, LLP (Provided herewith) 10.79 Security agreement dated July 18, 2003 between Registrant and Cornell Capital Partners, L.P. (Provided herewith.) 21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian corporation. 23.1 Independent Auditors' Consent. (Provided herewith.)
NOTES TO INDEX TO EXHIBITS 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.
II-10 NOTES TO INDEX TO EXHIBITS 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: 11(a) A report on Form 8-K dated January 3, 1992. 11(b) A report on Form 8-K dated September 14, 1993. 11(c) A report on Form 8-K dated April 25, 1994. 11(d) A report on Form 8-K dated June 3, 1994. 11(e) A report on Form 8-K dated June 17, 1994. 11(f) A report on Form 8-K dated October 25, 1994. 11(g) A report on Form 8-K dated December 28, 1995. 11(h) A report on Form 8-K dated April 22, 1996. 11(i) A report on Form 8-K dated July 12, 1996. 11(j) A report on Form 8-K dated October 17, 1996. 11(k) A report on Form 8-K dated February 21, 1997. 11(l) A report on Form 8-K dated March 25, 1997. 11(m) A report on Form 8-K dated September 26, 1997. 11(n) A report on Form 8-K dated July 21, 1998. 11(o) A report on Form 8-K dated November 24, 1998. 11(p) A report on Form 8-K dated December 3, 2001. 11(q) A report on Form 8-K dated September 10, 2002. 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.
II-11 NOTES TO INDEX TO EXHIBITS 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. 25. Documents incorporated by reference herein to certain exhibits to our Quarterly Report on Form 10-Q for the period ended June 30, 2002. 26. Documents incorporated by reference herein to certain exhibits to our Quarterly Report on Form 10-Q for the period ended September 30, 2002. 27. Document incorporated by reference herein to Exhibit 10.1 to our quarterly report for the period ended March 31, 2003.
(b) REPORTS ON FORM 8-K. None. II-12 UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made a post-effective amendment to this registration statement to: (i) To include any prospectus required by Sections 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any additional or changed material information on 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 bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the end of the offering. II-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Yonkers, State of New York, on July 18, 2003. Date: July 18, 2003 ADVANCED VIRAL RESEARCH CORP. (REGISTRANT) By: /s/ Shalom Z. Hirschman, M.D. ---------------------------------- Shalom Z. Hirschman, M.D., President, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933 as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated. Date: July 18, 2003 By: /s/ Eli Wilner ------------------------------------ Eli Wilner, Chairman, Secretary and Director Date: July 18, 2003 By: /s/ Alan V. Gallantar ------------------------------------ Alan V. Gallantar, Principal Financial and Accounting Officer Date: July 18, 2003 By: /s/ David Seligman ------------------------------------ David Seligman, Director Date: July 18, 2003 By: /s/ Nancy Van Sant ------------------------------------ Nancy Van Sant, Director Date: July 18, 2003 By: /s/ Roy Walzer ------------------------------------ Roy Walzer, Director II-14 EX-5.1 3 g83525exv5w1.txt EX-5.1 OPINION: LEGALITY EXHIBIT 5.1 July 16, 2003 Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, New York 10701 RE: ADVANCED VIRAL RESEARCH CORP. (THE "CORPORATION") REGISTRATION STATEMENT ON FORM S-1 (THE "REGISTRATION STATEMENT") Gentlemen: We have acted as special counsel to the Corporation in connection with the preparation of the Registration Statement on Form S-1 filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "1933 Act"), relating to the proposed public offering of up to 415,908,375 shares of the Corporation's common stock (the "Common Stock"). We are furnishing this opinion to you in accordance with Item 601(b)(5) of Regulation S-K promulgated under the 1933 Act for filing as Exhibit 5.1 to the Registration Statement. We are familiar with the Registration Statement, and we have examined the Corporation's Certificate of Incorporation, as amended to date, the Corporation's Bylaws, as amended to date, and minutes and resolutions of the Corporation's Board of Directors and shareholders. We have also examined such other documents, certificates, instruments and corporate records, and such statutes, decisions and questions of law, as we have deemed necessary or appropriate for the purpose of this opinion Based upon the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Selling Stockholder (as defined in the Registration Statement) to the public, when issued and sold in the manner described in the Registration Statement (as amended), will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Prospectus constituting a part thereof. Very truly yours, /s/ Kirkpatrick & Lockhart LLP KIRKPATRICK & LOCKHART LLP EXHIBIT 5.1-1 EX-10.74 4 g83525exv10w74.txt EX-10.74 CONSULTING AGREEMENT EXHIBIT 10.74 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement") is entered into by and among ADVANCED VIRAL RESEARCH CORP. (the "Company") and ROBERT NOWINSKI (the "Consultant"), as of April 22, 2003 (the "Effective Date"). In consideration of the mutual covenants set forth and for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Consultant and the Company agree as follows: 1. CONSULTING ENGAGEMENT. The Company hereby engages Consultant as a consultant and advisor and Consultant agrees to accept such engagement upon the terms and conditions set forth herein. During the term of this agreement (the "Consulting Period"), unless sooner terminated pursuant to the terms herein. Nothing contained herein shall prevent Consultant from engaging in other endeavors not in conflict with the business of the Company or his duties and responsibilities under this Agreement or in violation of Section 6 of this Agreement. 2. CONSULTING DUTIES. Consultant shall take direction from Eli Wilner, the Chairman of the Board of Directors ("Wilner"), or his designee. Consultant shall have the title "Senior Advisor to the Board of Directors." During the Consulting Period, Consultant shall render such service and promote the name and goodwill of the Company as Wilner may reasonably request so that the Company may have the benefit of Consultant's experience and knowledge, including, but not limited to the introduction to the Company of potential investors the Company. Consultant agrees that he will be available for advice and counsel to the officers and directors of the Company at all reasonable times by telephone, letter, or in person during the Consulting Period, provided, however Consultant shall not be required to perform services hereunder more than sixteen (16) hours per week. 3. STATUS OF CONSULTANT. Consultant shall be an independent contractor and not an "associate" or "employee" of the Company. Accordingly, the Company shall not withhold amounts of applicable federal and state income, withholding and employment taxes from the fees to be paid Consultant hereunder unless otherwise required by law. Consultant shall be solely responsible for and shall pay all of such taxes. 4. CONSULTING FEE; EXPENSES. In consideration of the services provided in Section 2, during the Consulting Period Consultant shall receive a consulting fee (the "Consulting Fee") of Fifteen Thousand Dollars ($15,000) payable on May 22, 2003, and Seven Thousand Five Hundred Dollars ($7,500) payable on the 8th and the 22nd day of every month thereafter during the Consulting Period. In addition, the Company shall pay to Consultant on the 8th day of each month during the Consulting Period the sum of $700 for expenses and shall provide to Consultant the use by Consultant at Consultant's home, of a computer to be selected by Consultant. Private car transportation to and from Consultant's home and the Company shall be provided for Consultant by the Company twice weekly and all other times the Company requests Consultant to be present at the Company. Consultant shall be reimbursed for all reasonable business and travel expenses incurred by Consultant for the benefit of the Company as approved in writing in advance by Wilner or his designee. 5. BONUS. In addition to the compensation to be paid to Consultant pursuant to Section 4 hereof, during the Consulting Period, the Company shall: (a) pay to Consultant a (i) cash fee of 5% of the net proceeds received by the Company from investors who purchase securities of the Company from the Company for cash during the Consulting Period except those investors whose commitment to purchase such securities preceded the Consulting Period (a "Financing") and (ii) issue to Consultant warrants to purchase that number of shares of the Company's common stock which is equal to 5% of the shares issued in the Financing exercisable within a period of five (5) years from the closing of the Financing at a per share exercise price equal to the greater of (x) 100% of the closing bid price of the Company's Common Stock on the trading day prior to the date the Company receives the funding or (y) the exercise price of any convertible securities issued by the Company or its affiliates in the applicable transaction; and (b) pay to Consultant a cash fee of 5% of the initial net proceeds received by the Company during the Consulting Period resulting from the consummation of a license, joint venture or similar contractual arrangement. EXHIBIT 10.74-1 (c) the amounts payable to Consultant under Sections 5(a) and 5(b) shall be paid to the Consultant at the time funds are actually received by the Company and so long as such funds (i) are received by the Company during the Consulting Period; or (ii) are irrevocably committed to the Company during the Consulting Period and received by the Company within 90 days of the termination of the Consulting Period. 6. TERM; TERMINATION. a. TERM. The term of this Agreement and consulting engagement shall be six (6) months (the "Term"). b. TERMINATION. Notwithstanding anything contained herein to the contrary, this Agreement may be terminated by the Company at any time for Cause or upon the death or Disability of Consultant, and the Company shall have no further obligation to the Consultant after the Determination Date. For purposes hereof, "Cause" means (i) the conviction of the Consultant of a felony under federal, state or local criminal law, or (ii) willful and gross misconduct by the Consultant that is materially detrimental to the Company or their subsidiaries, or (iii) a violation by the Consultant of Sections 7 or 8 hereof or actions by Consultant which the Company believes do not promote or are not in the best interests of the Company, each as determined in good faith by a written resolution adopted by the affirmative vote of at least majority of the Company's directors. For purposes hereof, "Disability" means Consultant has been totally incapacitated by bodily injury or physical or mental disease so as to be prevented from engaging in any comparable occupation or employment for remuneration or profit. For purposes hereof, the "Determination Date" shall mean either (i) the date of the Company's determination that Cause exists; (ii) the date of Consultant's death; or (iii) the date of the Company's determination of Consultant's Disability. 7. NONCOMPETITION COVENANT. Consultant agrees that the Company has many substantial legitimate business interests that can be protected only by Consultant agreeing not to compete with the Company under certain circumstances and that the Company will suffer irreparable harm if Consultant does compete under such circumstances. These interests include, without limitation, the Company's contacts and relationships with its clients, the Company's reputation and goodwill in the industry, and the Company's rights in its secret or confidential information, knowledge or data relating to the Company and its business. Consultant therefore agrees that, during the Consulting Period and for a period of six (6) months following termination of this engagement, Consultant shall not directly or indirectly, own, manage, operate, join, advise, control or otherwise engage or participate in or be connected as an employee, partner, investor, stockholder, creditor, guarantor, advisor or consultant in, the BUSINESS OF THE COMPANY (THE "BUSINESS"), to any person or any entity; provided, however, Consultant may hold stock representing up to five percent of the equity of a company engaged in the Business. In the event that Consultant violates this paragraph, Consultant shall forfeit all of the unpaid portion of the Consulting Fee and shall be required to reimburse the Company for any portion of the Consulting Fee paid to Consultant prior to such breach. 8. CONFIDENTIAL INFORMATION. Consultant shall hold in a fiduciary capacity for the benefit of the Company all technical and non-technical information presented to Consultant by the Company, whether orally or in writing, including without limitation, information, techniques, inventions, discoveries, ideas, specifications, "know-how", procedures, designs, diagrams, apparatus, equipment, algorithms, software programs, software source codes (the "Confidential Information") and all tangible documents, materials, products, prototypes, sketches, drawings, models, and/or other media containing the Confidential Information ("Material") developed and disclosed to Consultant by the Company or its independent contractors, agents, clients, attorneys, accountants, and other authorized representatives and which shall not be or become public knowledge. During the term of this Agreement and after termination of this Agreement, Consultant shall not, without the prior written consent of the Company, communicate or divulge any such Confidential Information or Materials to anyone other than the Company and those designated by it unless required by law. Consultant acknowledges that the Confidential Information and Materials are and shall remain the property of the Company. The confidentiality obligations hereunder shall not apply to Confidential Information which: (i) is, or later becomes, public knowledge other than by breach of the provisions of this Agreement; or (ii) is in the possession of Consultant with the full right to disclose prior to its receipt from the Company, as evidenced by written records; or (iii) is independently received by Consultant from a third party, with no restrictions on disclosure. Furthermore, Consultant agrees not to use, without the Company's written consent, the Confidential Information and Materials for any purpose other than to perform services for the Company. Consultant will deliver to the Company, at the termination of this Agreement, all Materials in Consultant's possession or under Consultant's control relating to the business, products, or projects of the Company. Consultant will not impart to any subsequent clients or use for Consultant's own benefit any information required to be held in confidence. 9. SECURITIES LAWS. Consultant hereby acknowledges that he is aware that the United States securities laws restrict persons with material non-public information about a company from purchasing or selling securities of such EXHIBIT 10.74-2 company or from communicating such information to a third party under circumstances in which it is reasonably foreseeable that such third party is likely to purchase or sell such securities. Consultant further agrees that none of the confidential information of the Company or any other information obtained by Consultant will be used by Consultant, or disclosed to others for use, in connection with purchasing, selling or trading in the Company's securities in any manner that is in violation of legal or regulatory restrictions applicable from time to time, and Consultant acknowledges a duty not to purchase, sell or trade in securities on the basis of any material "inside" information that is not publicly known. 10. NON-EXCLUSIVITY AND SURVIVAL. The covenants and obligations of Consultant contained in Sections 7 and 8 are in addition to, and not in lieu of, any other covenants and obligations which Consultant may have with respect to the subject matter hereof, whether by contract, as a matter of law or otherwise, and such covenants and obligations, and their enforceability, will survive any termination of this Agreement by either party and any investigation made with respect to the breach thereof by the Company at any time. 11. INDEMNIFICATION. a. Consultant shall indemnify, defend and hold harmless the Company from and against all claims, losses, costs, damages and expenses, including, without limitation, attorneys' fees and costs, incurred by the Company resulting from or arising in connection with any intentional or willful misconduct by Consultant arising out of or related to Consultant's activities under this Agreement. b. The Company shall indemnify, defend and hold harmless Consultant from and against all claims, losses, costs, damages and expenses, including, without limitation, attorneys' fees and costs, incurred by Consultant resulting from or arising in connection with any intentional or willful misconduct by the Company or any misrepresentation or concealment of a material fact supplied in written materials provided by the Company to Consultant for use in performing Consultant's duties hereunder. c. This section shall survive termination of this Agreement regardless of the reason for such termination. 12. DEBARMENT Consultant hereby certifies that Consultant has not been debarred under the provisions of the Generic Drug Enforcement Act of 1992, 21 U.S.C. Sec. 335a (a) and (b). In the event that during the term of this Agreement Consultant (i) becomes debarred, or (ii) receives notice of an action or threat of an action with respect to Consultant's debarment, or (iii) becomes aware of an action taken by Consultant or involving Consultant which might lead to Consultant's debarment, Consultant agrees to immediately notify the Company. Consultant also agrees that in the event Consultant becomes debarred Consultant shall immediately cease all activities relating to this Agreement. In the event Consultant becomes debarred, this Agreement shall automatically terminate, without any further action or notice by either Party. In the event Company receives notice from Consultant or otherwise becomes aware that (i) a debarment action has been brought against Consultant, or (ii) Consultant has been threatened with a debarment action, or (iii) is, or has been, involved in any activity which may cause Consultant to be debarred, then Company shall have the right to terminate this Agreement immediately. 13. MISCELLANEOUS. a. ASSIGNMENT. This Agreement is personal to Consultant and without the prior written consent of the Company shall not be assignable by Consultant. b. ARBITRATION; GOVERNING LAW. The parties shall resolve any disputes arising hereunder before a panel of one arbitrator selected to pursuant to and run in accordance with the rules of the American Arbitration Association. The arbitration shall be held in Westchester County, New York. Each party shall bear their own attorney's fees and costs of such arbitration. Disputes under this Agreement as well all of the terms and conditions of this Agreement shall be governed in accordance with and by the laws of the State of New York. c. INJUNCTIVE RELIEF. Notwithstanding Section 11(b) above, in the event of a breach or threatened breach by Consultant of Sections 6 and 7 of this Agreement, in addition to any other form of relief that may be granted, the Company shall be entitled to an injunction from a court of appropriate jurisdiction, including a temporary restraining order, restraining Consultant from committing or continuing such breaches. EXHIBIT 10.74-3 d. ATTORNEYS' FEES. If the Company or Consultant acts to enforce all or a portion of this Agreement, whether or not resulting in litigation, the prevailing party shall be entitled to recover all reasonable costs, including, without limitation, attorneys' fees incurred in such action. e. ENFORCEABILITY. In the event that an arbitrator, court or other tribunal finds any provision of this Agreement to be overly broad, the parties agree that such arbitrator, court or tribunal has the authority to narrow such restrictions so as to render them reasonable and enforceable. Should any provision of this Agreement be found to be invalid or unreasonable in nature, the remainder of the Agreement, including any portion of a challenge provision found to be reasonable, shall remain fully enforceable. f. NOTICES. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Consultant: Robert Nowinski ------------------------- ------------------------- ------------------------- If to the Company: Advanced Viral Research Corp. Attn: Alan Gallantar, Chief Financial Officer 200 Corporate Boulevard South Yonkers, NY 10701 Tel: 914-376-7383 Fax: 914-376-7368 With a copy to: Berman Rennert Vogel & Mandler, P.A. Attn: Charles J. Rennert Bank of America Tower, Suite 3500 100 SE 2nd Street Miami, Florida 33131 Tel: 305-577-4171 Fax: 305-347-6463 or such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. g. MODIFICATION AND WAIVER. None of the terms or conditions of this Agreement may be waived except in writing by the party which is entitled to the benefits thereof. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by Consultant and Company. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision (whether or not similar) nor shall such waiver constitute a continuing waiver. h. SEVERABILITY. Each term and provision of this Agreement constitutes a separate and distinct undertaking, covenant, term and/or provision hereof. In the event that any term of provision of this Agreement shall be determined to be unenforceable, invalid or illegal in any respect, such unenforceability, invalidity or illegality shall not affect any other term or provision of this Agreement, but this Agreement shall be construed as if such unenforceable, invalid or illegal term or provision had never been contained herein. Moreover, if any term of provision of this Agreement shall for any reason be held to be excessively broad as to time, duration, scope, activity or subject, it shall be construed, by limiting and reducing it, so as to be enforceable to the extent permitted under applicable law as it shall then exist. i. ENTIRE AGREEMENT. This Agreement constitutes and embodies the full and complete understanding and agreement of the parties hereto with respect to the subject matter here of and supercedes all prior understanding whether oral or in writing and may not be modified except by writing signed by the parties hereto. EXHIBIT 10.74-4 IN WITNESS WHEREOF, this Agreement has been executed and is effective as of the day and year first written above. ADVANCED VIRAL RESEARCH CORP. By: Name: Eli Wilner Title: Chairman of the Board of Directors CONSULTANT /s/ Robert Nowinski ----------------------------------------- Robert Nowinski EXHIBIT 10.74-5 EX-10.75 5 g83525exv10w75.txt EX-10.75 SECURITIES PURCHASE AGREEMENT EXHIBIT 10.75 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of July 18, 2003, by and among ADVANCED VIRAL RESEARCH CORP., a Delaware corporation, with headquarters located at 200 Corporate Boulevard South, Yonkers, New York 10701 (the "COMPANY"), and the Buyers listed on Schedule I attached hereto (individually, a "BUYER" or collectively "BUYERS"). WITNESSETH: WHEREAS, the Company and the Buyer(s) are executing and delivering this Agreement in reliance upon an exemption from securities registration pursuant to Section 4(2) and/or Rule 506 of Regulation D ("REGULATION D") as promulgated by the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT"); WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall purchase up to One Million Dollars ($1,000,000) of convertible debentures (the "CONVERTIBLE DEBENTURES"), which shall be purchased within two (2) business days of the filing of the registration statement (the "REGISTRATION STATEMENT") filed pursuant to the Investor Registration Rights Agreement (as defined below) with the Securities and Exchange Commission (the "CLOSING"), which shall be convertible into shares of the Company's common stock, par value $0.00001 (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), for a total purchase price of up to One Million Dollars ($1,000,000), (the "PURCHASE PRICE") in the respective amounts set forth opposite each Buyer(s) name on Schedule I ( the "SUBSCRIPTION AMOUNT"); and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as EXHIBIT A (the "INVESTOR REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated there under, and applicable state securities laws; and WHEREAS, the aggregate proceeds of the sale of the Convertible Debentures contemplated hereby shall be held in escrow pursuant to the terms of an escrow agreement substantially in the form of the Escrow Agreement (as defined herein) attached hereto as EXHIBIT B. WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering Irrevocable Transfer Agent Instructions substantially in the form attached hereto as EXHIBIT C (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Security Agreement substantially in the form attached hereto as EXHIBIT D (the "SECURITY AGREEMENT") pursuant to which the Company has agreed to provide the Buyer a security interest in Pledged Collateral (as this term is defined in the Security Agreement dated the date hereof) in the event of a default of the Company's obligations herein and contained in the Convertible Debenture, until the occurrence of an Expiration Event as defined in the Security Agreement; and NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Buyer(s)hereby agree as follows: 1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURES. (a) PURCHASE OF CONVERTIBLE DEBENTURES. Subject to the satisfaction (or waiver) of the terms and conditions of this Agreement, each Buyer agrees, severally and not jointly, to purchase at the Closing (as defined herein below) and the Company agrees to sell and issue to each Buyer, severally and not jointly, at the Closing, Convertible Debentures in amounts corresponding with the Subscription Amount set forth opposite each Buyer's name on Schedule I hereto. Upon execution hereof by a Buyer, the Buyer shall wire transfer the Subscription Amount set forth opposite his name on Schedule I in same-day funds or a check payable to Butler Gonzalez LLP, as Escrow Agent for Advanced Viral Research Corp. / Cornell Capital Partners, LP ", which Subscription Amount shall be held in escrow pursuant to the terms of the Escrow Agreement (as hereinafter defined) and disbursed in accordance therewith. (b) CLOSING DATES. The Closing of the purchase and sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern Standard Time on the second (2nd) business day following the date the Registration Statement filed pursuant to the Investor Registration Rights Agreement is filed with the SEC (the "CLOSING DATE"), subject to notification of satisfaction of the conditions to the Closings set forth in Sections 6 and 7 below. The Closings shall occur on the Closing Date at the offices of Butler Gonzalez, LLP, 1000 Stuyvesant Avenue, Suite 6, Union, NJ 07083 (or such other place as is mutually agreed to by the Company and the Buyer(s)). (c) ESCROW ARRANGEMENTS; FORM OF PAYMENT. Not later than three (3) days prior to each Closing, the aggregate proceeds of the sale of the Convertible Debentures to Buyer(s) pursuant hereto shall be deposited in a non-interest bearing escrow account with Butler Gonzalez LLP, as escrow agent (the "ESCROW AGENT"), pursuant to the terms of an escrow agreement between the Company, the Buyer(s) and the Escrow Agent in the form attached hereto as EXHIBIT B (the "ESCROW AGREEMENT"). Subject to the satisfaction of the terms and conditions of this Agreement, on the Closing Date, (i) the Escrow Agent shall deliver to the Company in accordance with the terms of the Escrow Agreement such aggregate proceeds for the Convertible Debentures to be issued and sold to such Buyer(s) at the Closings minus the additional retainer of Kirkpatrick & Lockhart LLP in the amount of Five Thousand Dollars ($5,000) by wire transfer in accordance with the Company's written wire instructions and (ii) the Company shall deliver to each Buyer, Convertible Debentures which such Buyer(s) is purchasing in amounts indicated opposite such Buyer's name on Schedule I, duly executed on behalf of the Company. 2 2. BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants, severally and not jointly, that: (a) INVESTMENT PURPOSE. Each Buyer is acquiring the Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer will acquire the Conversion Shares then issuable, for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer reserves the right to dispose of the Conversion Shares at any time in accordance with or pursuant to an effective registration statement covering such Conversion Shares or an available exemption under the 1933 Act. (b) ACCREDITED INVESTOR STATUS. Each Buyer is an "ACCREDITED INVESTOR" as that term is defined in Rule 501(a)(3) of Regulation D. (c) RELIANCE ON EXEMPTIONS. Each Buyer understands that the Convertible Debentures are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such securities. (d) INFORMATION. Each Buyer and its advisors (and his or, its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information he deemed material to making an informed investment decision regarding his purchase of the Convertible Debentures and the Conversion Shares, which have been requested by such Buyer. Each Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. Each Buyer understands that its investment in the Convertible Debentures and the Conversion Shares involves a high degree of risk. Each Buyer is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Buyer to obtain information from the Company in order to evaluate the merits and risks of this investment. Each Buyer has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to its acquisition of the Convertible Debentures and the Conversion Shares. (e) NO GOVERNMENTAL REVIEW. Each Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Convertible Debentures or the Conversion Shares, or the fairness or suitability of the investment in the Convertible Debentures or the Conversion Shares, nor have such authorities passed upon or endorsed the merits of the offering of the Convertible Debentures or the Conversion Shares. (f) TRANSFER OR RESALE. Each Buyer understands that except as provided in the Investor Registration Rights Agreement: (i) the Convertible Debentures have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or 3 transferred unless (A) subsequently registered thereunder, or (B) such Buyer shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration requirements; (ii) any sale of such securities made in reliance on Rule 144 under the 1933 Act (or a successor rule thereto) ("RULE 144") may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC there under; and (iii) neither the Company nor any other person is under any obligation to register such securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption there under. The Company reserves the right to place stop transfer instructions against the shares and certificates for the Conversion Shares. (g) LEGENDS. Each Buyer understands that the certificates or other instruments representing the Convertible Debentures and or the Conversion Shares shall bear a restrictive legend in substantially the following form (and a stop transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. The legend set forth above shall be removed and the Company within two (2) business days shall issue a certificate without such legend to the holder of the Conversion Shares upon which it is stamped, if, unless otherwise required by state securities laws, (i) in connection with a sale transaction, provided the Conversion Shares are registered under the 1933 Act or (ii) in connection with a sale transaction, after such holder provides the Company with an opinion of counsel, which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale, assignment or transfer of the Conversion Shares may be made without registration under the 1933 Act. (h) BUYER'S(S') TRADING ACTIVITIES. The Buyer's(s') trading activities with respect to the Conversion Shares will be in compliance with all applicable federal and state securities laws, rules and regulations and the rules and regulations of the principal market on 4 which the Company's Common Stock is listed or traded. Neither the Buyer(s) nor any of their affiliates has an open short position in the Common Stock of the Company, and each Buyer agrees that it will not, and that it will cause its affiliates not to engage in any short sales (as defined in any applicable SEC rules or rules of the National Association of Securities Dealers) or in any hedging transactions with respect to the Common Stock while the Convertible Debentures remain issued and outstanding. (i) AUTHORIZATION, ENFORCEMENT. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable in accordance with its terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. (j) RECEIPT OF DOCUMENTS. Each Buyer and his or its counsel has received and read in their entirety: (i) this Agreement and each representation, warranty and covenant set forth herein, the Investor Registration Rights Agreement, and the Escrow Agreement; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-K for the fiscal year ended December 31, 2002; (iv) the Company's Form 10-Q for the fiscal quarters ended March 31, 2002, June 30, 2002, September 30, 2002 and March 31, 2003, and (v) answers to all questions each Buyer submitted to the Company regarding an investment in the Company; and each Buyer has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Cornell Capital Partners LP has provided the Company with its audited financial statements for the period ended December 31, 2002. (k) DUE FORMATION OF CORPORATE AND OTHER BUYERS. If the Buyer(s) is a corporation, trust, partnership or other entity that is not an individual person, it has been formed and validly exists and has not been organized for the specific purpose of purchasing the Convertible Debentures and is not prohibited from doing so. (l) NO LEGAL ADVICE FROM THE COMPANY. Each Buyer acknowledges, that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. Each Buyer is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Buyers that, except as set forth in the SEC Documents (as defined herein): (a) ORGANIZATION AND QUALIFICATION. The Company and its subsidiaries are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power to own their properties and to carry on their 5 business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole. (b) AUTHORIZATION, ENFORCEMENT, COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions and any related agreements, and to issue the Convertible Debentures the Conversion Shares in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions and the Convertible Debentures and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Convertible Debentures, the Conversion Shares and the reservation for issuance and the issuance of the Conversion Shares issuable upon conversion or exercise thereof, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions, the Security Agreement and the Convertible Debentures and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions, the Security Agreement and the Convertible Debentures and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. The authorized officer of the Company executing this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions, the Security Agreement and the Convertible Debentures and any related agreements knows of no reason why the Company cannot file the registration statement as required under the Investor Registration Rights Agreement or perform any of the Company's other obligations under such documents. (c) CAPITALIZATION. The authorized capital stock of the Company consists of 1,000,000,000 shares of Common Stock, par value $0.00001 per share. As of May 28, 2003, the Company has 474,989,609 shares of Common Stock and Stock issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in Section 3(f)), no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any 6 character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except pursuant to the Registration Rights Agreement), and (iv) there are no outstanding registration statements other than on Form S-8 and the Company's Post Effective Registration Statement on Form S-1 which the SEC has informed the Company that it will review and there are no other outstanding comment letters from the SEC or any other regulatory agency. There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Convertible Debentures as described in this Agreement. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto other than stock options issued to employees and consultants. (d) ISSUANCE OF SECURITIES. The Convertible Debentures to be issued to Cornell Capital Partners LP are duly authorized and, upon issuance in accordance with the terms hereof, shall be duly issued, fully paid and nonassessable, are free from all taxes, liens and charges with respect to the issue thereof. The Conversion Shares issuable upon conversion of the Convertible Debentures have been duly authorized and reserved for issuance. Upon conversion or exercise in accordance with the Convertible Debentures, the Conversion Shares will be duly issued, fully paid and nonassessable. (e) NO CONFLICTS. Except as disclosed in the SEC Documents, the execution, delivery and performance of this Agreement, the Investors Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions and the Convertible Debentures by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or the By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of The National Association of Securities Dealers Inc.'s OTC Bulletin Board on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted, and shall not be conducted in violation of any material law, ordinance, or regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or 7 registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. Except as disclosed in the SEC Documents, all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any facts or circumstance, which might give rise to any of the foregoing. (f) SEC DOCUMENTS: FINANCIAL STATEMENTS. Since January 1, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof or amended after the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to the Buyers or their representatives, or made available through the SEC's website at http://www.sec.gov., true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "FINANCIAL STATEMENTS") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such Financial Statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and, fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyer which is not included in the SEC Documents, including, without limitation, information referred to in this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (g) 10(B)-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. (h) ABSENCE OF LITIGATION. Except as disclosed in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a material adverse effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a material adverse effect on the business, operations, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole. 8 (i) ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF THE CONVERTIBLE DEBENTURES. The Company acknowledges and agrees that the Buyer(s) is acting solely in the capacity of an arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by the Buyer(s) or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to such Buyer's purchase of the Convertible Debentures or the Conversion Shares. The Company further represents to the Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation by the Company and its representatives. (j) NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Convertible Debentures or the Conversion Shares. (k) NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Convertible Debentures or the Conversion Shares under the 1933 Act or cause this offering of the Convertible Debentures or the Conversion Shares to be integrated with prior offerings by the Company for purposes of the 1933 Act. (l) EMPLOYEE RELATIONS. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. (m) INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. (n) ENVIRONMENTAL LAWS. The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations 9 relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. (o) TITLE. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. (p) INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. (q) REGULATORY PERMITS. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. (r) INTERNAL ACCOUNTING CONTROLS. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, and (iii) the recorded amounts for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) NO MATERIAL ADVERSE BREACHES, ETC. Except with respect to the Company's right of first refusal to an investor and except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a material adverse effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a material adverse effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. 10 (t) TAX STATUS. The Company and each of its subsidiaries has made and filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. (u) CERTAIN TRANSACTIONS. Except as set forth in the SEC Documents, and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed in the SEC Documents, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. (v) FEES AND RIGHTS OF FIRST REFUSAL. Except as set forth on the SEC Documents and except for a right of first refusal to an investor, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. 4. COVENANTS. (a) BEST EFFORTS. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. (b) FORM D. The Company agrees to file a Form D with respect to the Conversion Shares as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Conversion Shares, or obtain an exemption for the Conversion Shares for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. (c) REPORTING STATUS. Until the earlier of (i) the date as of which the Buyer(s) may sell all of the Conversion Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Buyer(s) 11 shall have sold all the Conversion Shares and (B) none of the Convertible Debentures are outstanding (the "REGISTRATION PERIOD"), the Company shall file in a timely manner all reports required to be filed with the SEC pursuant to the 1934 Act and the regulations of the SEC there under, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations there under would otherwise permit such termination. (d) USE OF PROCEEDS. The Company will use the proceeds from the sale of the Convertible Debentures for general corporate and working capital purposes. (e) RESERVATION OF SHARES. The Company shall take all action reasonably necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the issuance of the Conversion Shares. If at any time the Company does not have available such shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Conversion Shares of the Company shall call and hold a special meeting of the shareholders within sixty (60) days of such occurrence, for the sole purpose of increasing the number of shares authorized. The Company's management shall recommend to the shareholders to vote in favor of increasing the number of shares of Common Stock authorized. Management shall also vote all of its shares in favor of increasing the number of authorized shares of Common Stock. (f) LISTINGS OR QUOTATION. The Company shall promptly secure the listing or quotation of the Conversion Shares upon each national securities exchange, automated quotation system or The National Association of Securities Dealers Inc.'s Over-The-Counter Bulletin Board or other market, if any, upon which shares of Common Stock are then listed or quoted (subject to official notice of issuance) and shall use its best efforts to maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable under the terms of this Agreement. The Company shall maintain the Common Stock's authorization for quotation in the over-the counter market. (g) FEES AND EXPENSES. Each of the Company and the Buyer(s) shall pay all costs and expenses incurred by such party in connection with the negotiation, investigation, preparation, execution and delivery of this Agreement, the Escrow Agreement, the Investor Registration Rights Agreement, the Irrevocable Transfer Agent Instructions and the Convertible Debentures. The Buyer(s) shall be entitled to a ten percent (10%) discount on the Purchase Price. The additional retainer of Kirkpatrick &Lockhart LLP in the amount of Ten Thousand Dollars ($10,000) shall be paid at Closing directly from the gross proceeds held in escrow. (h) CORPORATE EXISTENCE. Except with respect to the sale of a subsidiary and a manufacturing facility, so long as any of the Convertible Debentures remain outstanding, the Company shall not directly or indirectly consummate any merger, reorganization, restructuring, reverse stock split consolidation, sale of all or substantially all of the Company's assets or any similar transaction or related transactions (each such transaction, an "ORGANIZATIONAL CHANGE") unless, prior to the consummation of an Organizational Change, the Company obtains the written consent of each Buyer. In any such case, 12 the Company will make appropriate provision with respect to such holders' rights and interests to insure that the provisions of this Section 4(j) will thereafter be applicable to the Convertible Debentures. (i) TRANSACTIONS WITH AFFILIATES. So long as any Convertible Debentures are outstanding, the Company shall not, and shall cause each of its subsidiaries not to, enter into, amend, modify or supplement, or permit any subsidiary to enter into, amend, modify or supplement any agreement, transaction, commitment, or arrangement with any of its or any subsidiary's officers, directors, person who were officers or directors at any time during the previous two (2) years, stockholders who beneficially own five percent (5%) or more of the Common Stock, or Affiliates (as defined below) or with any individual related by blood, marriage, or adoption to any such individual or with any entity in which any such entity or individual owns a five percent (5%) or more beneficial interest (each a "RELATED PARTY"), except for (a) customary employment arrangements and benefit programs on reasonable terms in accordance with the Company's past practices, (b) any investment in an Affiliate of the Company, (c) any agreement, transaction, commitment, or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, (d) any agreement transaction, commitment, or arrangement which is approved by a majority of the disinterested directors of the Company, for purposes hereof, any director who is also an officer of the Company or any subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment, or arrangement, or (e) retention of the Law Firm of Sacher Zelman. "AFFILIATE" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a ten percent (10%) or more equity interest in that person or entity, (ii) has ten percent (10%) or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity. (j) TRANSFER AGENT. The Company covenants and agrees that, in the event that the Company's agency relationship with the transfer agent should be terminated for any reason prior to a date which is two (2) years after the Closing Date, the Company shall immediately appoint a new transfer agent and shall require that the transfer agent execute and agree to be bound by the terms of the Irrevocable Transfer Agent Instructions (as defined herein) to Transfer Agent. (k) RESTRICTION ON ISSUANCE OF CAPITAL STOCK. So long as any Convertible Debentures are outstanding, the Company shall not, without the prior written consent of the Buyer(s), issue or sell shares of Common Stock or preferred stock (i) without consideration, or (ii) any preferred stock, warrant, option, right, contract, call, or other security instrument granting the holder thereof, the right to acquire Common Stock without consideration or for a consideration less than such Common Stock's Bid Price value determined immediately prior to it's issuance, or (iii) file any registration statement on Form S-8 or (iv) grant a security interest in any of the Assets of the Company. The provisions of this Section 4(m) shall terminate and be of no further force and effect as of the one hundred and twenty-first (121st) day following effectiveness of the Registration Statement referred to in the Investor Rights Agreement. 13 (l) BUYER'S(S') TRADING ACTIVITIES. The Buyer's(s') trading activities with respect to the Conversion Shares will be in compliance with all applicable federal and state securities laws, rules and regulations and the rules and regulations of the principal market on which the Company's Common Stock is listed or traded. Neither the Buyer(s) nor any of their affiliates has an open short position in the Common Stock of the Company, and each Buyer agrees that it will not, and that it will cause its affiliates not to engage in any short sales (as defined in any applicable SEC rules or rules of the National Association of Securities Dealers) or in any hedging transactions with respect to the Common Stock while the Convertible Debentures remain issued and outstanding. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue Irrevocable Transfer Agent Instructions in the form attached hereto as EXHIBIT C to its transfer agent irrevocably appointing Butler Gonzalez LLP as its agent for purpose of having certificates issued, registered in the name of the Buyer(s) or its respective nominee(s), for the Conversion Shares representing such amounts of Convertible Debentures as specified from time to time by the Buyer(s) to the Company upon conversion of the Convertible Debentures, for interest owed pursuant to the Convertible Debentures, and any and all Liquidated Damages (as this term is defined in the Registration Rights Agreement) that may be owed pursuant to the Investor's Registration Rights Agreement. Butler Gonzalez LLP shall be paid a cash fee of Fifty Dollars ($50) for every occasion they act pursuant to the Irrevocable Transfer Agent Instructions. The Company shall not change its transfer agent without the express written consent of the Buyer(s), which may be withheld by the Buyer(s) in its sole discretion. Prior to registration of the Conversion Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(g) hereof (in the case of the Conversion Shares prior to registration of such shares under the 1933 Act) will be given by the Company to its transfer agent and that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Investor Registration Rights Agreement. Nothing in this Section 5 shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of Conversion Shares. If the Buyer(s) provides the Company with an opinion of counsel, in form, scope and substance customary for opinions of counsel in comparable transactions to the effect that registration of a resale by the Buyer(s) of any of the Conversion Shares is not required under the 1933 Act, the Company shall within two (2) business days instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Buyer. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that the Buyer(s) shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 14 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Convertible Debentures to the Buyer(s) at the Closings is subject to the satisfaction, at or before the Closings, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: (a) Each Buyer shall have executed this Agreement, the Escrow Agreement, the Investor Registration Rights Agreement and the Security Agreement and delivered the same to the Company. (b) The Buyer(s) shall have delivered to the Escrow Agent the Purchase Price for Convertible Debentures in respective amounts as set forth next to each Buyer as outlined on Schedule I attached hereto and the Escrow Agent shall have delivered the net proceeds to the Company by wire transfer of immediately available U.S. funds pursuant to the wire instructions provided by the Company. (c) The representations and warranties of the Buyer(s) shall be true and correct in all material respects as of the date when made and as of the Closings as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer(s) shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer(s) at or prior to the Closings. (d) The Company shall have filed a form UCC -1 with regard to the Pledged Property and Pledged Collateral as detailed in the Security Agreement dated the date hereof and provided proof of such filing to the Buyer(s). 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at the Closing is subject to the satisfaction, at or before the Closings, of each of the following conditions, provided that these conditions are for the Buyer's sole benefit: (a) The Company shall have executed this Agreement, the Convertible Debentures, the Escrow Agreement, the Irrevocable Transfer Instructions and the Investor Registration Rights Agreement and the Security Agreement, and delivered the same to the Buyer(s). (b) The Common Stock shall be authorized for quotation on The National Association of Securities Dealers, Inc. OTC Bulletin Board, trading in the Common Stock shall not have been suspended for any reason and all of the Conversion Shares issuable upon conversion of the Convertible Debentures shall be approved for listing or quotation on The National Association of Securities Dealers, Inc. OTC Bulletin Board. (c) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Closings as though made at that time (except for representations and warranties 15 that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closings . (d) The Company shall have executed and delivered to the Buyer(s) the Convertible Debentures in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached hereto. (e) The Buyer(s) shall have received an opinion of counsel from Kirkpatrick & Lockhart, LLP. (f) The Company shall have provided to the Buyer(s) a certificate of good standing from the secretary of state from the state in which the Company is incorporated. (g) As of the Closings, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Convertible Debentures, shares of Common Stock to effect the conversion of all of the Conversion Shares. (h) The Company shall have provided to the Investor an acknowledgement from Rachlin, Cohen & Holtz as to its ability to provide all consents required in order to file a registration statement in connection with this transaction. (i) The Company shall have filed a form UCC -1 with regard to the Pledged Property and Pledged Collateral as detailed in the Security Agreement dated the date hereof and provided proof of such filing to the Buyer(s). 8. INDEMNIFICATION. (a) In consideration of the Buyer's execution and delivery of this Agreement and acquiring the Convertible Debentures and the Conversion Shares hereunder, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Buyer(s) and each other holder of the Convertible Debentures and the Conversion Shares, and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "BUYER INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Buyer Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Buyer Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement, the Convertible Debentures or the Investor Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement, or the Investor Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such 16 Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Indemnities, any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Convertible Debentures or the status of the Buyer or holder of the Convertible Debentures the Conversion Shares, as a Buyer of Convertible Debentures in the Company. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Buyer's other obligations under this Agreement, the Buyer shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "COMPANY INDEMNITEES") from and against any and all Indemnified Liabilities incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Buyer(s) in this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions or any other instrument or document contemplated hereby or thereby executed by the Buyer, (b) any breach of any covenant, agreement or obligation of the Buyer(s) contained in this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions, the Convertible Debentures or any other certificate, instrument or document contemplated hereby or thereby executed by the Buyer, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on material misrepresentations or due to a material breach and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement, the Investor Registration Rights Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions, the Convertible Debentures or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnities. To the extent that the foregoing undertaking by each Buyer may be unenforceable for any reason, each Buyer shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. 9. GOVERNING LAW: MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County and the United States District Court for the District of New Jersey sitting in Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph. (b) COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery 17 shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. (c) HEADINGS. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (d) SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (e) ENTIRE AGREEMENT, AMENDMENTS. This Agreement supersedes all other prior oral or written agreements between the Buyer(s), the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. (f) NOTICES. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon confirmation of receipt, when sent by facsimile; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, NY 10701 Attention: Alan Gallantar, Chief Financial Officer Telephone: (914) 376-7383 Facsimile: (914) 376-7638 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 18 If to the Transfer Agent, to: American Stock Transfer & Trust Company 6501 15th Avenue Brooklyn, NY 11219 Attention: Kevin Jennings Telephone: (718) 921-8208 Facsimile: (718) 921 8326 With a copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 If to the Buyer(s), to its address and facsimile number on Schedule I, with copies to the Buyer's counsel as set forth on Schedule I. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. (g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder. (h) NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. (i) SURVIVAL. Unless this Agreement is terminated under Section 9(l), the representations and warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive the Closing for a period of one (1) year following the later of the date on which the Convertible Debentures are converted in full. The Buyer(s) shall be responsible only for its own representations, warranties, agreements and covenants hereunder. (j) PUBLICITY. The Company and the Buyer(s) shall have the right to approve, before issuance any press release or any other public statement with respect to the transactions contemplated hereby made by any party; provided, however, that the Company shall be entitled, without the prior approval of the Buyer(s), to issue any press release or other public disclosure with respect to such transactions required under applicable securities or other laws or regulations (the Company shall use its best efforts to consult the Buyer(s) in connection with any such press release or other public disclosure prior to its release and Buyer(s) shall be provided with a copy thereof upon release thereof). (k) FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 19 (l) TERMINATION. In the event that the Closing shall not have occurred with respect to the Buyers on or before five (5) business days from the date hereof due to the Company's or the Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above, the non-breaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party. (m) NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. COMPANY: ADVANCED VIRAL RESEARCH CORP. By: /s/ SHALOM Z. HIRSCHMAN ------------------------------- Name Shalom Z. Hirschman Title: Chief Executive Officer 20 SCHEDULE I SCHEDULE OF BUYERS
ADDRESS/FACSIMILE AMOUNT OF NAME SIGNATURE NUMBER OF BUYER SUBSCRIPTION - --------------------------- ------------------------------ ----------------------------- ------------ Cornell Capital Partners, LP By: Yorkville Advisors, LLC 101 Hudson Street - Suite 3606 $1,000,000 Its: General Partner Jersey City, NJ 07303 Facsimile: (201) 985-8266 By: /s/ Mark Angelo -------------------------- Name: Mark Angelo Title: Portfolio Manager
EX-10.76 6 g83525exv10w76.txt EX-10.76 5% CONVERTIBLE DEBENTURE EXHIBIT 10.76 THIS DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO REGULATION D OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE ACT. SECURED CONVERTIBLE DEBENTURE ADVANCED VIRAL RESEARCH CORP. 5% SECURED CONVERTIBLE DEBENTURE DUE JULY 18, 2008 NO. ___ $1,000,000 This Secured Debenture ("Debenture") is issued by ADVANCED VIRAL RESEARCH CORP., a Delaware corporation (the "COMPANY"), to Cornell Capital Partners, LP (together with its permitted successors and assigns, the "Holder") pursuant to exemptions from registration under the Securities Act of 1933, as amended. ARTICLE I. SECTION 1.01 PRINCIPAL AND INTEREST. For value received, on July 18, 2008, the Company hereby promises to pay to the order of the Holder in lawful money of the United States of America and in immediately available funds the principal sum of One Million Dollars (US $1,000,000), together with interest on the unpaid principal of this Debenture at the rate of five percent (5%) per year (computed on the basis of a 365-day year and the actual days elapsed) from the date of this Debenture until paid. At the Company's option, the entire principal amount and all accrued interest shall be either (a) paid to the Holder on the fifth (5th) year anniversary from the date hereof or (b) converted in accordance with Section 1.02 herein. 1 SECTION 1.02 OPTIONAL CONVERSION. Commencing ninety (90) days after the date hereof, the Holder is entitled, at its option, to convert, and sell on the same day, until payment in full of this Debenture, all or any part of the principal amount of the Debenture, plus accrued interest, into shares (the "CONVERSION SHARES") of the Company's common stock, par value $0.00001 per share ("COMMON STOCK"), at the price per share (the "CONVERSION PRICE") equal to the lesser of (a) an amount equal to Eight Cents ($0.08) or (b) an amount equal to eighty percent (80%) of the lowest Closing Bid Price of the Common Stock for the four (4) trading days immediately preceding the Conversion Date (as defined herein). Subparagraphs (a) and (b) above are individually referred to as a "CONVERSION PRICE". As used herein, "PRINCIPAL MARKET" shall mean The National Association of Securities Dealers Inc.'s Over-The-Counter Bulletin Board, Nasdaq SmallCap Market, or American Stock Exchange. If the Common Stock is not traded on a Principal Market, the Closing Bid Price shall mean, the reported Closing Bid Price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc., for the applicable periods. No fraction of shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. To convert this Debenture, the Holder hereof shall deliver written notice thereof, substantially in the form of EXHIBIT "A" to this Debenture, with appropriate insertions (the "CONVERSION NOTICE"), to the Company at its address as set forth herein. The date upon which the conversion shall be effective (the "CONVERSION DATE") shall be deemed to be the date set forth in the Conversion Notice. SECTION 1.03 CONVERSION RESTRICTIONS. Notwithstanding Section 1.02 herein or any other agreement or instrument entered between the Company and the Holder, unless otherwise agreed to by the Company, in any 30 calendar day period, the Holder may not, in the aggregate, convert in excess of Six Hundred Thousand Dollars ($600,000) of any convertible debentures issued to Holder. SECTION 1.04 RESERVATION OF COMMON STOCK. The Company shall reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of this Debenture, such number of shares of Common Stock as shall from time to time be sufficient to effect such conversion, based upon the Conversion Price. If at any time the Company does not have a sufficient number of Conversion Shares authorized and available, then the Company shall call and hold a special meeting of its stockholders within sixty (60) days of that time for the sole purpose of increasing the number of authorized shares of Common Stock. SECTION 1.05 RIGHT OF REDEMPTION. (i) The Company at its option shall have the right to redeem, with two (2) business days advance written notice (the "REDEMPTION NOTICE"), a portion or all outstanding convertible debenture. The redemption price shall be one hundred fifteen percent (115%) of the amount redeemed plus accrued interest. In the event the Company exercises a redemption of either all or a portion the Convertible Debenture, as outlined in section (i) herein, the Holder shall receive a warrant to purchase one million (1,000,000) shares of the Company's Common Stock for every One Hundred Thousand Dollars ($100,000) redeemed, pro rata. (the "WARRANT") The Warrant shall be exercisable on a "cash 2 basis" and have an exercise price of the higher of one hundred ten percent (110%) of the Closing Bid Price of the Company's Common Stock on the Closing Date or Eight Cents ($0.08) per share. The Warrant shall have "piggy-back" registration rights and shall survive for five (5) years from the Closing Date. The Warrant shall not be exercisable prior to six months after the date hereof. SECTION 1.06 REGISTRATION RIGHTS. The Company is obligated to register the resale of the Conversion Shares under the Securities Act of 1933, as amended, pursuant to the terms of a Registration Rights Agreement, between the Company and the Holder of even date herewith (the "Investor Registration Rights Agreement"). SECTION 1.07 INTEREST PAYMENTS. The interest so payable will be paid at the time of maturity or conversion to the person in whose name this Debenture is registered. At the time such interest is payable, the Holder, in its sole discretion, may elect to receive interest in cash (via wire transfer or certified funds) or in the form of Common Stock. In the event of default, as described in Article III Section 3.01 hereunder, the Holder may elect that the interest be paid in cash (via wire transfer or certified funds) or in the form of Common Stock. If paid in the form of Common Stock, the amount of stock to be issued will be calculated as follows: the value of the stock shall be the Closing Bid Price on: (i) the date the interest payment is due; or (ii) if the interest payment is not made when due, the date the interest payment is made. A number of shares of Common Stock with a value equal to the amount of interest due shall be issued. No fractional shares will be issued; therefore, in the event that the value of the Common Stock per share does not equal the total interest due, the Company will pay the balance in cash. SECTION 1.08 PAYING AGENT AND REGISTRAR. Initially, the Company will act as paying agent and registrar. The Company may change any paying agent, registrar, or Company-registrar by giving the Holder not less than ten (10) business days' written notice of its election to do so, specifying the name, address, telephone number and facsimile number of the paying agent or registrar. The Company may act in any such capacity. SECTION 1.09 SECURED NATURE OF DEBENTURE. This Debenture is secured by all of the property of the Company as set forth on Exhibit A to the Security Agreement dated the date hereof between the Company and the Holder (the "SECURITY AGREEMENT"). As set forth in the Security Agreement, Holder's security interest shall terminate upon the occurrence of an Expiration Event as defined in the Security Agreement. ARTICLE II. SECTION 2.01 AMENDMENTS AND WAIVER OF DEFAULT. The Debenture may not be amended. Notwithstanding the above, the Debenture may be amended to cure any ambiguity, defect or inconsistency, to provide for assumption of the Company obligations to the Holder or to make any change that does not adversely affect the rights of the Holder. ARTICLE III. SECTION 3.01 EVENTS OF DEFAULT. An Event of Default is defined as follows: (a) failure by the Company to pay amounts due hereunder within fifteen (15) days of the date of maturity of this Debenture; (b) failure by the Company to comply with the terms of the Irrevocable Transfer Agent Instructions attached 3 to the Securities Purchase Agreement; (c) failure by the Company's transfer agent to issue Common Stock to the Holder within ten (10) days of the Company's receipt of the attached Notice of Conversion from Holder; (d) failure by the Company for ten (10) days after notice to it to comply with any of its other agreements in the Debenture; (e) events of bankruptcy or insolvency; (f) a breach by the Company of its obligations under the Securities Purchase Agreement which is not cured by the Company within ten (10) days after receipt of written notice thereof. ARTICLE IV. SECTION 4.01 RIGHTS AND TERMS OF CONVERSION. Commencing ninety (90) days after the date hereof, this Debenture, in whole or in part, may be converted at any time into shares of Common Stock at a price equal to the Conversion Price as described in Section 1.02 above. SECTION 4.02 RE-ISSUANCE OF DEBENTURE. When the Holder elects to convert a part of the Debenture, then the Company shall reissue a new Debenture in the same form as this Debenture to reflect the new principal amount. SECTION 4.03 TERMINATION OF CONVERSION RIGHTS. The Holder's right to convert the Debenture into the Common Stock in accordance with paragraph 4.01 shall terminate on the date that is the fifth (5th) year anniversary from the date hereof and this Debenture shall be automatically converted on that date in accordance with the formula set forth in Section 1.02 hereof, and the appropriate shares of Common Stock and amount of interest shall be issued to the Holder. ARTICLE V. SECTION 5.01 ANTI-DILUTION. In the event that the Company shall at any time subdivide the outstanding shares of Common Stock, or shall issue a stock dividend on the outstanding Common Stock, the Conversion Price in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in the event that the Company shall at any time combine the outstanding shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision, dividend or combination as the case may be. SECTION 5.02 CONSENT OF HOLDER TO SELL CAPITAL STOCK. Except for the Equity Line of Credit Agreement dated April 28, 2003 between the Company and Cornell Capital Partners, LP. so long as any of the principal of or interest on this Note remains unpaid and unconverted, the Company shall not, without the prior consent of the Holder, issue or sell (i) any Common Stock or preferred stock without consideration, or (ii) issue or sell any preferred stock, warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's fair market value determined immediately prior to its issuance or (iii) file any registration statement on Form S-8 or (iv) grant a security interest in any of the Assets of the Company. The provisions of this Section 5.02 shall terminate and be of no further force or effect on the one hundred and twenty-first (121st) day following the Effective Date of the Registration Statement referred to in the Investor Registration Rights Agreement. 4 ARTICLE VI. SECTION 6.01 NOTICE. Notices regarding this Debenture shall be sent to the parties at the following addresses, unless a party notifies the other parties, in writing, of a change of address: If to the Company, to: Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, NY 10701 Attention: Alan Gallantar Chief Financial Officer Telephone: (914) 376-7383 Facsimile: (914) 376-7638 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Holder: _______________________________ _______________________________ _______________________________ _______________________________ With a copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 SECTION 6.02 GOVERNING LAW. This Debenture shall be deemed to be made under and shall be construed in accordance with the laws of the State of Delaware without giving effect to the principals of conflict of laws thereof. Each of the parties consents to the jurisdiction of the U.S. District Court sitting in the District of the State of New Jersey or the state courts of the State of New Jersey sitting in Hudson County, New Jersey in connection with any dispute arising under this Debenture and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS to the bringing of any such proceeding in such jurisdictions. SECTION 6.03 SEVERABILITY. The invalidity of any of the provisions of this Debenture shall not invalidate or otherwise affect any of the other provisions of this Debenture, which shall remain in full force and effect. 5 SECTION 6.04 ENTIRE AGREEMENT AND AMENDMENTS. This Debenture represents the entire agreement between the parties hereto with respect to the subject matter hereof and there are no representations, warranties or commitments, except as set forth herein. This Debenture may be amended only by an instrument in writing executed by the parties hereto. SECTION 6.05 COUNTERPARTS. This Debenture may be executed in multiple counterparts, each of which shall be an original, but all of which shall be deemed to constitute on instrument. SECTION 6.06 NO ASSIGNMENT. This Debenture shall not be assignable. IN WITNESS WHEREOF, with the intent to be legally bound hereby, the Company as executed this Debenture as of the date first written above. ADVANCED VIRAL RESEARCH CORP. By: /s/ SHALOM Z. HIRSCHMAN ---------------------------------- Name: Shalom Z. Hirschman Title: Chief Executive Officer 6 EX-10.77 7 g83525exv10w77.txt EX-10.77 INVESTORS REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.77 INVESTOR REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July 18, 2003, by and among ADVANCED VIRAL RESEARCH CORP., a Delaware corporation, with its principal office located at 200 Corporate Boulevard South, Yonkers, New York 10701 (the "COMPANY"), and the undersigned investors (each, an "INVESTOR" and collectively, the "INVESTORS"). WHEREAS: A. In connection with the Securities Purchase Agreement by and among the parties hereto of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the conditions of the Securities Purchase Agreement, to issue and sell to the Investors convertible debentures (the "CONVERTIBLE DEBENTURES") which shall be convertible into that number of shares of the Company's common stock, par value $0.00001 per share (the "COMMON STOCK"), pursuant to the terms of the Securities Purchase Agreement for an aggregate purchase price of up to One Million Dollars ($1,000,000). Capitalized terms not defined herein shall have the meaning ascribed to them in the Securities Purchase Agreement. B. To induce the Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations there under, or any similar successor statute (collectively, the "1933 ACT"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investors hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "PERSON" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. (b) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange SEC (the "SEC"). (c) "REGISTRABLE SECURITIES" means the shares of Common Stock issuable to Investors upon conversion of the Convertible Debentures pursuant to the Securities Purchase Agreement. 1 (d) "REGISTRATION STATEMENT" means a registration statement under the 1933 Act which covers the Registrable Securities. 2. REGISTRATION. (a) Subject to the terms and conditions of this Agreement, the Company shall prepare and file, no later than thirty (30) days from the date hereof (the "SCHEDULED FILING DEADLINE"), with the SEC a registration statement on Form S-1 or SB-2 (or, if the Company is then eligible, on Form S-3) under the 1933 Act (the "INITIAL REGISTRATION STATEMENT") for the registration for the resale by all Investors who purchased Convertible Debentures pursuant to the Securities Purchase Agreement 78,125,000 shares of Common Stock to be issued upon conversion of the Convertible Debentures issued pursuant to the Securities Purchase Agreement. The Company shall cause the Registration Statement to remain effective until all of the Registrable Securities have been sold. Prior to the filing of the Registration Statement with the SEC, the Company shall furnish a copy of the Initial Registration Statement to the Investors, and Butler Gonzalez, LLP for their review and comment. The Investors and Butler Gonzalez LLP shall furnish comments on the Initial Registration Statement to the Company within twenty-four (24) hours of the receipt thereof from the Company. (b) EFFECTIVENESS OF THE INITIAL REGISTRATION STATEMENT. The Company shall use its best efforts (i) to have the Initial Registration Statement declared effective by the SEC no later than one hundred thirty-five (135) days after the date hereof (the "SCHEDULED EFFECTIVE DEADLINE") and (ii) file a response to any comments received from the SEC to the Initial Registration Statement and file an Amendment to the Initial Registration Statement, if necessary, no later than thirty (30) days after the date the Company receives a comment letter from the SEC, if any (the "Amendment Deadline"); and (iii) to insure that the Initial Registration Statement and any subsequent Registration Statement remains in effect until all of the Registrable Securities have been sold, subject to the terms and conditions of this Agreement. (c) FAILURE TO FILE OR OBTAIN EFFECTIVENESS OF THE REGISTRATION STATEMENT. In the event the Registration Statement is not filed by the Scheduled Filing Deadline or is not declared effective by the SEC on or before the Scheduled Effective Date, or the Company fails to file an Amendment to the Registration Statement, if necessary, by the Amendment Deadline, or if after the Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to the Registration Statement (whether because of a failure to keep the Registration Statement effective, failure to disclose such information as is necessary for sales to be made pursuant to the Registration Statement, failure to register sufficient shares of Common Stock or otherwise then as partial relief for the damages to any holder of Registrable Securities by reason of any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies at law or in equity), the Company will pay as liquidated damages (the "LIQUIDATED DAMAGES") to the Investor, at the Investor's option, either a cash amount or shares of the Company's Common Stock within three (3) business days, after demand therefore, equal to two percent (2%) of the liquidated value of the Convertible Debentures outstanding as Liquidated Damages for each thirty (30) day period after the Scheduled Filing Deadline or the Scheduled Effective Date as the case may be. If paid in the form of Common Stock, the amount of stock to be issued will be calculated as follows: the value of the stock shall be the Closing Bid Price of the Company's Common Stock on the date the Liquidated Damages payment is demanded. (d) LIQUIDATED DAMAGES. The Company and the Investor hereto acknowledge and agree that the sums payable under subsection 2(c) above shall 2 constitute liquidated damages and not penalties. The parties further acknowledge that (i) the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, (ii) the amounts specified in such subsections bear a reasonable relationship to, and are not plainly or grossly disproportionate to the probable loss likely to be incurred in connection with any failure by the Company to obtain or maintain the effectiveness of a Registration Statement, (iii) one of the reasons for the Company and the Investor reaching an agreement as to such amounts was the uncertainty and cost of litigation regarding the question of actual damages, and (iv) the Company and the Investor are sophisticated business parties and have been represented by sophisticated and able legal counsel and negotiated this Agreement at arm's length. 3. RELATED OBLIGATIONS. (a) The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (b) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 ACT"), the Company shall incorporate such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. 3 (c) The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) at least one (1) copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. (d) The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as any Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. (e) As promptly as practicable after becoming aware of such event or development, the Company shall notify each Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. 4 (f) The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. (g) At the reasonable request of any Investor, the Company shall furnish to such Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as an Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investors. (h) The Company shall make available for inspection by (i) any Investor and (ii) one (1) firm of accountants or other agents retained by the Investors (collectively, the "INSPECTORS") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and each Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. (i) The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or 5 governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. (j) The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or (ii) the inclusion for quotation on the National Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j). (k) The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investors may reasonably request and registered in such names as the Investors may request. (l) The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. (m) The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve (12) month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. (n) The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. (o) Within two (2) business days after a Registration Statement which covers Registrable Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as EXHIBIT A. (p) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement. 6 4. OBLIGATIONS OF THE INVESTORS. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of an Investor in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company. 6. INDEMNIFICATION. With respect to Registrable Securities which are included in a Registration Statement under this Agreement: (a) To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls any Investor within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "CLAIMS") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("BLUE SKY FILING"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company 7 of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). The Company shall reimburse the Investors and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(c); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9 hereof. (b) In connection with a Registration Statement, each Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers, employees, representatives, or agents and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "INDEMNIFIED Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to each Investor prior to such Investor's use of the prospectus to which the Claim relates. 8 (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one (1) counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. (d) The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. (e) The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 9 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144") the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents as are required by the applicable provisions of Rule 144; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who then hold at least two-thirds (2/3) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. No such amendment shall be effective to the extent that it applies to fewer than all of the holders of the Registrable Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. 10 10. MISCELLANEOUS. (a) A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two (2) or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, New York 10701 Attention: Alan Gallantar Chief Financial Officer Telephone: (914) 376-7383 Facsimile: (914) 376-7638 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, Florida 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to an Investor, to its address and facsimile number on the Schedule of Investors attached hereto, with copies to such Investor's representatives as set forth on the Schedule of Investors or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. 11 (d) The laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and the Investors as its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the Superior Courts of the State of New Jersey, sitting in Hudson County, New Jersey and federal courts for the District of New Jersey sitting Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. (e) This Agreement, the Irrevocable Transfer Agent Instructions, the Securities Purchase Agreement and related documents including the Convertible Debentures and the Escrow Agreement dated the date hereof by and among the Company, the Investors set forth on the Schedule of Investors attached hereto and Butler Gonzalez LLP (the "ESCROW AGREEMENT") constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Irrevocable Transfer Agent Instructions, the Securities Purchase Agreement and related documents including the Convertible Debentures and the Escrow Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. (f) This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. (g) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be 12 delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (i) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (j) The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. (k) This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. IN WITNESS WHEREOF, the parties have caused this Investor Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: ADVANCED VIRAL RESEARCH CORP. By: /s/ SHALOM Z. HIRSCHMAN --------------------------------- Name: Shalom Z. Hirschman Title: Chief Executive Officer 13 SCHEDULE I SCHEDULE OF BUYERS
ADDRESS/FACSIMILE NAME SIGNATURE NUMBER OF BUYER - ---------------------------- -------------------------------- ------------------------------ Cornell Capital Partners, LP By: Yorkville Advisors, LLC 101 Hudson Street - Suite 3606 Its: General Partner Jersey City, NJ 07303 Facsimile: (201) 985-8266 By: /s/ MARK ANGELO -------------------------- Name: Mark Angelo Title: Portfolio Manager
EX-10.78 8 g83525exv10w78.txt EX-10.78 ESCROW AGREEMENT EXHIBIT 10.78 ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "AGREEMENT") is made and entered into as of July 18, 2003, by ADVANCED VIRAL RESEARCH CORP., a Delaware corporation (the "COMPANY"); the Buyer(s) listed on Schedule I to the Securities Purchase Agreement dated the date hereof, (the "INVESTOR(S)"), and BUTLER GONZALEZ, LLP, as Escrow Agent hereunder (the "ESCROW AGENT"). BACKGROUND WHEREAS, the Company and the Investor(s) have entered into a Securities Purchase Agreement (the "SECURITIES PURCHASE AGREEMENT"), dated as of the date hereof, pursuant to which the Company proposes to sell convertible debentures (the "CONVERTIBLE DEBENTURES") which shall be convertible into the Company's Common Stock, par value $0.00001 per share (the "COMMON STOCK"), at a price per share equal to the Purchase Price, as that term is defined in the Securities Purchase Agreement. The Securities Purchase Agreement provides that the Investor(s) shall deposit the purchase amount in a segregated escrow account to be held by Escrow Agent in order to effectuate a disbursement to the Company at a closing to be held as set forth in the Securities Purchase Agreement (the "CLOSING"). WHEREAS, the Company intends to sell Convertible Securities (the "OFFERING"). WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds deposited with it in accordance with the terms of this Agreement. WHEREAS, in order to establish the escrow of funds and to effect the provisions of the Securities Purchase Agreement, the parties hereto have entered into this Agreement. NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as follows: 1. DEFINITIONS. The following terms shall have the following meanings when used herein: a. "ESCROW FUNDS" shall mean the funds deposited with Escrow Agent pursuant to this Agreement. b. "JOINT WRITTEN DIRECTION" shall mean a written direction executed by the Investor(s) and the Company directing Escrow Agent to disburse all or a portion of the Escrow Funds or to take or refrain from taking any action pursuant to this Agreement. c. "ESCROW PERIOD" shall begin with the commencement of the Offering and shall terminate upon the earlier to occur of the following dates: (i) The date upon which Escrow Agent confirms that it has received in the Escrow Account all of the proceeds of the sale of the Convertible Debentures; (ii) The expiration of twenty (20) days from the date of commencement of the Offering (unless extended by mutual written agreement between the Company and the Investor(s) with a copy of such extension to Escrow Agent); or (iii) The date upon which a determination is made by the Company and the Investor(s) to terminate the Offering prior to the sale of all the Convertible Debentures. 1. During the Escrow Period, the Company and the Investor(s) are aware that they are not entitled to any funds received into escrow and no amounts deposited in the Escrow Account shall become the property of the Company or the Investor(s) or any other entity, or be subject to the debts of the Company or the Investor(s) or any other entity. 2. APPOINTMENT OF AND ACCEPTANCE BY ESCROW AGENT. The Investor(s) and the Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt by wire transfer of the Escrow Funds in accordance with Section 3 below, agrees to hold, invest and disburse the Escrow Funds in accordance with this Agreement. 3. CREATION OF ESCROW FUNDS. On or prior to the date of the commencement of the Offering, the Escrow Agent shall establish an escrow account which escrow account shall be entitled as follows: Advanced Viral Research Corp./Cornell Capital Partners, LP Escrow Account for the deposit of the Escrow Funds. The Investor(s) will instruct subscribers to wire funds to the account of the Escrow Agent as follows: BANK: Wachovia, N.A. of New Jersey ROUTING #: 031201467 ACCOUNT #: 2020000659170 NAME ON ACCOUNT: Butler Gonzalez LLP as Escrow Agent NAME ON SUB-ACCOUNT: Advanced Viral Research Corp./Cornell Capital Partners, LP Escrow account REFERENCE SUB-ACCOUNT #: 2229-03 4. DEPOSITS INTO THE ESCROW ACCOUNT. The Investor(s) agrees that they shall promptly deliver funds for the payment of the Convertible Debentures to Escrow Agent for deposit in the Escrow Account. 5. DISBURSEMENTS FROM THE ESCROW ACCOUNT. a. The Escrow Agent will continue to hold such funds until Cornell Capital Partners, LP on behalf of the Investor(s) and Company execute a Joint Written Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint Written Direction signed by the Company and the Investor(s). In disbursing such funds, Escrow Agent is authorized to rely upon such Joint Written Direction from the Company and the Investor(s) and may accept any 2 signatory from the Company listed on the signature page to this Agreement and any signature from the Investor(s) that the Escrow Agent already has on file. b. In the event Escrow Agent does not receive the amount of the Escrow Funds from the Investor(s), Escrow Agent shall notify the Company and the Investor(s). Upon receipt of payment instructions from the Company, Escrow Agent shall refund to each subscriber without interest the amount received from each Investor(s), without deduction, penalty, or expense to the subscriber. The purchase money returned to each subscriber shall be free and clear of any and all claims of the Company, the Investor(s) or any of their creditors. c. In the event Escrow Agent does receive the amount of the Escrow Funds prior to expiration of the Escrow Period, in no event will the Escrow Funds be released to the Company until such amount is received by Escrow Agent in collected funds. For purposes of this Agreement, the term "collected funds" shall mean all funds received by Escrow Agent which have cleared normal banking channels and are in the form of cash. 6. DEPOSIT INTO ESCROW. Escrow Agent is hereby authorized to deposit each wire deposit in the Escrow Account. 7. SUSPENSION OF PERFORMANCE: DISBURSEMENT INTO COURT. If at any time, there shall exist any dispute between the Company and the Investor(s) with respect to holding or disposition of any portion of the Escrow Funds or any other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is unable to determine, to Escrow Agent's sole satisfaction, the proper disposition of any portion of the Escrow Funds or Escrow Agent's proper actions with respect to its obligations hereunder, or if the parties have not within thirty (30) days of the furnishing by Escrow Agent of a notice of resignation pursuant to Section 9 hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole discretion, take either or both of the following actions: a. suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Escrow Agent or until a successor Escrow Agent shall be appointed (as the case may be); provided however, Escrow Agent shall continue to invest the Escrow Funds in accordance with Section 8 hereof; and/or b. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Escrow Agent, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all funds held by it in the Escrow Funds, after deduction and payment to Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Escrow Agent in connection with performance of its duties and the exercise of its rights hereunder. c. Escrow Agent shall have no liability to the Company, the Investor(s), or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of 3 any delay in the disbursement of funds held in the Escrow Funds or any delay in with respect to any other action required or requested of Escrow Agent. 8. INVESTMENT OF ESCROW FUNDS. Escrow Agent shall deposit the Escrow Funds in a non-interest bearing money market account. 9. RESIGNATION AND REMOVAL OF ESCROW AGENT. Escrow Agent may resign from the performance of its duties hereunder at any time by giving thirty (30) days' prior written notice to the parties or may be removed, with or without cause, by the parties, acting jointly, by furnishing a Joint Written Direction to Escrow Agent, at any time by the giving of ten (10) days' prior written notice to Escrow Agent as provided herein below. Upon any such notice of resignation or removal, the representatives of the Investor(s) and the Company identified in Sections 13a.(iv) and 13b.(iv), below, jointly shall appoint a successor Escrow Agent hereunder, which shall be a commercial bank, trust company or other financial institution with a combined capital and surplus in excess of $10,000,000.00. Upon the acceptance in writing of any appointment of Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be discharged from its duties and obligations under this Escrow Agreement, but shall not be discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession. After any retiring Escrow Agent's resignation or removal, the provisions of this Escrow Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall transmit all records pertaining to the Escrow Funds and shall pay all funds held by it in the Escrow Funds to the successor Escrow Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by the retiring Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. 10. LIABILITY OF ESCROW AGENT. a. Escrow Agent shall have no liability or obligation with respect to the Escrow Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole responsibility shall be for the safekeeping, investment, and disbursement of the Escrow Funds in accordance with the terms of this Agreement. Escrow Agent shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Escrow Agent may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained herein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Escrow Agent be liable for incidental, indirect, special, and consequential or punitive damages. Escrow Agent shall not be obligated to take any legal action or commence any proceeding in connection with the Escrow Funds, any account in which Escrow Funds are deposited, this Agreement or the Purchase Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Escrow Agent may consult legal counsel selected by it in any event of any dispute or question as to 4 construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor(s) jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel. b. Escrow Agent is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the Escrow Funds, without determination by Escrow Agent of such court's jurisdiction in the matter. If any portion of the Escrow Funds is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, Escrow Agent is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree which it is advised by legal counsel selected by it, binding upon it, without the need for appeal or other action; and if Escrow Agent complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 11. INDEMNIFICATION OF ESCROW AGENT. From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Escrow Agent and each director, officer, employee, attorney, agent and affiliate of Escrow Agent (collectively, the "INDEMNIFIED PARTIES") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor(s) hereunder in writing, and the Investor(s) and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor(s) and/or the Company shall be 5 required to pay such fees and expense if (a) the Investor(s) or the Company agree to pay such fees and expenses, or (b) the Investor(s) and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor(s) and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both the Indemnified Party, the Company and/or the Investor(s) and the Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor(s). The Investor(s) and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor(s) pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this section shall survive any termination of this Agreement, and resignation or removal of the Escrow Agent shall be independent of any obligation of Escrow Agent. The parties agree that neither payment by the Company or the Investor(s) of any claim by Escrow Agent for indemnification hereunder shall impair, limit, modify, or affect, as between the Investor(s) and the Company, the respective rights and obligations of Investor(s), on the one hand, and the Company, on the other hand, under the Placement Agency Agreement. 12. EXPENSES OF ESCROW AGENT. Except as set forth in Section 11 the Company shall reimburse Escrow Agent for all of its reasonable out-of-pocket expenses, including attorneys' fees, travel expenses, telephone and facsimile transmission costs, postage (including express mail and overnight delivery charges), copying charges and the like. All of the compensation and reimbursement obligations set forth in this Section shall be payable by the Company, upon demand by Escrow Agent. The obligations of the Company under this Section shall survive any termination of this Agreement and the resignation or removal of Escrow Agent. 13. WARRANTIES. a. The Investor(s) makes the following representations and warranties to Escrow Agent: (i) The Investor(s) has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (ii) This Agreement has been duly approved by all necessary corporate action of the Investor(s), including any necessary shareholder approval, has been executed by duly authorized officers of the Investor(s), enforceable in accordance with its terms. (iii) The execution, delivery, and performance of the Investor(s) of this Agreement will not violate, conflict with, or cause a default under the certificate of incorporation or bylaws of the Investor(s), any applicable law or regulation, any court order or administrative ruling or degree 6 to which the Investor(s) is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. (iv) Mark Angelo has been duly appointed to act as the representative of the Investor(s) hereunder and has full power and authority to execute, deliver, and perform this Escrow Agreement, to execute and deliver any Joint Written Direction, to amend, modify, or waive any provision of this Agreement, and to take any and all other actions as the Investor(s)'s representative under this Agreement, all without further consent or direction form, or notice to, the Investor(s) or any other party. (v) No party other than the parties hereto and the Investor(s)s have, or shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. (vi) All of the representations and warranties of the Investor(s) contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. b. The Company makes the following representations and warranties to the Escrow Agent: (i) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (ii) This Agreement has been duly approved by all necessary corporate action of the Company, including any necessary shareholder approval, has been executed by duly authorized officers of the Company, enforceable in accordance with its terms. (iii) The execution, delivery, and performance by the Company of this Agreement is in accordance with the Securities Purchase Agreement and will not violate, conflict with, or cause a default under the certificate of incorporation or bylaws of the Company, any applicable law or regulation, any court order or administrative ruling or decree to which the Company is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement, including without limitation to the Securities Purchase Agreement, to which the Company is a party. (iv) Alan Gallantar has been duly appointed to act as the representative of the Company hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify or waive any provision of this Agreement and to take all other actions as the Company's Representative under this Agreement, all without further consent or direction from, or notice to, the Company or any other party. (v) No party other than the parties hereto and the Investor(s)s have, or shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform 7 Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. (vi) All of the representations and warranties of the Company contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. 14. CONSENT TO JURISDICTION AND VENUE. In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree that the United States District Court for the District of New Jersey shall have the sole and exclusive jurisdiction over any such proceeding. If all such courts lack federal subject matter jurisdiction, the parties agree that the Superior Court Division of New Jersey, Chancery Division of Hudson County shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the courts specified herein and agree to accept the service of process to vest personal jurisdiction over them in any of these courts. 15. NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been validly served, given or delivered five (5) days after deposit in the United States mails, by certified mail with return receipt requested and postage prepaid, when delivered personally, one (1) day delivered to any overnight courier, or when transmitted by facsimile transmission and upon confirmation of receipt and addressed to the party to be notified as follows: If to Investor(s), to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 If to Escrow Agent, to: Butler Gonzalez LLP 1000 Stuyvesant Avenue Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 8 If to the Company, to: Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, NY 10701 Attention: Alan Gallantar Chief Financial Officer Telephone: (914) 376-7383 Facsimile: (914) 376-7638 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 Or to such other address as each party may designate for itself by like notice. 16. AMENDMENTS OR WAIVER. This Agreement may be changed, waived, discharged or terminated only by a writing signed by the parties hereto. No delay or omission by any party in exercising any right with respect hereto shall operate as waiver. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 17. SEVERABILITY. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the internal laws of the State of Delaware without giving effect to the conflict of laws principles thereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties relating to the holding, investment, and disbursement of the Escrow Funds and sets forth in their entirety the obligations and duties of the Escrow Agent with respect to the Escrow Funds. 20. BINDING EFFECT. All of the terms of this Agreement, as amended from time to time, shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, successors and assigns of the Investor(s), the Company, or the Escrow Agent. 21. EXECUTION OF COUNTERPARTS. This Agreement and any Joint Written Direction may be executed in counter parts, which when so executed shall constitute one and same agreement or direction. 22. TERMINATION. Upon the first to occur of the disbursement of all amounts in the Escrow Funds pursuant to Joint Written Directions or the disbursement of all amounts in the Escrow Funds into court pursuant to Section 7 hereof, this Agreement shall terminate and Escrow Agent shall have no further obligation or liability whatsoever with respect to this Agreement or the Escrow Funds. 9 IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year above set forth. ADVANCED VIRAL RESEARCH CORP. By: /s/ SHALOM Z. HIRSCHMAN ------------------------------- Name: Shalom Z. Hirschman Title: Chief Executive Officer CORNELL CAPITAL PARTNERS, LP BY: YORKVILLE ADVISORS, LLC ITS: GENERAL PARTNER By: /s/ MARK ANGELO ------------------------------- Name: Mark Angelo Title: Portfolio Manager BUTLER GONZALEZ LLP By: /s/ DAVID GONZALEZ ------------------------------- Name: David Gonzalez, Esq. Title: Partner 10 EX-10.79 9 g83525exv10w79.txt EX-10.79 SECURITY AGREEMENT EXHIBIT 10.79 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "AGREEMENT"), is entered into and made effective as of July 18, 2003, by and between ADVANCED VIRAL RESEARCH CORP. (the "COMPANY"), and the BUYER(S) listed on Schedule I attached to the Securities Purchase Agreement dated the date hereof (the "SECURED PARTY"). WHEREAS, the Company shall issue and sell to the Secured Party, as provided in the Securities Purchase Agreement dated the date hereof, and the Secured Party shall purchase up to One Million Dollars ($1,000,000) of five percent (5%) secured convertible debentures (the "CONVERTIBLE DEBENTURES"), which shall be convertible into shares of the Company's common stock, par value $0.00001 (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), for a total purchase price of up to One Million Dollars ($1,000,000), in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached to the Securities Purchase Agreement; WHEREAS, to induce the Secured Party to enter into the transaction contemplated by the Securities Purchase Agreement, the Secured Convertible Debenture, the Investor Registration Rights Agreement, the Irrevocable Transfer Agent Instructions, and the Escrow Agreement (collectively referred to as the "TRANSACTION DOCUMENTS"), the Company hereby grants to the Secured Party a security interest in and to the pledged property identified on EXHIBIT "A" hereto (collectively referred to as the "PLEDGED PROPERTY") until the earlier to occur of (i) the fiftieth (50th) day following the effectiveness of the Registration Statement referred to in the Investor Registration Rights Agreement, pursuant to the terms and conditions of this Agreement; (ii) the Company receives, after the date of this Agreement, Three Million Dollars ($3,000,000) of capital, in any form other than through the issuance of free-trading shares of the Company's common stock, from sources other than the Secured Party ("Capital Raise"); or (iii) satisfaction of the Obligations, as defined herein below ((i), (ii) and (ii) are sometimes hereinafter individually referred to as an "EXPIRATION EVENT"). NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS AND INTERPRETATIONS Section 1.1. RECITALS. The above recitals are true and correct and are incorporated herein, in their entirety, by this reference. Section 1.2. INTERPRETATIONS. Nothing herein expressed or implied is intended or shall be construed to confer upon any person other than the Secured Party any right, remedy or claim under or by reason hereof. Section 1.3. OBLIGATIONS SECURED. The obligations secured hereby are any and all obligations of the Company to the Secured Party, whether oral or written and whether arising before, on or after the date hereof including, without limitation, those obligations of the Company to the Secured Party under the Securities Purchase Agreement, the Secured Convertible Debenture, the Investor Registration Rights Agreement and Irrevocable Transfer Agent Instructions, in the principal amounts thereof outstanding from time to time, and any other amounts payable by or chargeable to the Company thereunder or hereunder (collectively, the "OBLIGATIONS"), PROVIDED, HOWEVER, the Scheduled Effective Deadline set forth in the Investor Registration Rights Agreement dated April 28, 2003 shall be one hundred thirty-five (135) days from the date hereof. ARTICLE 2. PLEDGED COLLATERAL, ADMINISTRATION OF COLLATERAL AND TERMINATION OF SECURITY INTEREST Section 2.1. PLEDGED PROPERTY. (a) Company hereby pledges to the Secured Party, and creates in the Secured Party for its benefit, a first position security interest, from the date hereof through an Expiration Event, in and to all of the property of the Company as set forth in EXHIBIT "A" attached hereto (collectively, the "PLEDGED PROPERTY"): The Pledged Property, as set forth in EXHIBIT "A" attached hereto, and the products thereof and the proceeds of all such items are hereinafter collectively referred to as the "PLEDGED COLLATERAL." (b) Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge, file, record and deliver to the Secured Party any documents reasonably requested by the Secured Party to perfect its security interest in the Pledged Property. Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute, acknowledge and deliver to the Secured Party such documents and instruments, including, without limitation, financing statements, certificates, affidavits and forms as may, in the Secured Party's reasonable judgment, be necessary to effectuate, complete or perfect, or to continue and preserve, the security interest of the Secured Party in the Pledged Property, and the Secured Party shall hold such documents and instruments as secured party, subject to the terms and conditions contained herein. 2 Section 2.2. RIGHTS; INTERESTS; ETC. (a) So long as no Event of Default (as hereinafter defined) shall have occurred and be continuing: (i) the Company shall be entitled to exercise any and all rights pertaining to the Pledged Property or any part thereof for any purpose not inconsistent with the terms hereof; and (ii) the Company shall be entitled to receive and retain any and all payments paid or made in respect of the Pledged Property. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of the Company to exercise the rights which it would otherwise be entitled to exercise pursuant to Section 2.2(a)(i) hereof and to receive payments which it would otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise such rights and to receive and hold as Pledged Collateral such payments; PROVIDED, HOWEVER, that if the Secured Party shall become entitled and shall elect to exercise its right to realize on the Pledged Collateral pursuant to Article V hereof, then all cash sums received by the Secured Party, or held by Company for the benefit of the Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any outstanding Obligations; and (ii) All interest, dividends, income and other payments and distributions which are received by the Company contrary to the provisions of Section 2.2(b)(i) hereof shall be received in trust for the benefit of the Secured Party, shall be segregated from other property of the Company and shall be forthwith paid over to the Secured Party; or (iii) The Secured Party in its sole discretion shall be authorized to sell any or all of the Pledged Property at public or private sale in order to recoup all of the outstanding principal plus accrued interest owed pursuant to the Convertible Debenture as described herein (c) Each of the following events shall constitute a default under this Agreement (each an "EVENT OF DEFAULT"): (i) any default, whether in whole or in part, shall occur in the payment to the Secured Party of principal, interest or other item comprising the Obligations as and when due or with respect to any other debt or obligation of the Company to a party other than the Secured Party; (ii) any default, whether in whole or in part, shall occur in the due observance or performance of any obligations or other covenants, terms or provisions to be performed under this Agreement or the Transaction Documents; 3 (iii) the Company shall: (1) make a general assignment for the benefit of its creditors; (2) apply for or consent to the appointment of a receiver, trustee, assignee, custodian, sequestrator, liquidator or similar official for itself or any of its assets and properties; (3) commence a voluntary case for relief as a debtor under the United States Bankruptcy Code; (4) file with or otherwise submit to any governmental authority any petition, answer or other document seeking: (A) reorganization, (B) an arrangement with creditors or (C) to take advantage of any other present or future applicable law respecting bankruptcy, reorganization, insolvency, readjustment of debts, relief of debtors, dissolution or liquidation; (5) file or otherwise submit any answer or other document admitting or failing to contest the material allegations of a petition or other document filed or otherwise submitted against it in any proceeding under any such applicable law, or (6) be adjudicated a bankrupt or insolvent by a court of competent jurisdiction; or (iv) any case, proceeding or other action shall be commenced against the Company for the purpose of effecting, or an order, judgment or decree shall be entered by any court of competent jurisdiction approving (in whole or in part) anything specified in Section 2.2(c)(iii) hereof, or any receiver, trustee, assignee, custodian, sequestrator, liquidator or other official shall be appointed with respect to the Company, or shall be appointed to take or shall otherwise acquire possession or control of all or a substantial part of the assets and properties of the Company, and any of the foregoing shall continue unstayed and in effect for any period of thirty (30) days. Section 2.3 TERMINATION OF SECURITY INTEREST. (a) Notwithstanding any provision to the contrary contained herein, the rights of Secured Party under this Agreement, including but not limited to, Secured Party's security interest in the Pledged Property and the Pledged Collateral, shall automatically terminate upon the occurrence of an Expiration Event. (b) Upon the occurrence of an Expiration Event, the Secured Party shall make, execute, acknowledge, file, record and deliver to the Company any documents reasonably requested by the Company to terminate the Secured Party's security interest in the Pledged Property and the Pledged Collateral. Upon the occurrence of an Expiration Event, the Secured Party shall make, execute, acknowledge and deliver to the Company such documents and instruments, including, without limitation, financing statements, certificates, affidavits and forms as may, in the Company's reasonable judgment, be necessary to eliminate and terminate, the security interest of the Secured Party in the Pledged Property and the Pledged Collateral, and the Company is authorized to file such documents as necessary to terminate Secured Party's security interest in the Pledged Property and the Pledged Collateral. 4 ARTICLE 3. ATTORNEY-IN-FACT; PERFORMANCE Section 3.1. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Upon the occurrence of an Event of Default, the Company hereby appoints the Secured Party as its attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company or otherwise, from time to time in the Secured Party's discretion to take any action and to execute any instrument which the Secured Party may reasonably deem necessary to accomplish the purposes of this Agreement, including, without limitation, to receive and collect all instruments made payable to the Company representing any payments in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. The Secured Party may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Pledged Property as and when the Secured Party may determine. To facilitate collection, the Secured Party may notify account debtors and obligors on any Pledged Property or Pledged Collateral to make payments directly to the Secured Party. Section 3.2. SECURED PARTY MAY PERFORM. If the Company fails to perform any agreement contained herein, the Secured Party, at its option, may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be included in the Obligations secured hereby and payable by the Company under Section 8.3. ARTICLE 4. REPRESENTATIONS AND WARRANTIES Section 4.1. AUTHORIZATION; ENFORCEABILITY. Each of the parties hereto represents and warrants that it has taken all action necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby; and upon execution and delivery, this Agreement shall constitute a valid and binding obligation of the respective party, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights or by the principles governing the availability of equitable remedies. Section 4.2. OWNERSHIP OF PLEDGED PROPERTY. The Company warrants and represents that it is the legal and beneficial owner of the Pledged Property free and clear of any lien, security interest, option or other charge or encumbrance except for the security interests identified on EXHIBIT A hereto and the security interest created by this Agreement. 5 ARTICLE 5. DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL Section 5.1. DEFAULT AND REMEDIES. (a) If an Event of Default described in Section 2.2(c)(i) and (ii) occurs, then in each such case the Secured Party may declare the Obligations to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration, the Obligations shall become immediately due and payable. If an Event of Default described in Sections 2.2(c)(iii) or (iv) occurs and is continuing for the period set forth therein, then the Obligations shall automatically become immediately due and payable without declaration or other act on the part of the Secured Party. (b) Upon the occurrence of an Event of Default, the Secured Party shall,: (i) be entitled to receive all distributions with respect to the Pledged Collateral, (ii) to cause the Pledged Property to be transferred into the name of the Secured Party or its nominee, (iii) to dispose of the Pledged Property, and (iv) to realize upon any and all rights in the Pledged Property then held by the Secured Party. Section 5.2. METHOD OF REALIZING UPON THE PLEDGED PROPERTY: OTHER REMEDIES. Upon the occurrence of an Event of Default, in addition to any rights and remedies available at law or in equity, the following provisions shall govern the Secured Party's right to realize upon the Pledged Property: (a) Any item of the Pledged Property may be sold for cash or other value in any number of lots at brokers board, public auction or private sale and may be sold without demand, advertisement or notice (except that the Secured Party shall give the Company ten (10) days' prior written notice of the time and place or of the time after which a private sale may be made (the "SALE NOTICE")), which notice period shall in any event is hereby agreed to be commercially reasonable. At any sale or sales of the Pledged Property, the Company may bid for and purchase the whole or any part of the Pledged Property and, upon compliance with the terms of such sale, may hold, exploit and dispose of the same without further accountability to the Secured Party. The Company will execute and deliver, or cause to be executed and delivered, such instruments, documents, assignments, waivers, certificates, and affidavits and supply or cause to be supplied such further information and take such further action as the Secured Party reasonably shall require in connection with any such sale. (b) Any cash being held by the Secured Party as Pledged Collateral and all cash proceeds received by the Secured Party in respect of, sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as follows: (i) to the payment of all amounts due the Secured Party for the expenses reimbursable to it hereunder or owed to it pursuant to Section 8.3 hereof; (ii) to the payment of the Obligations then due and unpaid. 6 (iii) the balance, if any, to the person or persons entitled thereto, including, without limitation, the Company. (c) In addition to all of the rights and remedies which the Secured Party may have pursuant to this Agreement, the Secured Party shall have all of the rights and remedies provided by law, including, without limitation, those under the Uniform Commercial Code. (d) (i) If the Company fails to pay such amounts due upon the occurrence of an Event of Default which is continuing, then the Secured Party may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of Company, wherever situated. (ii) The Company agrees that it shall be liable for any reasonable fees, expenses and costs incurred by the Secured Party in connection with enforcement, collection and preservation of the Transaction Documents, including, without limitation, reasonable legal fees and expenses, and such amounts shall be deemed included as Obligations secured hereby and payable as set forth in Section 8.3 hereof. Section 5.3. PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relating to the Company or the property of the Company or of such other obligor or its creditors, the Secured Party (irrespective of whether the Obligations shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Secured Party shall have made any demand on the Company for the payment of the Obligations), subject to the rights of Previous Security Holders, shall be entitled and empowered, by intervention in such proceeding or otherwise: (i) to file and prove a claim for the whole amount of the Obligations and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Secured Party (including any claim for the reasonable legal fees and expenses and other expenses paid or incurred by the Secured Party permitted hereunder and of the Secured Party allowed in such judicial proceeding), and (ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Secured Party to make such payments to the Secured Party and, in the event that the Secured Party shall consent to the making of such payments directed to the Secured Party, to pay to the Secured Party any amounts for expenses due it hereunder. 7 Section 5.4. DUTIES REGARDING PLEDGED COLLATERAL. The Secured Party shall have no duty as to the collection or protection of the Pledged Property or any income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody and reasonable care of any of the Pledged Property actually in the Secured Party's possession. ARTICLE 6. AFFIRMATIVE COVENANTS The Company covenants and agrees that, from the date hereof and until the Obligations have been fully paid and satisfied, unless the Secured Party shall consent otherwise in writing (as provided in Section 8.4 hereof): Section 6.1. EXISTENCE, PROPERTIES, ETC. (a) The Company shall do, or cause to be done, all things, or proceed with due diligence with any actions or courses of action, that may be reasonably necessary (i) to maintain Company's due organization, valid existence and good standing under the laws of its state of incorporation, and (ii) to preserve and keep in full force and effect all qualifications, licenses and registrations in those jurisdictions in which the failure to do so could have a Material Adverse Effect (as defined below); and (b) the Company shall not do, or cause to be done, any act impairing the Company's corporate power or authority (i) to carry on the Company's business as now conducted, and (ii) to execute or deliver this Agreement or any other document delivered in connection herewith, including, without limitation, any UCC-1 Financing Statements required by the Secured Party (which other loan instruments collectively shall be referred to as the "LOAN INSTRUMENTS") to which it is or will be a party, or perform any of its obligations hereunder or thereunder. For purpose of this Agreement, the term "MATERIAL ADVERSE EFFECT" shall mean any material and adverse affect as determined by Secured Party in its sole discretion, whether individually or in the aggregate, upon (a) the Company's assets, business, operations, properties or condition, financial or otherwise; (b) the Company's to make payment as and when due of all or any part of the Obligations; or (c) the Pledged Property. Section 6.2. FINANCIAL STATEMENTS AND REPORTS. The Company shall furnish to the Secured Party such financial data as the Secured Party may reasonably request. Without limiting the foregoing, the Company shall furnish to the Secured Party (or cause to be furnished to the Secured Party) the following: (a) as soon as practicable and in any event within ninety (90) days after the end of each fiscal year of the Company, the balance sheet of the Company as of the close of such fiscal year, the statement of earnings and retained earnings of the Company as of the close of such fiscal year, and statement of cash flows for the Company for such fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct and accompanied by a certificate of the chief executive and chief financial officers of the Company, stating that the Company has kept, observed, performed and fulfilled each 8 covenant, term and condition of this Agreement and the other Loan Instruments during such fiscal year and that no Event of Default hereunder has occurred and is continuing, or if an Event of Default has occurred and is continuing, specifying the nature of same, the period of existence of same and the action the Company proposes to take in connection therewith; (b) within thirty (30) days of the end of each calendar month, a balance sheet of the Company as of the close of such month, and statement of earnings and retained earnings of the Company as of the close of such month, all in reasonable detail, and prepared substantially in accordance with generally accepted accounting principles consistently applied, certified by the chief executive and chief financial officers of the Company as being true and correct; and (c) promptly upon receipt thereof, copies of all accountants' reports and accompanying financial reports submitted to the Company by independent accountants in connection with each annual examination of the Company. Section 6.3. ACCOUNTS AND REPORTS. The Company shall maintain a standard system of accounting in accordance with generally accepted accounting principles consistently applied and provide, at its sole expense, to the Secured Party the following: (a) as soon as available, a copy of any notice or other communication alleging any nonpayment or other material breach or default, or any foreclosure or other action respecting any material portion of its assets and properties, received respecting any of the indebtedness of the Company in excess of $50,000 (other than the Obligations), or any demand or other request for payment under any guaranty, assumption, purchase agreement or similar agreement or arrangement respecting the indebtedness or obligations of others in excess of $50,000, including any received from any person acting on behalf of the Secured Party or beneficiary thereof; and (b) within fifteen (15) days after the making of each submission or filing, a copy of any report, financial statement, notice or other document, whether periodic or otherwise, submitted to the shareholders of the Company, or submitted to or filed by the Company with any governmental authority involving or affecting (i) the Company that could have a Material Adverse Effect; (ii) the Obligations; (iii) any part of the Pledged Collateral; or (iv) any of the transactions contemplated in this Agreement or the Loan Instruments. Section 6.4. MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. The Company shall maintain its books, accounts and records in accordance with generally accepted accounting principles consistently applied, and permit the Secured Party, its officers and employees and any professionals designated by the Secured Party in writing, at any time to visit and inspect any of its properties (including but not limited to the collateral security described in the Loan Instruments), corporate books and financial records, and to discuss its accounts, affairs and finances with any employee, officer or director thereof. 9 Section 6.5. MAINTENANCE AND INSURANCE. (a) The Company shall maintain or cause to be maintained, at its own expense, all of its assets and properties in good working order and condition, making all necessary repairs thereto and renewals and replacements thereof. (b) The Company shall maintain or cause to be maintained, at its own expense, insurance in form, substance and amounts (including deductibles), which the Company deems reasonably necessary to the Company's business, (i) adequate to insure all assets and properties of the Company, which assets and properties are of a character usually insured by persons engaged in the same or similar business against loss or damage resulting from fire or other risks included in an extended coverage policy; (ii) against public liability and other tort claims that may be incurred by the Company; (iii) as may be required by the Loan Instruments or applicable law and (iv) as may be reasonably requested by Secured Party, all with adequate, financially sound and reputable insurers. Section 6.6. CONTRACTS AND OTHER COLLATERAL. The Company shall perform all of its obligations under or with respect to each instrument, receivable, contract and other intangible included in the Pledged Property to which the Company is now or hereafter will be party on a timely basis and in the manner therein required, including, without limitation, this Agreement. Section 6.7. DEFENSE OF COLLATERAL, ETC. The Company shall defend and enforce its right, title and interest in and to any part of: (a) the Pledged Property; and (b) if not included within the Pledged Property , those assets and properties whose loss could have a Material Adverse Effect, the Company shall defend the Secured Party's right, title and interest in and to each and every part of the Pledged Property, each against all manner of claims and demands on a timely basis to the full extent permitted by applicable law. Section 6.8. PAYMENT OF DEBTS, TAXES, ETC. The Company shall pay, or cause to be paid, all of its indebtedness and other liabilities and perform, or cause to be performed, all of its obligations in accordance with the respective terms thereof, and pay and discharge, or cause to be paid or discharged, all taxes, assessments and other governmental charges and levies imposed upon it, upon any of its assets and properties on or before the last day on which the same may be paid without penalty, as well as pay all other lawful claims (whether for services, labor, materials, supplies or otherwise) as and when due. Section 6.9. TAXES AND ASSESSMENTS; TAX INDEMNITY. The Company shall (a) file all tax returns and appropriate schedules thereto that are required to be filed under applicable law, prior to the date of delinquency, (b) pay and discharge all taxes, assessments and governmental charges or levies imposed upon the Company, upon its income and profits or upon any properties belonging to it, prior to the date on which penalties attach 10 thereto, and (c) pay all taxes, assessments and governmental charges or levies that, if unpaid, might become a lien or charge upon any of its properties; PROVIDED, HOWEVER, that the Company in good faith may contest any such tax, assessment, governmental charge or levy described in the foregoing clauses (b) and (c) so long as appropriate reserves are maintained with respect thereto. Section 6.10. COMPLIANCE WITH LAW AND OTHER AGREEMENTS. The Company shall maintain its business operations and property owned or used in connection therewith in compliance with (a) all applicable federal, state and local laws, regulations and ordinances governing such business operations and the use and ownership of such property, and (b) all agreements, licenses, franchises, indentures and mortgages to which the Company is a party or by which the Company or any of its properties is bound. Without limiting the foregoing, the Company shall pay all of its indebtedness promptly in accordance with the terms thereof. 6.11. NOTICE OF DEFAULT. The Company shall give written notice to the Secured Party of the occurrence of any default or Event of Default under this Agreement, the Transaction Documents or any other Loan Instrument or any other agreement of Company for the payment of money, promptly upon the occurrence thereof. 6.12. NOTICE OF LITIGATION. The Company shall give notice, in writing, to the Secured Party of (a) any actions, suits or proceedings wherein the amount at issue is in excess of $50,000, instituted by any persons against the Company, or affecting any of the assets of the Company, and (b) any dispute, not resolved within fifteen (15) days of the commencement thereof, between the Company on the one hand and any governmental or regulatory body on the other hand, which might reasonably be expected to have a Material Adverse Effect on the business operations or financial condition of the Company. ARTICLE 7. NEGATIVE COVENANTS The Company agrees to abide by the covenants set forth in the Securities Purchase Agreement. The covenants contained in the Securities Purchase Agreement, and any of the Transaction Documents, shall remain in full force and effect pursuant to their terms, notwithstanding the termination of this Agreement. 11 ARTICLE 8. MISCELLANEOUS Section 8.1. NOTICES. All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be considered as duly given on: (a) the date of delivery, if delivered in person, by nationally recognized overnight delivery service or (b) five (5) days after mailing if mailed from within the continental United States by certified mail, return receipt requested to the party entitled to receive the same: If to the Secured Party: Cornell Capital Partners, LP 101 Hudson Street-Suite 3606 Jersey City, New Jersey 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 986-8300 Facsimile: (201) 985-8266 With a copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 And if to the Company: Advanced Viral Research Corp. 200 Corporate Boulevard South Yonkers, NY 10701 Attention: Alan Gallantar, Chief Financial Officer Telephone: (914) 376-7383 Facsimile: (914) 376-7638 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard-Suite 2000 Miami, Florida 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 Any party may change its address by giving notice to the other party stating its new address. Commencing on the tenth (10th) day after the giving of such notice, such newly designated address shall be such party's address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. 12 Section 8.2. SEVERABILITY. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. Section 8.3. EXPENSES. In the event of an Event of Default, the Company will pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which the Secured Party may incur in connection with: (i) the custody or preservation of, or the sale, collection from, or other realization upon, any of the Pledged Property; (ii) the exercise or enforcement of any of the rights of the Secured Party hereunder or (iii) the failure by the Company to perform or observe any of the provisions hereof. Section 8.4. WAIVERS, AMENDMENTS, ETC. The Secured Party's delay or failure at any time or times hereafter to require strict performance by Company of any undertakings, agreements or covenants shall not waiver, affect, or diminish any right of the Secured Party under this Agreement to demand strict compliance and performance herewith. Any waiver by the Secured Party of any Event of Default shall not waive or affect any other Event of Default, whether such Event of Default is prior or subsequent thereto and whether of the same or a different type. None of the undertakings, agreements and covenants of the Company contained in this Agreement, and no Event of Default, shall be deemed to have been waived by the Secured Party, nor may this Agreement be amended, changed or modified, unless such waiver, amendment, change or modification is evidenced by an instrument in writing specifying such waiver, amendment, change or modification and signed by the Secured Party. Section 8.5. CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Pledged Property and shall: (i) remain in full force and effect until the occurrence of an Expiration Event; and (ii) be binding upon the Company and its successors and heirs and (iii) inure to the benefit of the Secured Party and its successors and assigns. Upon the occurrence of an Expiration Event, the Company shall be entitled to the return, at its expense, of such of the Pledged Property as shall not have been sold in accordance with Section 5.2 hereof or otherwise applied pursuant to the terms hereof. Section 8.6. INDEPENDENT REPRESENTATION. Each party hereto acknowledges and agrees that it has received or has had the opportunity to receive independent legal counsel of its own choice and that it has been sufficiently apprised of its rights and responsibilities with regard to the substance of this Agreement. 13 Section 8.7. APPLICABLE LAW: JURISDICTION. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County and the United States District Court for the District of New Jersey sitting in Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph. Section 8.8. WAIVER OF JURY TRIAL. AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION. Section 8.9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties and supersedes any prior agreement or understanding among them with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: ADVANCED VIRAL RESEARCH CORP. By: /s/ SHALOM Z. HIRSCHMAN ------------------------------------- Name: Shalom Z. Hirschman Title: Chief Executive Officer SECURED PARTY: CORNELL CAPITAL PARTNERS, LP BY: YORKVILLE ADVISORS, LLC ITS: GENERAL PARTNER By: /s/ MARK ANGELO ------------------------------------- Name: Mark Angelo Title: Portfolio Manager 14 EXHIBIT A DEFINITION OF PLEDGED PROPERTY For the purpose of securing prompt and complete payment and performance by the Company of all of the Obligations, the Company unconditionally and irrevocably hereby grants to the Secured Party a continuing security interest in and to, and lien upon, the following Pledged Property of the Company: (a) all goods of the Company, including, without limitation, machinery, equipment, furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles of every kind and description, now or hereafter owned by the Company or in which the Company may have or may hereafter acquire any interest, and all replacements, additions, accessions, substitutions and proceeds thereof, arising from the sale or disposition thereof, and where applicable, the proceeds of insurance and of any tort claims involving any of the foregoing; (b) all inventory of the Company, including, but not limited to, all goods, wares, merchandise, parts, supplies, finished products, other tangible personal property, including such inventory as is temporarily out of Company's custody or possession and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing; (c) all contract rights and general intangibles of the Company, including, without limitation, goodwill, trademarks, trade styles, trade names, leasehold interests, partnership or joint venture interests, patents and patent applications, including but not limited to those relating to the composition and uses of Product R, copyrights, deposit accounts whether now owned or hereafter created; (d) all documents, warehouse receipts, instruments and chattel paper of the Company whether now owned or hereafter created; (e) all accounts and other receivables, instruments or other forms of obligations and rights to payment of the Company (herein collectively referred to as "ACCOUNTS"), together with the proceeds thereof, all goods represented by such Accounts and all such goods that may be returned by the Company's customers, and all proceeds of any insurance thereon, and all guarantees, securities and liens which the Company may hold for the payment of any such Accounts including, without limitation, all rights of stoppage in transit, replevin and reclamation and as an unpaid vendor and/or lienor, all of which the Company represents and warrants will be bona fide and existing obligations of its respective customers, arising out of the sale of goods by the Company in the ordinary course of business; (f) to the extent assignable, all of the Company's rights under all present and future authorizations, permits, licenses and franchises issued or granted in connection with the operations of any of its facilities; (g) all products and proceeds (including, without limitation, insurance proceeds) from the above-described Pledged Property. A-1 EX-23.1 10 g83525exv23w1.txt EX-23.1 CONSENT OF RACHLIN COHEN & HOLTZ LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Advanced Viral Research Corp. of our Independent Auditors' Report dated February 21, 2003 on the December 30, 2002 and December 31, 2001 consolidated financial statements of Advanced Viral Research Corp. and subsidiaries, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Rachlin Cohen & Holtz LLP RACHLIN COHEN & HOLTZ LLP Certified Public Accountants Miami, Florida July 16, 2003 EXHIBIT 23.1-1 -----END PRIVACY-ENHANCED MESSAGE-----