FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2001.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-11503
CEL-SCI CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-0916344
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 506-9460
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on
December 19, 2001, as quoted on the American Stock Exchange, was approximately
$18,000,000. Shares of common stock held by each officer, director and principal
shareholder have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 20, 2001, the Registrant had 23,344,342 issued and outstanding
shares of Common Stock.
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado corporation in
1983. The Company is involved in the research and development of the drugs and
vaccines described below.
MULTIKINE
The Company's first, and main, product, MULTIKINE(TM), manufactured using
the Company's proprietary cell culture technologies, is a combination, or
"cocktail", of natural human interleukin-2 ("IL-2") and certain lymphokines and
cytokines. MULTIKINE is being tested to determine if it is effective in
improving the immune response of cancer patients.
MULTIKINE has been tested in over 160 patients in clinical trials
conducted in the U.S., Canada, Europe and Israel. Most of these patients were
head and neck cancer patients, but some studies were also conducted in prostate
cancer patients, HIV-infected patients and HIV-infected women with Human
Papilloma Virus ("HPV") induced cervical dysplasia, the precursor stage before
the development of cervical cancer. The safety profile was found to be very good
and the Company believes that the tumor response data suggests that further
studies are warranted. The Company is currently conducting one additional Phase
II head and neck cancer study and one study with HIV-infected women with HPV
induced cervical dysplasia.
At the present time the Company's primary focus for the development of
MULTIKINE is to prove its usefulness in the treatment of HIV-infected women with
HPV induced cervical dysplasia.
The function of the immunological system is to protect the body against
infectious agents, including viruses, bacteria, parasites and malignant (cancer)
cells. An individual's ability to respond to infectious agents and to other
substances (antigens) recognized as foreign by the body's immune system is
critical to health and survival. When the immune response is adequate, infection
is usually combated effectively and recovery follows. Severe infection can occur
when the immune response is inadequate. Such immune deficiency can be present
from birth but, in adult life, it is frequently acquired as a result of intense
sickness or as a result of the administration of chemotherapeutic drugs and/or
radiation. It is also recognized that, as people reach middle age and
thereafter, the immune system grows weaker.
Two classes of white blood cells, macrophages and lymphocytes, are
believed to be primarily responsible for immunity. Macrophages are large cells
whose principal immune activity is to digest and destroy infectious agents.
Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes,
B-cells, produces antibodies in response to antigens. Antibodies have unique
combining sites (specificities) that recognize the shape of particular antigens
and bind with them. The combination of an antibody with an antigen sets in
motion a chain of events which may neutralize the effects of the foreign
substance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation by
B-cells, and can also directly destroy "foreign" cells by activating "killer
cells."
It is generally recognized that the interplay among T-cells, B-cells and
the macrophages determines the strength and breadth of the body's response to
infection. It is believed that the activities of T-cells, B-cells and
macrophages are controlled, to a large extent, by a specific group of hormones
called cytokines. Cytokines regulate and modify the various functions of both
T-cells and B-cells. There are many cytokines, each of which is thought to have
distinctive chemical and functional properties. IL-2 is but one of these
cytokines and it is on IL-2 and its synergy with other cytokines that the
Company has focused its attention. Scientific and medical investigation has
established that IL-2 enhances immune responses by causing activated T-cells to
proliferate. Without such proliferation no immune response can be mounted. Other
cytokines support T-cell and B-cell proliferation. However, IL-2 is the only
known cytokine which causes the proliferation of T-cells. IL-2 is also known to
activate B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized cytokines with anticancer
potential, the Company is of the opinion that to have optimum therapeutic value,
IL-2 should be administered not as a single substance but rather as a mixture of
IL-2 and certain cytokines, i.e. as a "cocktail". This approach, which was
pioneered by the Company, makes use of the synergism between these cytokines. It
should be noted, however, that neither the FDA nor any other agency has
determined that the Company's MULTIKINE product will be effective against any
form of cancer.
It has been reported by researchers in the field of cytokine research that
IL-2 can increase the number of killer T-cells produced by the body, which
improves the body's capacity to selectively destroy specific tumor cells.
Research and human clinical trials sponsored by the Company have indicated a
correlation between administration of MULTIKINE to cancer patients and
immunological responses. On the basis of these experimental results, the Company
believes that MULTIKINE may have application for the treatment of solid tumors
in humans.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using the Company's
MULTIKINE product. The focus of the trial was unresectable head and neck cancer.
In 1991, four patients with regionally advanced squamous cell cancer of
the head and neck were treated with the Company's MULTIKINE product. The
patients had previously received radical surgery followed by x-ray therapy but
developed recurrent tumors at multiple sites in the neck and were diagnosed with
terminal cancer. The patients had low levels of lymphocytes and evidence of
immune deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects were observed
and the patients were treated as outpatients. Notwithstanding the above, it
should be noted that these trials were only preliminary and were only conducted
on a small number of patients. It remains to be seen if MULTIKINE will be
effective in treating any form of cancer.
These results caused the Company to embark on a major manufacturing
program for MULTIKINE with the goal of being able to produce a drug that would
meet the stringent regulatory requirements for advanced human studies. This
program included building a pilot scale manufacturing facility.
Since that time, MULTIKINE has been well tolerated in clinical studies
involving more than 160 patients. Some of the more recent clinical data were
presented at the 5th International Congress on Head and Neck Cancer in San
Francisco in August, 2000. The study enrolled advanced primary head and neck
cancer patients who were treated prior to surgery and/or radiation for 2 weeks.
Dr. Dudkevitch from the Department of Otolaryngology at the Rabin Medical
Center, Israel, presented data showing that, of the 12 patients treated, two
patients had a complete tumor response (100% tumor reduction) following the
2-week treatment with the MULTIKINE regimen. He also noted that upon
histopathological examination of the tissue removed during surgery, no tumor
residues were found in those patients. Another 4 patients showed a partial
(greater than 50%) tumor reduction and six patients had tumor reductions of less
than 50%. Two patients refused surgery after treatment with MULTIKINE.
In May 2001, the Company also started a Phase I clinical trial at the
University of Maryland Biotechnology Institute (UMBI). The principle
investigator of this study was Dr. Edmund Tramont, who is now the Director of
the Division of AIDS at the National Institute of Allergy and Infectious
Diseases (NIAID), a subdivision of the National Institutes of Health (NIH). The
focus of this study is HIV-infected women with Human Papilloma Virus (HPV)
induced cervical dysplasia, the precursor stage before the development of
cervical cancer. The goal of the study is to obtain safety and preliminary
efficacy data on Multikine as a treatment for pre-cancerous lesions of the
cervix (dysplasia). Most cervical dysplasia and cancer is due to infection with
HPV. The rationale for using MULTIKINE in the treatment of cervical
dysplasia/cancer is that MULTIKINE will help correct this defect and safely
boost the patients' immune systems to a point where their immune systems can
fight and eliminate the virally induced cancer. Cervical cancer is the second
leading cause of cancer death in women worldwide.
The HIV-infected women with HPV-induced cervical dysplasia were chosen as
a study group because of the high morbidity and low success rate of current
surgical therapies. Since HIV infection results in immune suppression,
HPV-induced cervical dysplasia follows a more malignant and aggressive course of
disease in such women. Co-infection with HPV is common in HIV-positive women
(about 83%) and cervical cancer is considered an AIDS-defining illness.
HPV infection is also a leading health problem in non HIV-infected
American college age women. A large concern among women who have HPV-induced
cervical dysplasia is that the repeated surgical procedures will lead to a
hysterectomy and the inability to bear children.
The study is designed to enroll up to a total of 15 women at 3 dose
levels. As of October 8, 2001 eight patients have completed the study. All eight
patients treated thus far in the ongoing phase I dose escalating study showed
clinical improvement by colposcopic (stereoscopic, binocular magnification of
the cervix under a focused beam of light) examination. Six out of eight patients
(75%) had no evidence of dysplasia on biopsy seven to eight weeks after the
final injection. One patient's final biopsy was performed at a later date. All
of the patients tolerated the injections well and without any associated serious
adverse reactions. As a result of this study, the Company has decided that,
barring some unforeseen circumstances, it will give the highest priority to
clinical trials in women with HPV-induced cervical dysplasia. The Company plans
to meet with the FDA to determine the best way to proceed with future clinical
trials. Given the large unmet medical need in HPV-induced cervical dysplasia,
the Company is hopeful that its meetings with the FDA will lead to the
initiation of a larger clinical trial in patients with HPV-induced cervical
dysplasia during 2002.
In November 2000, the Company concluded a development, supply and
distribution agreement with Orient Europharma of Taiwan. The agreement gives
Orient Europharma the exclusive marketing rights to Multikine for all cancer
indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides
for Orient Europharma to fund the clinical trials needed to obtain marketing
approvals in the four countries for head and neck cancer, naso-pharyngeal cancer
and potentially cervical cancer, which are very prevalent in Far East Asia. The
Company may use the clinical data generated in these trials to support
applications for marketing approvals for Multikine in other parts of the world.
Under the agreement, the Company will manufacture Multikine and Orient
Europharma will purchase the product from the Company for distribution in the
territory. Both parties will share in the revenue from the sale of Multikine.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this early stage of clinical investigation, it remains to be proven that
MULTIKINE will be effective against any form of cancer. Even if some form of
MULTIKINE is found to be effective in the treatment of cancer, commercial use of
MULTIKINE may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that the Company's research efforts, even if successful from a
medical standpoint, can be completed before those of its competitors.
The Company uses an unrelated corporation for certain aspects of the
production of MULTIKINE for research and testing purposes. The agreement with
this corporation expires in 2006.
T-CELL MODULATION PROCESS
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as L.E.A.P.S. (Ligand Epitope Antigen Presentation
System), is intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections and cancer, when it
cannot do so on its own. Administered like vaccines, L.E.A.P.S. combines T-cell
binding ligands with small, disease associated, peptide antigens and may provide
a new method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
The Company intends to use this technology to develop potential treatments
and/or vaccines against various diseases. Present target diseases are herpes
simplex, AIDS, malaria, tuberculosis, prostate cancer and breast cancer.
The Company is involved in the following publicly announced studies which
are designed to determine the effectiveness of the L.E.A.P.S. technology in
preclinical studies:
Cooperative Research and Development Agreement ("CRADA") with the Naval
Medical Research Institute of the U.S. Navy to jointly develop a potential
malaria vaccine using the L.E.A.P.S. technology. While at present the number of
malaria cases is not a major problem in the continental U.S., there are an
increasing number of cases involving Americans bringing the disease home from
overseas travels. Currently, there is no approved malaria vaccine anywhere in
the world.
Development of a herpes simplex virus vaccine based on the L.E.A.P.S.
technology with funding from the National Institute of Allergy and Infectious
Diseases.
Collaborative study for the treatment, and possible prevention, of
autoimmune myorcarditis with researchers at the Department of Pathology, the
Johns Hopkins Medical Institutions, Baltimore, Maryland.
Research collaboration agreement with research scientists at the
Max-Delbruck Center for Molecular Medicine in Berlin, Germany to develop a
therapeutic vaccine for breast and/or colon cancer.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2001, approximately $40,000,000 has
been expended on the Company-sponsored research and development, including
approximately $7,762,000, $5,186,000, and $4,662,000, respectively during the
years ended September 30, 2001, 2000 and 1999.
The costs associated with the clinical trials relating to the Company's
technologies, research expenditures and the Company's administrative expenses
have been funded with the public and private sales of shares of the Company's
common stock and borrowings from third parties, including affiliates of the
Company.
The Company has a Scientific Advisory Board ("SAB") comprised of
scientists distinguished in biomedical research in the field of cytokines and
related areas. From time to time, members of the SAB advise the Company on its
research activities. Institutions with which members of the SAB are affiliated
have in the past conducted and may in the future conduct Company-sponsored
research. The SAB has in the past and may in the future, at its discretion,
invite other scientists to opine in confidence on the merits of the
Company-sponsored research.
The members of the Company's SAB are:
Evan M. Hersh, M.D. - Professor of Medicine, Microbiology and Immunology,
Assistant Director of Experimental Therapeutics and Translational Research,
Arizona Cancer Center, Tucson.
Michael J. Mastrangelo, M.D. - Professor of Medicine, Jefferson Medical
College, Philadelphia, Pennsylvania; and Associate Clinical Director, Jefferson
Cancer Center, Philadelphia, Pennsylvania.
Alan B. Morris, Ph.D. - Professor, Department of Biological Sciences,
University of Warwick, Coventry, U.K.
GOVERNMENT REGULATION
The investigational agents and future products of the Company are
regulated in the United States under the Federal Food, Drug and Cosmetic Act,
the Public Health Service Act, and the laws of certain states. The Federal Food
and Drug Administration (FDA) exercises significant regulatory control over the
clinical investigation, manufacture and marketing of pharmaceutical and
biological products.
Prior to the time a pharmaceutical product can be marketed in the United
States for therapeutic use, approval of the FDA must normally be obtained.
Certain states, however, have passed laws which allow a state agency having
functions similar to the FDA to approve the testing and use of pharmaceutical
products within the state. In the case of either FDA or state regulation,
preclinical testing programs on animals, followed by three phases of clinical
testing on humans, are typically required in order to establish product safety
and efficacy.
The first stage of evaluation, preclinical testing, must be conducted in
animals. After lack of toxicity has been demonstrated, the test results are
submitted to the FDA (or state regulatory agency) along with a request for
clearance to conduct clinical testing, which includes the protocol that will be
followed in the initial human clinical evaluation. If the applicable regulatory
authority does not object to the proposed study, the investigator can proceed
with Phase I trials. Phase I trials consist of pharmacological studies on a
relatively few number of humans under rigidly controlled conditions in order to
establish lack of toxicity and a safe dosage range.
After Phase I testing is completed, one or more Phase II trials are
conducted in a limited number of patients to test the product's ability to treat
or prevent a specific disease, and the results are analyzed for clinical
efficacy and safety. If the results appear to warrant confirmatory studies, the
data is submitted to the applicable regulatory authority along with the protocol
for a Phase III trial. Phase III trials consist of extensive studies in large
populations designed to assess the safety of the product and the most desirable
dosage in the treatment or prevention of a specific disease. The results of the
clinical trials for a new biological drug are submitted to the FDA as part of a
product license application ("PLA"), a New Drug Application ("NDA") or Biologics
License Application ("BLA"), depending on the type or derivation of the product
being studied.
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") may need to be filed in the case of
biological products derived from blood, or not considered to be sufficiently
well characterized, in order to obtain FDA approval of the testing and
manufacturing facilities in which the product is produced. To the extent all or
a portion of the manufacturing process for a product is handled by an entity
other than the Company, the Company must similarly receive FDA approval for the
other entity's participation in the manufacturing process. Domestic
manufacturing establishments are subject to inspections by the FDA and by other
Federal, state and local agencies and must comply with Good Manufacturing
Practices ("GMP") as appropriate for production. In complying with GMP
regulations, manufacturers must continue to expend time, money and effort in the
area of production, quality control and quality assurance to ensure full
technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. Approval of drugs and biologicals by
regulatory authorities of most foreign countries must also be obtained prior to
initiation of clinical studies and marketing in those countries. The approval
process varies from country to country and the time period required in each
foreign country to obtain approval may be longer or shorter than that required
for regulatory approval in the United States.
There are no assurances that clinical trials conducted under approval from
state authorities or conducted in foreign countries will be accepted by the FDA.
Product licensure in a foreign country does not mean that the product will be
licensed by the FDA and there are no assurances that the Company will receive
any approval of the FDA or any other governmental entity for the manufacturing
and/or marketing of a product. Consequently, the commencement of the marketing
of any Company product is, in all likelihood, many years away.
There can be no assurance that the Company will be successful in obtaining
approvals from any regulatory authority to conduct further clinical trials or to
manufacture and sell its products. The lack of regulatory approval for the
Company's products will prevent the Company from generally marketing its
products. Delays in obtaining regulatory approval or the failure to obtain
regulatory approval in one or more countries may have a material adverse impact
upon the Company's operations.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental institutions are
conducting research on cytokines. Competition in the development of therapeutic
agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than the Company has to develop products.
The establishment by these large companies of in-house research groups and of
joint research ventures with other entities is already occurring in these areas
and will probably become even more prevalent. In addition, licensing and other
collaborative arrangements between governmental and other nonprofit institutions
and commercial enterprises, as well as the seeking of patent protection of
inventions by nonprofit institutions and researchers, could result in strong
competition for the Company. Any new developments made by such organizations may
render the Company's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. The
Company believes, however, that it is the only producer of a patented IL-2
product using a patented cell-culture technology with normal human cells. The
Company foresees that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is the Company's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore, the
Company's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2-rich
mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these
differences prove to be of importance, and if the therapeutic value of its
MULTIKINE product is conclusively established, the Company believes it will be
able to establish a strong competitive position in a future market.
The Company has not established a definitive plan for marketing nor has it
established a price structure for the Company's saleable products. However, the
Company intends, if the Company is in a position to begin commercialization of
its products, to enter into written marketing agreements with various major
pharmaceutical firms with established sales forces. The sales forces in turn
would probably target the Company's products to cancer centers, physicians and
clinics involved in immunotherapy.
The Company may encounter problems, delays and additional expenses in
developing marketing plans with outside firms. In addition, the Company may
experience other limitations involving the proposed sale of its products, such
as uncertainty of third-party reimbursement. There is no assurance that the
Company can successfully market any products which they may develop or market
them at competitive prices.
Some of the clinical trials funded to date by the Company have not been
approved by the FDA, but rather have been conducted pursuant to approvals
obtained from certain states and foreign countries. Conducting clinical studies
in foreign countries is normal industry practice since these studies can often
be completed in less time and are less expensive than studies conducted in the
U.S. Conducting clinical studies in foreign countries is also beneficial since
the Company will need the approval from a foreign country prior to the time the
Company can market any of its drugs in the foreign country. However, since the
results of these clinical trials may not be accepted by the FDA, competitors
conducting clinical trials approved by the FDA may have an advantage in that the
products of such competitors are further advanced in the regulatory process than
those of the Company. The Company is conducting its trials in compliance with
internationally recognized standards. By following these standards, the Company
anticipates obtaining acceptance from world regulatory bodies, including the
FDA.
ITEM 2. PROPERTIES
The Company leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $7,600. The Company believes this
arrangement is adequate for the conduct of its present business.
Tthe Company has a 17,900 square foot laboratory which is leased by the
Company at a cost of approximately $10,450 per month. The laboratory lease
expires in 2004, with extensions available until 2014.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 28, 2001 there were approximately 2,800 record holders of
the Company's common stock. The Company's common stock is traded on the American
Stock Exchange. Set forth below are the range of high and low quotations for the
Company's common stock for the periods indicated as reported on the American
Stock Exchange. The market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
Quarter Ending High Low
12/31/99 $3.06 $2.18
3/31/00 $9.87 $2.25
6/30/00 $6.37 $2.75
9/30/00 $3.56 $2.20
12/31/00 $2.54 $1.00
3/31/01 $3.30 $1.30
6/30/01 $1.85 $1.16
9/30/01 $1.94 $1.02
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment of liabilities. The Board of Directors is not
obligated to declare a dividend. The Company has not paid any dividends on its
common stock and the Company does not have any current plans to pay any common
stock dividends.
The provisions in the Company's Articles of Incorporation relating to the
Company's Preferred Stock would allow the Company's directors to issue Preferred
Stock with rights to multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to the Company's Common
Stock. The issuance of Preferred Stock with such rights may make more difficult
the removal of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if such
transactions are not favored by incumbent management.
The market price of the Company's common stock, as well as the securities
of other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or its competitors, governmental regulation, developments in
patent or other proprietary rights, public concern as to the safety of products
developed by the Company or other biotechnology and pharmaceutical companies,
and general market conditions may have a significant effect on the market price
of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the more detailed financial statements, related notes and other financial
information included herein.
For the Years Ended September 30,
--------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Investment Income and Other
Revenues: $670,092 $442,551 $469,518 $792,994 $ 438,145
Expenses:
Research and Development 7,762,213 5,168,065 4,662,226 3,833,854 6,011,670
Depreciation and
Amortization 209,121 220,994 268,210 295,331 313,547
General and Adminis-
trative 3,432,437 3,515,889 3,029,807 3,106,492 2,302,386
--------- --------- --------- --------- ---------
Net Loss $(10,733,679) $(8,478,397) $(7,490,725) $(6,442,683) $(8,189,458)
==================================================================
Loss per common share
(basic and diluted) $(0.51) $(0.44) $(0.52) $(0.74) $(1.00)
Weighted average common
Shares outstanding 21,824,273 19,259,190 14,484,352 11,379,437 9,329,419
Balance Sheet Data:
- ------------------
September 30,
-----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working Capital $2,807,299 $11,725,940 $6,152,715 $12,926,014 $4,581,247
Total Assets 4,508,920 13,808,882 7,559,772 14,431,813 6,334,397
Total Liabilities 507,727 847,423 461,586 456,529 508,617
Shareholders' Equity 4,001,193 12,961,459 7,098,186 13,975,284 5,825,780
No dividends have been declared on the Company's common stock.
The Company's net losses for each fiscal quarter during the two years
ended September 30, 2001 are shown below:
Quarter Net Loss Net Loss per Share
12-31-99 $(1,704,408) $(0.10)
03-31-00 $(2,857,840) $(0.15)
06-30-00 $(2,165,107) $(0.11)
09-30-00 $(1,791,642) $(0.09)
12-31-00 $(2,543,489) $(0.12)
03-31-01 $(3,633,943) $(0.18)
06-30-01 $(2,045,155) $(0.09)
09-30-01 $(2,511,092) $(0.12)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal 2001
Interest income during the year ending September 30, 2001 reflects interest
accrued on investments. Research and development expenses in 2001 are
substantially higher than the prior period due to costs involved in
manufacturing substantial quantities of MULTIKINE for use in future clinical
trials and costs involved in validating the manufacturing process. General and
Administrative expenses increased slightly due to compensation charges of
$593,472 for options to employees that were repriced and compensation charges of
$316,501 for options and common stock granted to persons other than employees
for services rendered to the Company. These increases were offset by a decrease
of $288,000 for compensation charges related to the common stock bonus granted
to an officer.
Fiscal 2000
Interest income during the year ended September 30, 2000 reflects interest
received and accrued on investments. Research and development expense in 2000 is
higher than in 1999 because the Company is running more and larger clinical
trials. General and administrative expenses increased due to the lawsuit brought
by former directors which was settled in May of 2000.
Fiscal 1999
Interest income during the year ending September 30, 1999 reflects
interest received and accrued on investments. Interest income decreased as the
Company used the proceeds of the sale of the Series D Preferred Stock. Research
and development expense in 1999 was higher than in 1998 because the Company is
running more and larger clinical trials. General and administrative expenses
have increased due to the addition of more employees needed for the increased
activity level.
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its
inception in March l983. The Company has relied upon proceeds realized from the
public and private sale of its Common Stock to meet its funding requirements.
Funds raised by the Company have been expended primarily in connection with the
acquisition of an exclusive worldwide license to certain patented and unpatented
proprietary technology and know-how relating to the human immunological defense
system, patent applications, the repayment of debt, the continuation of
Company-sponsored research and development, administrative costs and
construction of laboratory facilities. Inasmuch as the Company does not
anticipate realizing revenues until such time as it enters into licensing
arrangements regarding the technology and know-how licensed to it (which could
take a number of years), the Company is mostly dependent upon the proceeds from
the sale of its securities to meet all of its liquidity and capital resource
requirements.
During fiscal 2002, the Company expects that it will spend significant
amounts on research, development, and clinical trials. The Company plans to use
its existing financial resources, the proceeds from the sale of its common stock
under the equity line of credit agreement with Paul Revere Capital Partners, and
the proceeds from the issuance of convertible debt to fund its capital
requirements during this period.
Other than funding its research and development program, the Company does
not have any material capital commitments.
It should be noted that substantial additional funds will be needed for
more extensive clinical trials which will be necessary before the Company will
be able to apply to the FDA for approval to sell any products which may be
developed on a commercial basis throughout the United States. In the absence of
revenues, the Company will be required to raise additional funds through the
sale of securities, debt financing or other arrangements in order to continue
with its research efforts. However, there can be no assurance that such
financing will be available or be available on favorable terms.
The Company's cash flow and earnings are subject to fluctuations due to
changes in interest rates in its investment portfolio of debt securities, to the
fair value of equity instruments held, and, to an immaterial extent, to foreign
currency exchange rates. The Company maintains an investment portfolio of
various issuers, types and maturities. These securities are generally classified
as available-for-sale and, consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a separate component of
stockholder's equity. Other-than-temporary losses are recorded against earnings
in the same period the loss was deemed to have occurred. The Company does not
currently hedge this exposure and there can be no assurance that
other-than-temporary losses will not have a material adverse impact on the
Company's results of operations in the future.
Equity Line of Credit
In order to provide a possible source of funding for the Company's current
activities and for the development of its current and planned products, the
Company entered into an equity line of credit agreement with Paul Revere Capital
Partners.
Under the equity line of credit agreement, Paul Revere Capital Partners
has agreed to provide the Company with up to $10,000,000 of funding prior to
June 22, 2003. During this period, the Company may request a drawdown under the
equity line of credit by selling shares of its common stock to Paul Revere
Capital Partners, and Paul Revere Capital Partners will be obligated to purchase
the shares. The minimum amount the Company can draw down at any one time is
$100,000, and the maximum amount the Company can draw down at any one time will
be determined at the time of the drawdown request using a formula contained in
the equity line of credit agreement. The Company may request a drawdown once
every 22 trading days, although the Company is under no obligation to request
any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, the Company will
calculate the number of shares it will sell to Paul Revere Capital Partners and
the purchase price per share. The purchase price per share of common stock will
be based on the daily volume weighted average price of the Company's common
stock during each of the 22 trading days immediately following the drawdown
date, less a discount of 11%. On November 9, 2001 the Company sold 277,684
shares of its common stock to Paul Revere Capital Partners at an average price
of $1.08 per share, which was net of the 11% discount.
Cambrex Bio Science Promissory Note
In November 2001 the Company gave a promissory note to Cambrex Bio
Sciences, Inc., the owner of the manufacturing facility used by the Company to
produce MULTIKINE for the Company's clinical trials. The promissory note is in
the principal amount of $1,159,000 and represents the cost of the Company's use
of the Cambrex manufacturing facility for the three months ended January 10,
2002. The Company expects that its short term need for MULTIKINE will be
complete by January 10, 2002 and as a result the Company will not incur the
expense associated with the use of the Cambrex facility after that date. The
amount borrowed from Cambrex is due and payable on January 2, 2003. Beginning
November 16, 2002 will bear interest at the prime interest rate, which is
adjusted monthly, and is secured by the equipment used by the Company to
manufacture MULTIKINE.
Convertible Notes and Series F Warrants
In December 2001, the Company agreed to sell convertible notes, plus Series
F warrants, to a group of private investors for $800,000, subject to
satisfaction of certain closing conditions. The notes will bear interest at 7%
per year, will be due and payable two years from the closing date, and will be
secured by substantially all of the Company's assets. Interest will be payable
quarterly except that the first interest payment is not due until July 1, 2002.
If the Company fails to make any interest payment when due, the notes will
become immediately due and payable. The proceeds to the Company from the sale of
these notes, net of transaction costs, is expected to be
approximately $730,000.
At the holder's option the notes will be convertible into shares of the
Company's common stock equal in number to the amount determined by dividing each
$1,000 of note principal to be converted by the Conversion Price. The Conversion
Price will be 76% of the average of the three lowest daily trading prices of the
Company's common stock on the American Stock Exchange during the 20 trading days
immediately prior to the conversion date. The Conversion Price may not be less
than the Floor Price. The Floor Price will be 75% of the Closing Price. The
Closing Price is the average of the three lowest daily trading prices of the
Company's common stock on the American Stock Exchange during the 20 trading days
immediately prior to the date the transaction closes. However, if the Company's
common stock trades for less than the Closing Price for a period of 20
consecutive trading days, the Floor Price will no longer be applicable.
If the Company sells any additional shares of common stock, or any
securities convertible into common stock at a price below the then applicable
Conversion Price, the Conversion Price will be lowered to the price at which the
shares were sold or the lowest price at which the securities are convertible, as
the case may be. If the Company sells any additional shares of common stock, or
any securities convertible into common stock at a price below the market price
of the Company's common stock, the Conversion Price will be lowered by a
percentage equal to the price at which the shares were sold or the lowest price
at which the securities are convertible, as the case may be, divided by the then
prevailing market price of the Company's common stock. However the Conversion
Price will not be adjusted as the result of shares issued in connection with a
Permitted Financing. A Permitted Financing involves shares of common stock
issued or sold:
- - in connection with a merger or acquisition;
- - upon the exercise of options or the issuance of common stock to the
Company's employees, officers, directors, consultants and vendors in
accordance with the Company's equity incentive policies;
- - pursuant to the conversion or exercise of securities which were outstanding
on the date of the closing of the transaction;
- - pursuant to the Company's equity line of credit;
- - to key officers of the Company in lieu of their respective salaries.
The Company has agreed to file a registration statement with the
Securities and Exchange Commission so that the shares of common stock issued
upon the conversion of the notes or the exercise of the warrants may be resold
in the public market. Upon the effective date of this registration statement the
holders of the notes have agreed to purchase an additional $800,000 of
convertible notes from the Company. The additional $800,000 of convertible notes
will have the same terms as the notes sold in December 2001.
The Company's agreement with the note holders will place the following
restrictions on the Company's operations. Any of the following restrictions may
be waived with the written consent of the holders of a majority of the principal
amount of the notes outstanding at the time the consent is required.
o So long as the notes are outstanding, and except as required by the terms
of the Company's Series E Preferred stock, the Company may not:
- declare or pay any dividends (other than a stock dividend or
stock split) or make any distributions to any holders of its
common stock, or
- purchase or otherwise acquire for value, directly or indirectly,
any common or preferred stock.
o Until the earlier of 270 days after the date the transaction closes or the
date all of the notes are no longer outstanding, the Company may not sell
any common stock or any securities convertible into common stock. However,
this restriction will not apply to shares issued in a Permitted Financing.
o If the Company maintains a balance of less than $1,000,000 in its bank
account in any month, it may draw down the maximum amount allowable for
such month under its equity line of credit. If the Company maintains a
balance of greater than $1,000,000 in its bank account in any month, it may
only draw down a maximum of $235,000 per month under the equity line of
credit.
So long as the notes remain outstanding, the note holders will have a
first right of refusal to participate in any subsequent financings involving the
Company. If the Company enters into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the note holders
may exchange notes and warrants for the securities sold in the subsequent
financing.
Upon the occurrence of any of the following events the Company is required
to redeem the notes at a price equal to 130% of the then outstanding principal
balance of the notes:
- the failure of the Registration Statement which the Company has
agreed to file to be declared effective by the Securities and
Exchange Commission within 90 days of the closing date of the
transaction.
- the suspension from listing or the failure of the Company's
common stock to be listed on the American Stock Exchange for a
period of five consecutive trading days; or
- the effectiveness of the Registration Statement lapses for any
reason or the Registration Statement is unavailable to the note
holders and the lapse or unavailability continues for a period
of ten consecutive trading days, provided the cause of the lapse
or unavailability is not due to factors primarily within the
control of the note holders.
- any representation or warranty made by the Company to the note
holders proves to be materially inaccurate or the Company fails
to perform any material covenant or condition in its agreement
with the note holders.
- the completion of a merger or other business combination
involving the Company and as a result of which the Company is
not the surviving entity.
- a purchase, tender or exchange offer accepted by the holders of
more than 30% of the Company's outstanding shares of common
stock.
- the Company's shareholders fail to approve the issuance of the
shares of the Company's common stock upon the conversion of the
notes or the exercise of the warrants.
- the Company files for protection from its creditors under the
federal bankruptcy code.
- the Company exceeds its draw down limits under it equity line of
credit.
The Series F warrants will allow the holders to initially purchase up to
960,000 shares of the Company's common stock at a price equal to 110% of the
Closing Price at any time prior to the date which is seven years after the
closing of the transaction.
If the Company sells any additional shares of common stock, or any
securities convertible into common stock at a price below the then applicable
warrant exercise price, the warrant exercise price will be lowered to the price
at which the shares were sold or the lowest price at which the securities are
convertible, as the case may be. If the warrant exercise price is adjusted, the
number of shares of common stock issuable upon the exercise of the warrant will
be increased by the product of the number of shares of common stock issuable
upon the exercise of the warrant immediately prior to the sale multiplied by the
percentage by which the warrant exercise price is reduced.
If the Company sells any additional shares of common stock, or any
securities convertible into common stock at a price below the market price of
the Company's common stock, the warrant exercise price will be lowered by a
percentage equal to the price at which the shares were sold or the lowest price
at which the securities are convertible, as the case may be, divided by the then
prevailing market price of the Company's common stock. If the warrant exercise
price is adjusted, the number of shares of common stock issuable upon the
exercise of the warrant will be increased by the product of the number of shares
of common stock issuable upon the exercise of the warrant immediately prior to
the sale multiplied by the percentage determined by dividing the price at which
the shares were sold by the market price of the Company's common stock on the
date of sale.
However, neither the warrant exercise price nor the shares issuable upon
the exercise of the warrant will be adjusted as the result of shares issued in
connection with a Permitted Financing.
On the date that the registration statement which the Company has agreed
to file is declared effective by the Securities and Exchange Commission, and
every three months following the effective date, the warrant exercise price will
be adjusted to an amount equal to 110% of the Conversion Price on such date,
provided that the adjusted price is lower than the warrant exercise price on
that date.
Quantitative and Qualitative Disclosure About Market Risks
Market risk is the potential change in an instrument's value caused by,
for example, fluctuations in interest and currency exchange rates. The Company
has no derivative financial instruments or debt. Further, there is no exposure
to risks associated with foreign exchange rate changes because none of the
operations of the Company are transacted in a foreign currency. The interest
rate risk on investments is considered immaterial due to the dollar value of
investments as of September 30, 2001.
Recent Accounting Pronouncements
Effective October 1, 2001, the Company adopted SFAS No. 133, issued by
FASB, "Accounting for Derivative Instruments and Hedging Activities", (as
amended by SFAS No. 137 and SFAS No. 138). This statement requires companies to
record qualifying derivatives on their balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The Company had no derivative
or hedging activity in any of the periods presented and therefore there is no
impact of these Standards on its financial position or the results of its
operations.
In June 2001, the FASB issued SFAS No. 141, Accounting for Business
Combinations. SFAS No. 141 requires that all business combinations initiated
after June 30, 2001, be accounted for under the purchase method and addresses
the initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. The Company has not yet determined the
impact that the adoption of SFAS No. 141 will have on its results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives not be
amortized but will rather be tested at least annually for impairment. The
Company will adopt SFAS No. 142 on October 1, 2002. The Company has not yet
determined the impact that the adoption of SFAS No. 142 will have on its results
of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company has not yet determined the impact
Statement of Financial Accounting Standards No. 143 will have on its financial
position or the results of operations when such statement is adopted.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It supersedes
SFAS 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 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.
The Company is required to adopt SFAS No. 144 on October 1, 2002. The Company
has not yet determined the impact that the adoption of SFAS No. 144 will have on
its results of operations or its financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements included with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
Maximilian de Clara 71 Director and President
Geert R. Kersten, Esq. 42 Director, Chief Executive Officer and
Treasurer
Patricia B. Prichep 49 Senior Vice President of Operations and
Secretary
Name Age Position
M. Douglas Winship 52 Senior Vice President of Regulatory Affairs
and Quality Assurance
Dr. Eyal Talor 45 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 59 Senior Vice President of Research, Cellular
Immunology
Alexander G. Esterhazy 56 Director
Dr. C. Richard Kinsolving 66 Director
The directors of the Company serve in such capacity until the next annual
meeting of the Company's shareholders and until their successors have been duly
elected and qualified. The officers of the Company serve at the discretion of
the Company's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of the Company, may be deemed to be the "parent" and "founder" of the
Company as those terms are defined under applicable rules and regulations of the
Securities and Exchange Commission.
The principal occupations of the Company's officers and directors, during
the past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a Director of the Company since
its inception in March l983, and has been President of the Company since July
l983. Prior to his affiliation with the Company, and since at least l978, Mr. de
Clara was involved in the management of his personal investments and personally
funding research in the fields of biotechnology and biomedicine. Mr. de Clara
attended the medical school of the University of Munich from l949 to l955, but
left before he received a medical degree. During the summers of l954 and l955,
he worked as a research assistant at the University of Istanbul in the field of
cancer research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the
honor cross of the Austrian Albert Schweitzer Society.
Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and Investment
Relations for the Company between February 1987 and October 1987. In October of
1987, he was appointed Vice President of Operations. In December 1988, Mr.
Kersten was appointed Director of the Company. Mr. Kersten also became the
Company's Treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief
Operating Officer and in February 1995, Mr. Kersten became the Company's Chief
Executive Officer. In previous years, Mr. Kersten worked as a financial analyst
with Source Capital, Ltd., an investment advising firm in McLean, Virginia. Mr.
Kersten is a stepson of Maximilian de Clara, who is the President and a Director
of the Company. Mr. Kersten attended George Washington University in Washington,
D.C. where he earned a B.A. in Accounting and an M.B.A. with emphasis on
International Finance. He also attended law school at American University in
Washington, D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Senior Vice President of
Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep
was the Company's Director of Operations. Ms. Prichep became the Company's
Secretary in May 2000. From June 1990 to December 1992, Ms. Prichep was the
Manager of Quality and Productivity for the NASD's Management, Systems and
Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and
Operations Manager for Source Capital, Ltd.
M. Douglas Winship has been the Company's Senior Vice President of
Regulatory Affairs and Quality Assurance since April 1994. Between 1988 and
April 1994, Mr. Winship held various positions with Curative Technologies, Inc.,
including Vice President of Regulatory Affairs and Quality Assurance
(1991-1994).
Eyal Talor, Ph.D. has been the Company's Senior Vice President of Research
and Manufacturing since March 1994. From October 1993 until March 1994, Dr.
Talor was Director of Research, Manufacturing and Quality Control, as well as
the Director of the Clinical Laboratory, for Chesapeake Biological Laboratories,
Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA Technologies, Inc.,
as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and
Clinical Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held
various positions with the John Hopkins University, including course coordinator
for the School of Continuing Studies (1989-Present), research associate and
lecturer in the Department of Immunology and Infectious Diseases (1987-1991),
and associate professor (1991-Present).
Daniel H. Zimmerman, Ph.D. has been the Company's Senior Vice President of
Cellular Immunology since January 1996. Dr. Zimmerman founded CELL-MED, Inc. and
was its president from 1987-1995. From 1973 to 1987 Dr. Zimmerman served in
various positions at Electronucleonics, Inc. including Scientist, Senior
Scientist, Technical Director and Program Manager. From 1969-1973 Dr. Zimmerman
was a Senior Staff Fellow at NIH.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of the Company since April
2001. Since February 1999 Dr. Kinsolving has been the Chief Executive Officer of
BioPharmacon, a pharmaceutical development company. Between December 1992 and
February 1999 Dr. Kinsolving was the President of Immuno-Rx, Inc., a company
engaged in immuno-pharmaceutical development. Between December 1991 and
September 1995 Dr. Kinsolving was President of Bestechnology, Inc. a nonmedical
research and development company producing bacterial preparations for industrial
use. Dr. Kinsolving received his Ph.D. in Pharmacology from Emory University
(1970), his Masters degree in Physiology/Chemistry from Vanderbilt University
(1962), and his Bachelor's degree in Chemistry from Tennessee Tech. University
(1957).
All of the Company's officers devote substantially all of their time to the
Company's business. Messrs. Esterhazy and Kinsolving, as directors, devote only
a minimal amount of time to the Company.
The Company has an audit committee and compensation committee. The members
of the audit committee are Alexander G. Esterhazy and C. Richard Kinsolving. The
members of the compensation committee are Maximilian de Clara, Alexander
Esterhazy and C. Richard Kinsolving.
Executive Compensation
The following table sets forth in summary form the compensation received
by (i) the Chief Executive Officer of the Company and (ii) by each other
executive officer of the Company who received in excess of $100,000 during the
fiscal year ended September 30, 2001.
All
Other Other
Annual Restric- Com-
Compen- ted Stock Options pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted tion
pal Position Year (1) (2) (3) (4) (5) (6)
- ------------------ ----- ------ ------- -------- ------- ---------- -------
Maximilian de Clara, 2001 $357,167 -- $52,186 $262,000 95,000 $ 64
President 2000 $345,583 -- $72,945 $550,000 60,000 $ 64
1999 $335,292 -- $72,945 $435,625 145,000 $ 63
Geert R. Kersten, 2001 $265,175 -- $10,462 $ 8,313 655,000 $4,114
Chief Executive 2000 $303,049 -- $15,349 $ 10,375 60,000 $4,114
Officer, Secretary 1999 $268,480 -- $15,154 $10,000 145,000 $4,113
and Treasurer
Patricia B. Prichep 2001 $104,505 -- $3,000 $6,270 260,000 $ 63
Senior Vice President 2000 $114,430 -- $3,000 $6,998 23,000 $ 63
of Operations
M. Douglas Winship, 2001 $163,725 -- $2,400 $9,824 65,000 $ 64
Senior Vice President 2000 $154,658 -- $2,400 $9,280 20,000 $ 64
of Regulatory Affairs 1999 $146,609 -- $2,400 $8,797 27,500 $ 63
and Quality Assurance
Eyal Talor, Ph.D. 2001 $157,420 -- $3,000 $9,269 200,000 $ 63
Senior Vice President 2000 $150,334 -- $3,000 $9,020 50,000 $ 63
of Research and 1999 $139,085 -- $3,000 $8,345 30,000 $ 63
Manufacturing
Daniel Zimmerman, 2001 $117,145 -- $3,000 $6,962 175,000 $ 64
Ph.D., 2000 $124,165 -- $3,000 $7,450 20,000 $ 64
Senior Vice President 1999 $114,806 -- $3,000 $6,888 45,000 $ 63
of Cellular Immunology
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
director's fees of $8,000.
(4) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of Mr. de Clara, the shares were issued in
consideration for past services rendered to the Company. In the case of all
other persons listed in the table, the shares were issued as the Company's
contribution on behalf of the named officer to the Company's 401(k)
retirement plan.
As of September 30, 2001, the number of shares of the Company's common
stock, owned by the officers included in the table above, and the value of
such shares at such date, based upon the market price of the Company's
common stock were:
Name Shares Value
Maximilian de Clara 195,071 $247,741
Geert R. Kersten 157,173 $199,610
Patricia B. Prichep 16,843 $ 21,391
M. Douglas Winship 14,360 $ 18,237
Eyal Talor, Ph.D. 29,837 $ 37,893
Daniel Zimmerman, Ph.D. 31,299 $ 39,750
Dividends may be paid on shares of restricted stock owned by the Company's
officers and directors, although the Company has no plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the periods covered by the Table. Includes certain
options issued in connection with the Company's Salary Reduction Plans as
well as certain options purchased from the Company. See "Options Granted
During Fiscal Year Ended September 30, 2001" below.
(6) All other compensation received that the Company could not properly report
in any other column of the Table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and the
dollar value of any insurance premiums paid by, or on behalf of, the Company
with respect to term life insurance for the benefit of the named executive
officer, and the full dollar value of the remainder of the premiums paid by,
or on behalf of, the Company. Amounts in the table represent life insurance
premiums.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 the Company implemented a defined contribution retirement
plan, qualifying under Section 401(k) of the Internal Revenue Code and covering
substantially all the Company's employees. Prior to January 1, 1998 the
Company's contribution was equal to the lesser of 3% of each employee's salary,
or 50% of the employee's contribution. Effective January 1, 1998 the plan was
amended such that the Company's contribution is now made in shares of the
Company's common stock as opposed to cash. Each participant's contribution is
matched by the Company with shares of common stock which have a value equal to
100% of the participant's contribution, not to exceed the lesser of $1,000 or 6%
of the participant's total compensation. The Company's contribution of common
stock is valued each quarter based upon the closing price of the Company's
common stock. The fiscal 2001 expenses for this plan were $93,705. Other than
the 401(k) Plan, the Company does not have a defined benefit, pension plan,
profit sharing or other retirement plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its directors $2,000 per
quarter, plus expenses. The Company has no standard arrangement pursuant to
which directors of the Company are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. The Company has from time to time granted options to
its outside directors. See Stock Options below for additional information
concerning options granted to the Company's directors.
Employment Contracts
Effective April 12, 1999, the Company entered into a three-year employment
agreement with Mr. de Clara. The employment agreement provides that the Company
will pay Mr. de Clara an annual salary of $363,000 during the term of the
agreement. In the event that there is a material reduction in Mr. de Clara's
authority, duties or activities, or in the event there is a change in the
control of the Company, then the agreement allows Mr. de Clara to resign from
his position at the Company and receive a lump-sum payment from the Company
equal to 18 months salary. For purposes of the employment agreement, a change in
the control of the Company means the sale of more than 50% of the outstanding
shares of the Company's Common Stock, or a change in a majority of the Company's
directors.
Effective August 1, 2000, the Company entered into a three-year employment
agreement with Mr. Kersten. The employment agreement provides that during the
term of the employment agreement the Company will pay Mr. Kersten an annual
salary of $336,132, subject to minimum annual increases of 5% per year. In the
event there is a change in the control of the Company, the agreement allows Mr.
Kersten to resign from his position at the Company and receive a lump-sum
payment from the Company equal to 24 months salary. For purposes of the
employment agreement a change in the control of the Company means: (1) the
merger of the Company with another entity if after such merger the shareholders
of the Company do not own at least 50% of voting capital stock of the surviving
corporation; (2) the sale of substantially all of the assets of the Company; (3)
the acquisition by any person of more than 50% of the Company's common stock; or
(4) a change in a majority of the Company's directors which has not been
approved by the incumbent directors.
Compensation Committee Interlocks and Insider Participation
The Company has a compensation committee comprised of all of the Company's
directors, with the exception of Mr. Kersten. During the year ended September
30, 2001, Mr. de Clara was the only officer participating in deliberations of
the Company's compensation committee concerning executive officer compensation.
During the year ended September 30, 2001, no director of the Company was
also an executive officer of another entity, which had an executive officer of
the Company serving as a director of such entity or as a member of the
compensation committee of such entity.
Stock Options
The following tables set forth information concerning the options granted
during the fiscal year ended September 30, 2001, to the persons named below, and
the fiscal year-end value of all unexercised options (regardless of when
granted) held by these persons.
Options Granted During Fiscal Year Ended September 30, 2001
-----------------------------------------------------------
Individual Grants
- -------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in Price Per Expiration for Option Term (1)
Name Granted(#) Fiscal Year Share Date 5% 10%
- ------ ------------- ------------ -------- -------- ------------------
Maximilian de Clara 35,000 (2) 2.04% $1.67 12/1/04 $16,100 $35,700
60,000 3.49% $1.38 3/22/11 $45,600 $132,000
------
95,000
Geert R. Kersten 35,000 (2) 2.04% $1.67 12/1/04 $16,100 $35,700
60,000 3.49% $1.38 3/22/11 $45,600 $132,000
560,000 (2) 32.62% $1.05 7/16/05 $162,400 $358,400
-------
655,000
Patricia B. Prichep 35,000 (2) 2.04% $1.67 12/1/04 $12,600 $35,700
25,000 1.46% $1.18 12/8/10 $30,000 $47,000
200,000 (2) 11.65% $1.05 7/16/05 $58,000 $128,000
-------
260,000
Individual Grants
- -------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in Price Per Expiration for Option Term (1)
Name Granted(#) Fiscal Year Share Date 5% 10%
- ------ ------------- ------------ -------- -------- ------------------
Eyal Talor, Ph.D. 25,000 1.46% $1.76 11/10/10 $27,500 $70,125
15,000 (2) 0.87% $1.67 12/1/04 $ 6,900 $15,300
160,000 (2) 9.32% $1.05 7/16/05 $46,400 $102,400
-------
200,000
M. Douglas Winship 25,000 1.46% $1.39 04/5/11 $21,750 $55,250
40,000 (2) 2.33% $1.05 7/16/05 $11,600 $25,600
------
65,000
Daniel Zimmerman,
Ph.D. 35,000 (2) 2.04% $1.67 12/1/04 $16,100 $35,700
20,000 1.16% $1.85 1/26/11 $23,200 $59,000
120,000 (2) 6.99% $1.05 7/16/05 $34,800 $76,800
-------
175,000
(1) The potential realizable value of the options shown in the table assuming
the market price of the Company's Common Stock appreciates in value from
the date of the grant to the end of the option term at 5% or 10%.
(2) Options were granted in accordance with the Company's Salary Adjustment
Plan. Pursuant to the Salary Adjustment Plan, any employee of the Company
was allowed to receive options (exercisable at market price at the time of
grant) in exchange for a one-time reduction in such employee's salary.
Option Exercises and Year-End Option Values
Value (in $) of
Unexercised
Number of In-the-Money
Unexercised Options at Fiscal
Shares Options (3) Year-End (4)
------------ -----------------
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- ----------------
Maximilian de Clara -- -- 348,333/151,666 55,733/12,467
Geert R. Kersten -- -- 1,073,334/711,666 215,233/135,667
Patricia Prichep -- -- 203,501/285,999 34,320/51,970
Eyal Talor 82,500/206,666 15,950/36,667
M. Douglas Winship -- -- 94,167/83,333 19,067/12,833
Daniel Zimmerman -- -- 107,667/193,333 17,087/30,433
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2001.
(2) With respect to options exercised during the Company's fiscal year ended
September 30, 2001, the dollar value of the difference between the option
exercise price and the market value of the option shares purchased on the
date of the exercise of the options.
(3) The total number of unexercised options held as of September 30, 2001,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 2001, the market value
of the stock underlying those options as of September 30, 2001.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans and Stock Bonus Plans. A summary description of these Plans follows. In
some cases these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans collectively
authorize the issuance of up to 2,100,000 shares of the Company's Common Stock
to persons who exercise options granted pursuant to the Plan. Only Company
employees may be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option
holder's employment by the Company is terminated, if such
termination is due to the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common Stock of
the Company may not be exercisable by its terms after five years from the date
of grant. Any other option granted pursuant to the Plan may not be exercisable
by its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market value of
the Common Stock on the date of the grant of the option (or 110% of the fair
market value in the case of a person owning more than 10% of the Company's
outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
collectively authorize the issuance of up to 5,760,000 shares of the Company's
Common Stock to persons that exercise options granted pursuant to the Plans. The
Company's employees, directors, officers, consultants and advisors are eligible
to be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
Stock Bonus Plan. Up to 1,040,000 shares of Common Stock may be granted
under the Stock Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan,
the Company's employees, directors, officers, consultants and advisors are
eligible to receive a grant of the Company's shares, provided however that bona
fide services must be rendered by consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by the
Company's Compensation Committee ("the Committee"), each member of which is a
director of the Company. The members of the Committee were selected by the
Company's Board of Directors and serve for a one-year tenure and until their
successors are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the Committee
will be filled by the Board of Directors. The Committee is vested with the
authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is empowered to select
those persons to whom shares or options are to be granted, to determine the
number of shares subject to each grant of a stock bonus or an option and to
determine when, and upon what conditions, shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company. At the time an employee ceases working for the Company
(or at the time a non-employee ceases to perform services for the Company), any
shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Committee payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of the Company's Common Stock
having an aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner they
deem appropriate, provided that such amendment, termination or suspension will
not adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Summary. The following sets forth certain information, as of November 30,
2001, concerning the stock options and stock bonuses granted by the Company.
Each option represents the right to purchase one share of the Company's Common
Stock.
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
- ------------ ----------- ------------ ----------- -------------
Incentive Stock
Option Plans 2,100,000 1,170,100 N/A 843,315
Non-Qualified Stock
Option Plans 5,760,000 3,398,814 N/A 1,213,725
Stock Bonus Plans 1,040,000 N/A 838,241 201,759
Of the shares issued pursuant to the Company's Stock Bonus Plans 146,019
shares were issued as part of the Company's contribution to its 401(k) plan.
During the year ended September 30, 1999 the Company issued 200,000 shares
of its common stock to Mr. de Clara for past services provided to the Company.
In January 2000 the Company issued Mr. de Clara an additional 200,000 shares of
common stock for past services provided to the Company. In September 2001 the
Company issued Mr. de Clara an additional 200,000 shares of common stock for
past services provided to the Company. In October 2001 the Company issued Mr. de
Clara an additional 75,071 shares of common stock for past services provided to
the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 20, 2001, information with
respect to the only persons owning beneficially 5% or more of the outstanding
Common Stock and the number and percentage of outstanding shares owned by each
director and officer and by the officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment powers over his
shares of Common Stock.
Name and Address Number of Shares (1) Percent of Class (3)
- ---------------- ----------------- ----------------
Maximilian de Clara 451,804 1.9%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 1,282,483 (2) 5.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 284,824 1.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
M. Douglas Winship 119,707 *
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 146,329 *
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 196,487 *
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 25,000 *
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving 11,000 *
5414 61st Street East
Bradenton, FL 34203
All Officers and Directors
as a Group (8 persons) 2,517,634 9.9%
* Less than 1%
(1) Includes shares issuable prior to February 28, 2002 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2002
---- -----------------------------------
Maximilian de Clara 383,333
Geert R. Kersten 1,108,334
Patricia B. Prichep 260,168
M. Douglas Winship 94,167
Eyal Talor, Ph.D. 105,834
Daniel H. Zimmerman, Ph.D. 156,001
Alexander G. Esterhazy 25,000
C. Richard Kinsolving --
See Item 11 of this report for information concerning outstanding stock
options.
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount includes shares referred to in (1) above but excludes shares which
may be issued upon the exercise or conversion of other options, warrants
and other convertible securities previously issued by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See the Financial Statements attached to this Report.
(b) On August 23, 2001 the Company filed a report on Form 8-K which
disclosed the issuance of the Company's Series E Preferred stock and
Series E warrants.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to Exhibit 3(a)
of the Company's combined Registration
Statement on Form S-1 and Post-Effective
Amendment ("Registration Statement"),
Registration Nos.2-85547-D and 33-7531.
(b) Amended Articles Incorporated by reference to Exhibit 3(a)
of the Company's Registration Statement
on Form S-1, Registration Nos. 2-85547-D
and 33-7531.
(c) Amended Articles Incorporated by reference to Exhibit (Name
change only) 3(c) filed with Registration
Statement on Form S-1 (No. 33-34878).
(d) Bylaws Incorporated by reference to Exhibit 3(b)
of the Company's Registration Statement
on Form S-1,Registration Nos.2-85547-D and
33-7531.
4(a) Specimen copy of Stock Incorporated by reference to Exhibit 4(a)
Certificate of the Company's Registration Statement on
Form S-1, Registration Nos. 2-85547-D and
33-7531.
4(b) Designation of Series E Incorporated by reference to Exhibit 4 to
Preferred Stock report on Form 8-K dated August 21, 2001.
4(c) Form of Common Stock Incorporated by reference to Exhibit
Purchase Warrant 4(c) filed as an exhibit
to the Company's Registration Statement on
Form S-1 (Registration No. 33-43281).
10(e) Employment Agreement with Incorporated by reference to Exhibit 10(e)
Geert Kersten of the Company's report on Form 10-K for
the year ended September 30, 2000.
10(q) Common Stock Purchase Incorporated by reference to Exhibit10(q)
Agreement with Paul Revere to Cel-Sci Registration Statement on Form
Capital Partners Ltd. S-1(Commission File Number 333-59798).
10(r) Stock Purchase Warrant issued Incorporated by reference to Exhibit 10(r)
to Paul Revere Capital to Cel-Sci Registration Statement on Form
Partners Ltd. S-1 (Commission File Number 333-59798).
(c) Exhibits Page Number
10(s) Securities Exchange Agreement Incorporated by reference to Exhibit 10.1
(together with Schedule to report on Form 8-K dated August 21,
required by Instruction 2 to 2001.
Item 601 Regulation S-K)
10(t) Form of Series E Warrant Incorporated by reference to Exhibit 10.2
to report on Form 8-K dated August 21,
2001.
10(u) Form of Secondary Warrant Incorporated by reference to Exhibit 10.3
to report on Form 8-K dated August 21,
2001.
23 Consent of Independent Auditors ________________________________
(d) Financial statement schedules. None
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2001, 2000 and 1999,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
- ----------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000, AND 1999:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation and subsidiaries (the Company) as of September 30, 2001 and 2000,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 CEL-SCI
Corporation and subsidiaries as of September 30, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
McLean, Virginia
December 20, 2001
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
- ------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $1,783,990 $6,909,263
Investment securities available for sale
593,384 3,760,922
Interest and other receivables
40,376 39,252
Prepaid expenses
866,058 1,838,376
Advances to officer/shareholder and employees - 728
-------- ---------
Total current assets 3,283,808 12,548,541
RESEARCH AND OFFICE EQUIPMENT - Less accumulated
depreciation of $1,864,182 and $1,721,336 620,608 594,919
DEPOSITS 139,828 139,828
PATENT COSTS - Less accumulated amortization
of $623,235 and $574,362 464,676 525,594
----------- ---------
$ 4,508,920 $13,808,882
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 476,048 $ 822,601
Due to officer/shareholder and employees 461 -
----- -------
Total current liabilities 476,509 822,601
DEFERRED RENT 31,218 24,822
------- -------
Total liabilities 507,727 847,423
------- -------
STOCKHOLDERS' EQUITY:
Series E cumulative convertible redeemable
preferred stock, $.01 par value, $1,000
liquidation value - authorized, 6,288 shares;
issued and outstanding, 5,863 and -0-
shares at September 30, 2001 and 2000,
respectively 59 -
Common stock, $.01 par value - authorized,
100,000,000 shares; issued and outstanding,
21,952,082 and 20,459,700 shares at September
30, 2001 and 2000, respectively 219,521 204,597
Additional paid-in capital 75,641,365 73,924,653
Unearned compensation (19,636) -
Accumulated other comprehensive loss (210) (61,564)
Accumulated deficit (71,839,906) (61,106,227)
---------- -----------
Total stockholders' equity $4,001,193 $12,961,459
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,508,920 $13,808,882
========== ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2001, 2000,
AND 1999
- -------------------------------------------------------------------------------
2001 2000 1999
INVESTMENT INCOME $ 376,221 $ 402,011 $ 402,831
OTHER INCOME 293,871 40,540 66,687
------------ ------------ --------
Total income 670,092 442,551 469,518
--------- --------- --------
OPERATING EXPENSES:
Research and development
7,762,213 5,186,065 4,662,226
Depreciation and amortization
209,121 220,994 268,210
General and administrative 3,432,437 3,513,889 3,029,807
----------- ----------- ---------
Total operating expenses 11,403,771 8,920,948 7,960,243
------------ ----------- ---------
NET LOSS (10,733,679) (8,478,397) (7,490,725)
ACCRUED DIVIDENDS ON PREFERRED STOCK (53,153) - -
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (317,419) - -
---------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(11,104,251) $(8,478,397) $(7,490,725)
============= ============ ============
LOSS PER COMMON SHARE (BASIC) $ (0.51) $ (0.44) $ (0.52)
============= =========== ===========
LOSS PER COMMON SHARE (DILUTED) $ (0.51) $ (0.44) $ (0.52)
============= =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 21,824,273 19,259,190 14,484,352
=========== =========== ==========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------
2001 2000 1999
NET LOSS (10,733,679) (8,478,397) (7,490,725)
OTHER COMPREHENSIVE LOSS - Unrealized
gain (loss) on investments 61,354 55,095 (68,368)
-------- -------- -----------
COMPREHENSIVE LOSS (10,672,325) (8,423,302) (7,559,093)
============ =========== ============
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- -------------------------------------------------------------------------------
Accumu-
Preferred Preferred lated other
Series D Stock Series E Stock Common Stock Additional Unearned comprehen- Accumu-
------------- --------------- ----------------- Paid-In Compen- sive (Loss) lated
Shares Amount Shares Amount Shares Amount Capital sation Income Deficit Total
------ ------ ------ ------ ------ ------ ------- -------- ---------- -------- -----
BALANCE,OCTOBER 1,1998 9,002 $ 90 - $ - 11,972,695 $119,726 $59,040,864 $ - $(48,291) $(45,137,105)$13,975,284
Exercise of stock
options - - - - 28,500 285 70,965 - - - 71,250
Stock options issued to
non-employees for
services - - - - - - 88,166 - - - 88,166
Preferred Series D
conversion (9,002) (90) - - 4,760,126 47,602 (47,512) - - - -
401(k) contributions - - - - 41,020 410 86,544 - - - 86,954
Stock bonus to officer - - - - 200,000 2,000 433,625 - - - 435,625
Change in unrealized gain
(loss) of investment
securities available for
sale - - - - - - - - (68,368) - (68,368)
Net loss - - - - - - - - - (7,490,725) (7,490,725)
---- ---- ---- ---- --- --- ---- ---- ------ ----------- ----------
BALANCE, SEPTEMBER 30,
1999 - - - - 17,002,341 170,023 59,672,652 - (116,659) (52,627,830) 7,098,186
Exercise of stock options - - - - 1,047,612 10,476 3,646,991 - - - 3,657,467
Issuance - common stock - - - - 2,175,258 21,753 9,958,247 - - - 9,980,000
401(k) contributions - - - - 34,489 345 98,762 - - - 99,107
Stock bonus to officer - - - - 200,000 2,000 548,000 - - - 550,000
Change in unrealized gain
(loss) of investment
securities available for
sale - - - - - - - - 55,095 - 55,095
Net loss - - - - - - - - - (8,478,397) (8,478,397)
---- ---- ---- ---- ----- ------ ------- ---- ------- ----------- -----------
BALANCE, SEPTEMBER 30,
2000 - - - - 20,459,700 204,597 73,924,653 - (61,564) (61,106,227) 12,961,459
Exercise of warrants - - - - 3,794,432 37,944 (37,593) - - - 351
Stock issued to employees
for service - - - - 114,867 1,149 113,718 - - - 114,867
Repriced options - - - - - - 613,108 (19,636) - - 593,472
Stock options issued to
non-employees for
services - - - - - - 167,087 - - - 167,087
Stock issued to non-
employees for service - - - - 34,546 346 34,201 - - - 34,547
Exchange of common stock
for Preferred Series E - - 6,288 63 (3,589,289) (35,893) 35,830 - - - -
Conversion of Preferred
Series E to common stock - - (425) (4) 348,841 3,488 (3,484) - - - -
Issuance - common stock - - - - 522,108 5,221 584,779 - - - 590,000
401(k) contributions - - - - 66,877 669 93,036 - - - 93,705
Stock bonus to officer - - - - 200,000 2,000 260,000 - - - 262,000
Costs for equity-related
transactions - - - - - - (143,970) - - - (143,970)
Change in unrealized gain
(loss) of investment
securities available
for sale - - - - - - - - 61,354 - 61,354
Net loss - - - - - - - - - (10,733,679)(10,670,218)
---- ---- --- ---- ---- ---- ------- ---- ------ ---------- ------------
BALANCE, SEPTEMBER 30,
2001 - - 5,863 59 21,952,082 219,521 75,641,365 (19,636) (210) (71,839,906) 4,001,193
==== ==== ====== === =========== ======= ========== ======== ===== ============ =========
See notes to consolidated financial statements
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,733,679) $(8,478,397) $(7,490,725)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 209,121 220,994 268,210
Issuance of stock options for
services 167,087 - 88,166
Repriced options 593,472 - -
Common stock bonus granted to
officer 262,000 550,000 435,625
Issuance of common stock for
services 149,414 - -
Common stock contributed to
401(k) plan 93,705 99,107 86,954
Net realized loss on sale of
securities 9,831 49,963 151,349
Impairment loss on abandonment of
patents 30,439 - -
Changes in assets and liabilities:
(Increase) decrease in interest
and other receivables (1,124) 23,573 6,984
Decrease (increase) in prepaid
expenses 972,318 (1,323,804) 209,262
Decrease (increase) in advances 728 68,720 (69,275)
Increase in deposits - (125,000) -
(Decrease) increase in accounts
payable and accrued expenses (346,553) 389,336 6,118
Increase in due to officer/
shareholder and employees 461 - -
Increase (decrease) in deferred
rent 6,396 (3,499) (1,061)
------- -------- -------
Net cash used in
operating activities (8,586,384) (8,529,007) (6,308,393)
------------ ----------- ------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of investments - (2,000,587) (235,698)
Sales and maturities of investments 3,219,064 1,436,289 6,499,801
Repayment on note receivable from
shareholder - - 70,809
Expenditures for property and
equipment (168,537) (284,043) (60,552)
Expenditures for patents (35,797) (98,500) (102,798)
--------- --------- ---------
Net cash provided by (used
in) investing activities 3,014,730 (946,841) 6,171,562
----------- ---------- ---------
(Continued)
See notes to consolidated financial statements
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND
1999
- -------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Cash proceeds from issuance of
preferred and common stock
and warrant conversion for cash 590,351 13,637,467 71,250
Costs for equity-related
transactions (143,970) - -
--------- -------- -------
Net cash provided by
financing activities 446,381 13,637,467 71,250
--------- ---------- --------
NET (DECREASE) INCREASE IN CASH (5,125,273) 4,161,619 (65,581)
CASH, BEGINNING OF YEAR 6,909,263 2,747,644 2,813,225
----------- ----------- ---------
CASH, END OF YEAR $ 1,783,990 $6,909,263 $2,747,644
=========== =========== =========
SUPPLEMENTAL DISCLOSURES:
At September 30, 2001, 2000, and 1999, the net unrealized gain (loss) on
investments available-for-sale was $(210), $(61,564), and $(116,659),
respectively.
During the year ended September 30, 2001, 3,589,289 shares of common stock were
exchanged for 6,288 shares of Series E Preferred Stock and 425 shares of Series
E Preferred Stock were converted into 348,841 shares of common stock. Pursuant
to these transactions, $53,153 of dividends were accrued on the preferred stock
and $317,419 was accreted for the beneficial conversion feature on the preferred
stock.
The Company extended the expiration date and repriced Series A Warrants during
the year ended September 30, 2001 resulting in a deemed dividend to the common
shareholders in the amount of $43,842 for the incremental value of the warrants
at the date of modification.
During the year ended September 30, 2001, 200,800 common stock purchase warrants
were issued pursuant to the equity line of credit and 272,108 common stock
purchase warrants were issued in connection with a private offering of common
stock resulting in transaction costs of $200,000 and $224,000, respectively.
During the year ended September 30, 1999, 9,002 shares of Series D Preferred
Stock were converted into 4,760,126 shares of common stock.
See notes to consolidated financial statements. (Concluded)
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
- ----------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22, 1983, in the
State of Colorado, to finance research and development in biomedical science
and ultimately to engage in marketing products.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial statements
include the accounts of CEL-SCI Corporation and its wholly owned
subsidiaries, Viral Technologies, Inc., and MaxPharma AG. All
significant intercompany transactions have been eliminated upon
consolidation.
Investments - Investments that may be sold as part of the liquidity
management of the Company or for other factors are classified as
available-for-sale and are carried at fair market value. Unrealized
gains and losses on such securities are reported as a separate component
of stockholders' equity. Realized gains and losses on sales of
securities are reported in earnings and computed using the specific
identified cost basis.
Research and Office Equipment - Research and office equipment is
recorded at cost and depreciated using the straight-line method over
estimated useful lives of five to seven years. Leasehold improvements
are depreciated over the shorter of the estimated useful life of the
asset or the terms of the lease. Repairs and maintenance are expensed
when incurred.
Research and Development Costs - Research and development expenditures
are expensed as incurred. The Company has an agreement with an unrelated
corporation for the production of MULTIKINE, which is the Company's only
product source.
Research and Development Grant Revenues - The Company's grant
arrangements are handled on a reimbursement basis. Grant revenues under
the arrangements are recognized as other income when costs are incurred.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology
or other circumstances impair the value or life of the patent,
appropriate adjustment in the asset value and period of amortization is
made. An impairment loss is recognized when estimated future
undiscounted cash flows expected to result from the use of the asset,
and from disposition, is less than the carrying value of the asset. The
amount of the impairment loss would be the difference between the
estimated fair value of the asset and its carrying value. During the
year ended September 30, 2001, the Company recorded patent impairment
charges of $30,439 for the net book value of patents abandoned during
the year and such amount is included in general and administrative
expenses. There were no impairment charges for the fiscal years ended
September 30, 2000 and 1999.
Net Loss Per Share - Net loss per common share is computed by dividing
the net loss, after increasing the loss for the effect of any accrued
dividends on the preferred stock and the accretion of the beneficial
conversion feature related to the preferred stock, by the weighted
average number of common shares outstanding during the period. Common
stock equivalents, including convertible preferred stock and options to
purchase common stock, were excluded from the calculation for all
periods presented as they were antidilutive.
Prepaid Expenses - The majority of prepaid expenses consist of
manufacturing production advances and bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company's product
for clinical studies.
Income Taxes - Income taxes are accounted for using the liability method
under which deferred tax liabilities or assets are determined based on
the difference between the financial statement and tax bases of assets
and liabilities (i.e., temporary differences) and are measured at the
enacted tax rates. Deferred tax expense is determined by the change in
the liability or asset for deferred taxes.
The difference in the Company's U.S. Federal statutory income tax rate
and the Company's effective rate is primarily attributed to the
recording of a valuation allowance due to the uncertainty of the amount
of future tax benefits that will be realized because it is more likely
than not that future taxable income will not be sufficient to realize
such tax benefits.
Cash and Cash Equivalents - For purposes of the statements of cash
flows, cash and cash equivalents consists principally of unrestricted
cash on deposit and short-term money market funds. The Company considers
all highly liquid investments with a maturity when purchased of less
than three months to be cash equivalents.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the
fiscal year 2000 and 1999 financial statements to conform with the
current-year presentation.
2. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of an exclusive worldwide license to certain patented
and unpatented proprietary technology and know-how relating to the human
immunological defense system, patent applications, research and development,
administrative costs, construction of laboratory facilities, and clinical
trials. The Company has funded such costs with proceeds realized from the
public and private sale of its common stock. The Company will be required to
raise additional capital or find additional long-term financing in order to
continue with its research efforts. The Company expects to receive
additional funding from private investors subsequent to September 30, 2001
(see Note 14); however, there can be no assurances that the Company will be
able to raise additional capital or obtain additional financing. Also, the
ability of the Company to complete the necessary clinical trials and obtain
FDA approval for the sale of products to be developed on a commercial basis
is uncertain.
The Company plans to seek continued funding of the Company's development by
raising additional capital. If necessary, the Company plans to reduce
discretionary expenditures in order to meet its obligations; however such
reductions would delay the development of the Company's products. It is the
opinion of management that sufficient funds will be available from external
financing and additional capital and/or expenditure reductions in order to
meet the Company's liabilities and commitments as they come due during
fiscal year 2002. Ultimately, the Company must complete the development of
its products and obtain sufficient revenues to support its operations.
3. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 2001 and 2000, are as follows:
September 30, 2001
-----------------------------------------------------
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 2001
---------- ---------- ----------- ----------------
Fixed income mutual
funds $ 593,594 $ -- $ (210) $ 593,384
---------- ------- ---------- -------------
Total $ 593,594 $ -- $ (210) $ 593,384
============ ======= ========== =============
September 30, 2000
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 2000
---------- ---------- ----------- ----------------
Bonds $2,000,000 $ 4,720 $ - $ 2,004,720
Fixed income mutual
funds 1,822,486 - (66,284) 1,756,202
-------------- --------- --------- ------------
Total $3,822,486 $ 4,720 $(66,284) $ 3,760,922
========== ======== ========= =============
The gross realized gains and losses of sales of investments available-for-sale
for the years ended September 30, 2001, 2000, and 1999, are as follows:
2001 2000 1999
Realized gains $ 14,997 $ -- $ --
Realized losses (24,828) (49,963) (151,349)
---------- --------- ----------
Net realized loss $ (9,831) $(49,963) $ (151,349)
======== ========= ==========
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2001 and 2000, consist of the
following:
2001 2000
Research equipment $ 2,177,553 $ 2,052,082
Furniture and equipment 265,581 258,780
Leasehold improvements 41,656 5,393
----------- -----------
2,484,790 2,316,255
Less accumulated depreciation and
amortization (1,864,182) (1,721,336)
------------ -----------
Net research and office equipment $ 620,608 $ 594,919
======== ============
5. INCOME TAXES
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Company's deferred tax assets and
liabilities at September 30, 2001 and 2000, is as follows:
2001 2000
---- ------
Depreciation $ (23,140) $(28,964)
Prepaid expenses (300,068) (697,848)
Net operating loss carryforward 25,902,462 22,905,872
Compensation expense for
repriced options 225,282 -
Other 11,883 9,422
Less: Valuation allowance (25,816,419) (22,188,482)
----------- -----------
Net deferred $ -- $ --
=========== =========
The Company has available for income tax purposes net operating loss
carryforwards of approximately $68,236,200, expiring from 2002 through 2021.
In the event of a significant change in the ownership of the Company, the
utilization of such carryforwards could be substantially limited.
For fiscal years 2001 and 2000, the Company's statutory tax rate was 35%,
and its effective tax rate was 0%. The difference between the rates was
primarily attributable to net operating loss carryforwards and
non-recognition of deferred taxes due to the valuation allowance.
6. STOCK OPTIONS, BONUS PLAN, AND WARRANTS
Non-Qualified Stock Option Plan - At September 30, 2001, the Company has
collectively authorized the issuance of 5,760,000 shares of common stock
under the Non-Qualified Plan. Options typically vest over a three-year
period and expire no later than ten years after the grant date. Terms of the
options are to be determined by the Company's Compensation Committee, which
administers all of the plans. The Company's employees, directors, officers,
and consultants or advisors are eligible to be granted options under the
Non-Qualified Plan.
Information regarding the Company's Non-Qualified Stock Option Plan is
summarized as follows:
Outstanding Exercisable
------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding,
October 1, 1998 1,959,700 $3.32 1,315,002 $3.10
Options granted 470,959 2.02
Options forfeited (56,602) 4.78
------- ------
Options outstanding,
September 30, 1999 2,374,057 2.80 1,595,934 3.09
Options granted 262,500 3.09
Options exercised (789,085) 3.41
Options forfeited (46,266) 2.34
---------
Options outstanding,
September 30, 2000 1,801,206 3.18 1,547,445 3.19
Options granted 1,673,500 1.20
Options exercised - -
Options forfeited (114,640) 2.82
----------
Options outstanding,
September 30, 2001 3,360,066 1.29 1,640,047 1.38
=========
At September 30, 2001, options outstanding and exercisable were as follows:
Weighted
Average Weighted Weighted
Exercise Average Average
Range of Number Price Remaining Number Exercise
Exercise 0ut- out- Contractual Exer- Price
Prices standing standing Life cisable Exercisable
$1.05 - $1.51 2,495,434 $1.07 3.1 years 1,178,938 $1.05
$1.67 - $2.38 780,652 $1.81 3 years 378,795 $1.95
$2.94 - $3.31 77,680 $3.06 1.9 years 77,680 $3.06
$3.87 - $4.63 5,500 $4.00 6.1 years 3,834 $4.00
$6.25 800 $6.25 7 years 800 $6.25
During fiscal year 1999, the Company extended the expiration dates on
approximately 35,750 options from the Nonqualified Stock Option Plan with
exercise prices of 2.87 originally expiring in March 1999 to expiration
dates in March 2000. This date was considered a new measurement date with
respect to all of the modified options. As of March 30, 2000, all options
had been exercised.
During March 2000, the Company agreed to restore and vest 40,000 options at
prices ranging from $5.25 to 5.62, to one former Director and one Director
as part of a settlement agreement. The options will expire on September 25,
2006. As of September 30, 2001, 20,000 options had been exercised.
In October 2000 and April 2001, the Company extended the expiration dates on
approximately 1,056,000 options from the Nonqualified Stock Option Plan with
exercise prices ranging from $2.38 to $5.25. The options originally expired
from October 2000 to January 2001 but were extended to expiration dates
ranging from October 2001 to January 2002. Each of these two dates was
considered a new measurement date with respect to all of the modified
options; however, on each date the exercise price of the options exceeded
the fair market value of the Company's common stock. As of September 30,
2001, all options remain outstanding.
In July 2001, the Company repriced 1,298,098 outstanding employee and
director stock options under the Nonqualified Plans that were priced over
$2.00 down to $1.05. In accordance with Financial Interpretation No. 44 (FIN
44), such repriced options are considered to be variable options. During the
year ended September 30, 2001, compensation charges of $364,532 were
recorded in the consolidated statement of operations and unearned
compensation of $11,916 was recorded on the consolidated balance sheet as of
September 30, 2001. The compensation expense was determined based upon the
difference between the fair market value of the Company's common stock at
the date of modification and the exercise price of each stock option. On
September 30, 2001, the incremental compensation expense was determined
based on the difference between the fair market value of the stock on
September 30, 2001 and the exercise price, less the previously recorded
expense. Changes in the fair market value of the Company's common stock will
result in future changes in compensation expenses. As of September 30, 2001,
all options remain outstanding.
Incentive Stock Option Plan - At September 30, 2001, the Company has
collectively authorized the issuance of 2,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest after a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is
summarized as follows:
Outstanding Exercisable
------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding,
October 1, 1998 772,384 $ 4.06 311,622 $3.64
Options granted 206,500 2.14
Options forfeited (2,034) 3.70
----------
Options outstanding,
September 30, 1999 976,850 3.71 520,688 3.86
Options granted 140,000 3.77
Options exercised (68,418) 4.47
Options forfeited (1,666) 3.38
----------
Options outstanding,
September 30, 2000 1,046,766 3.62 722,435 3.98
Options granted 130,000 1.24
Options exercised - -
Options forfeited (6,666) 3.36
--------
Options outstanding,
September 30, 2001 1,170,100 1.65 862,103 2.33
===========
At September 30, 2001, options outstanding and exercisable were as follows:
Weighted
Average Weighted Weighted
Exercise Average Average
Range of Number Price Remaining Number Exercise
Exercise 0ut- out- Contractual Exer- Price
Prices standing standing Life cisable Exercisable
$1.05 - $1.39 866,066 $ 1.08 6.4 years 640,069 $ 1.05
$1.88 - $2.87 134,167 $ 2.35 4.0 years 110,167 $ 2.43
$3.25 - $3.87 30,167 $ 3.40 5.9 years 30,167 $ 3.40
$4.50 - $5.75 39,100 $ 5.06 6.7 years 81,100 $ 5.08
$11.00 600 $ 11.00 4.7 years 600 $ 11.00
During fiscal year 1999, the Company extended the expiration date on 23,000
options at $3.25 from the Incentive Stock Option Plan. The options were to
expire February 21, 1999, and were extended to February 21, 2000. The
options had originally been granted in February 1996. All options were
exercised as of September 30, 2000.
During fiscal year 2001, the Company extended the expiration date on 50,000
options at $2.87 from the Incentive Stock Option Plan. The options were to
expire November 1, 2001, and were extended to November 1, 2002. The options
had originally been granted in November 1991. November 1, 2001 was
considered a new measurement date; however, the exercise price on all the
options modified exceeded the fair market value of the Company's common
stock. All options remain outstanding as of September 30, 2001.
In July 2001, the Company repriced 816,066 outstanding employee and director
stock options under the Incentive Stock Option Plan that were priced over
$2.00 down to $1.05. In accordance with FIN 44, such repriced options are
considered to be variable options. During the year ended September 30, 2001,
compensation charges of $228,940 were recorded in the consolidated statement
of operations and unearned compensation of $7,720 was recorded on the
consolidated balance sheet as of September 30, 2001. The compensation
expense was determined based upon the difference between the fair market
value of the Company's common stock at the date of modification and the
exercise price of each stock option. On September 30, 2001 the incremental
compensation expense was determined based on the difference between the fair
market value of the stock on September 30, 2001 and the exercise price, less
the previously recorded expense. Changes in the fair market value of the
Company's common stock will result in future changes in compensation
expenses. As of September 30, 2001, all options remain outstanding.
Stock Bonus Plan - At September 30, 2001, the Company has authorized the
issuance of 1,040,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted options. During the year ended September 30, 2001, 266,877 shares
with related expenses of $355,705 were issued under the Plan and recorded in
the consolidated statement of operations.
Other Options and Warrants - In connection with the 1992 public offering,
5,175,000 common stock purchase warrants were issued and outstanding at
September 30, 1997. Every ten warrants entitled the holder to purchase one
share of common stock at a price of $15.00 per share. Subsequently, the
expiration date of the warrants was extended to February 1998. Effective
June 1, 1997, the exercise price of warrants was lowered from $15 to $6 and
only five warrants, rather than 10 warrants, were required to purchase one
share of common stock. Subsequent to September 30, 1997, warrant-holders who
tendered five warrants and $6.00 between January 9, 1998, and February 7,
1998, would receive one share of the Company's common stock and one new
warrant. The new warrants would permit the holder to purchase one share of
the Company's common stock at a price of $10.00 per share prior to February
7, 2000. During fiscal year 1998, the expiration date of the original
warrants was extended to July 31, 1998, and 582,025 original warrants were
tendered for 116,405 common shares. As of September 30, 1999, the 4,592,975
original warrants had expired. In January 2001, the Company extended the
expiration date on the remaining 116,405 warrants to August 2001 and
repriced them from $10.00 to $3.00 per share. In July 2001, the Company
extended the expiration date further to February 2002. The incremental value
at the date of these modifications collectively of $43,842 is considered a
deemed dividend and is recorded as an addition to additional paid-in capital
and also a charge to additional paid-in capital since the Company is in an
accumulated deficit position. The deemed dividend was valued using the
Black-Scholes pricing methodology. All warrants remained outstanding as of
September 30, 2001.
During fiscal year 1995, the Company granted a consultant options to
purchase 17,858 shares of the Company's common stock. These shares became
exercisable on November 2, 1995, and were to expire November 1, 1999. In
February 2000, the Company extended the expiration date on the options by
one year to February 6, 2001. These options are exercisable at $5.60 per
share and as of September 30, 2000, all 17,858 options remain outstanding.
All outstanding options expired during the year ended September 30, 2001.
In June and September 1995, the Company completed private offerings whereby
it sold a total of 1,150,000 units at $2.00 per unit. Each unit consisted of
one share of Common Stock and one warrant. Each warrant entitled the holder
to purchase one additional share of Common Stock at a price of $3.25 per
share at any time prior to June 30, 1997. All warrants sold in this Offering
were exercised during fiscal year 1996. Additionally, the Company issued to
the underwriter warrants to purchase 230,000 equity units. Each unit
consisted of one share of the Company's common stock. For the June 1995
private placement, 57,500 equity units were issued at $2.00 per unit and
another 57,500 equity units were issued at $3.25 per unit. All units issued
in the June 1995 private placement were exercised at September 30, 1996. For
the September 1995 private placement, 57,500 equity units were issued at
$2.40 per unit and another 57,500 equity units were issued at $3.25 per
unit. As of September 30, 1996, 21,890 equity units had been exercised at
$3.25 per unit and 21,890 equity units had been exercised at $2.40 per unit.
As of September 30, 1997, 35,610 equity units had been exercised at $2.40
per unit and 25,610 equity units were exercised at $3.25 per unit. All
remaining 10,000 equity units expired on February 6, 2001.
During fiscal year 1997, the Company granted four consultants options to
purchase a total of 268,000 shares of the Company's common stock. The fair
value of the options is expensed over the life of the consultants'
contracts. Of the 268,000 options, 218,000 options became exercisable during
fiscal year 1997 at prices ranging from $2.50 to $4.50. The remaining 50,000
options became exercisable during fiscal year 1998 at $5.00. During fiscal
year 1997, 50,000 options were exercised at $3.50. During fiscal year 1998,
114,500 options were exercised at prices ranging from $3.50 to $4.50. During
fiscal year 1999, 18,500 options were exercised at prices ranging from $3.50
to $4.50. In December 1999, the Company extended the expiration date on
10,000 options exercisable at $3.25 per share to June 30, 2000.
Subsequently, the expiration date was extended to June 30, 2001. During
fiscal year 2000, 25,000 options were exercised at prices ranging from $2.50
to $3.94. At September 30, 2000, 60,000 options related to the four
consultants remained outstanding at prices ranging from $3.50 to $5.00. On
June 30, 2001, the 10,000 options at $3.25 per share expired. Of the
remaining 50,000 options at $5.00, 25,000 options expire in November 2002
and 25,000 options expire in February 2003. All 50,000 options remain
outstanding as of September 30, 2001.
In connection with the December 1997 private offering of common stock, the
Company issued to the underwriters warrants to purchase 50,000 shares of
common stock at $8.63 per share. The warrants were exercisable at any time
prior to December 22, 2000. At September 30, 2000, all warrants remained
outstanding and subsequently expired in December 2000.
During fiscal year 1998, the Company granted seven consultants options to
purchase a total of 282,000 shares of the Company's common stock. The fair
value of the options is expensed over the life of the consultants'
contracts. All options became exercisable during 1998 and were exercisable
at prices ranging from $3.50 to $7.31. During fiscal year 1998, 22,000
options were exercised at prices ranging from $3.50 to $4.50. During fiscal
year 1999, 75,000 options expired ranging in price from $5.06 to $7.31, and
10,000 options were exercised at a price of $2.50. In December 1999, the
Company extended the expiration date on 20,000 options exercisable at $3.94
per share and 10,000 options exercisable at $3.50 per share to June 30,
2000. Subsequently, the expiration date was extended to June 30, 2001.
During fiscal year 2000, 165,000 options were exercised at prices ranging
from $2.50 to $5.62. At September 30, 2000, 5,000 options related to the
consultants remained outstanding at a price of $3.50 per common share. All
remaining options expired during the year ended September 30, 2001.
During fiscal year 1999, the Company granted one consultant options to
purchase a total of 50,000 shares of the Company's common stock. The fair
value of the options is expensed over the life of the consultant's contract.
All 50,000 options became exercisable during fiscal year 1999 at $2.50 per
share. At September 30, 2001 and 2000, all 50,000 options remained
outstanding.
In January 1999, the Company revised the terms of 23,500 and 125,000 options
granted to consultants in fiscal years 1997 and 1998, respectively. The
terms of the agreements set the exercise price of the 148,500 options at
$4.00 and set the expiration date of the options at December 31, 1999.
During 1999, 28,500 options to purchase shares were exercised at $2.50 per
share. The options were further revised in December 1999 to extend the
expiration date to June 30, 2001. During fiscal year 2000, all 120,000
options to purchase shares were exercised at $2.50 per share.
In connection with the December 1999 private offering of common stock, the
Company issued 402,007 common stock purchase warrants (Series A Warrants).
Each warrant entitled the holder to purchase one share of common stock at
$2.925 per share, expiring December 2002. The investors in this private
offering also received warrants that allow investors under certain
circumstances to acquire additional shares of the Company's common stock at
a nominal price (the Series B Warrants). At September 30, 2000, all warrants
were outstanding. In December 2000, the terms of the Series B Warrants were
fixed because the common stock price reached $1.54 and entitled the holder
to purchase 274,309 shares of common stock at an exercise price of $0.001.
All shares of the Series B Warrants were exercised during the year ended
September 30, 2001. As discussed in Note 10, the Series A Warrants were
exchanged for new series E Warrants, which entitles the holder to purchase
one share of common stock at $1.19 per share, expiring August 16, 2004.
In connection with the March 2000 private offering of common stock, the
Company issued 413,334 common stock purchase warrants (Series C Warrants).
Each warrant entitled the holder to purchase one share of common stock at
$8.50 per share, expiring March 2003. The investors in this private offering
also received warrants that allow investors under certain circumstances to
acquire additional shares of the Company's common stock at a nominal price
(the Series D Warrants). At September 30, 2000, all warrants were
outstanding. During the year ended September 30, 2001, the terms of the
Series D Warrants were fixed on two separate vesting dates, the first of
which entitled the holder to purchase 4,207,865 shares of common stock at a
price of $0.001 because the common stock price reached $1.47 and the second
of which entitled the holder to purchase 1,526,290 shares of common stock at
$0.001 because the common stock price reached $1.088. As a result, and in
accordance with the terms of the Series D Warrants, the holders were
entitled to receive 5,734,155 additional shares of the Company's common
stock, of which 3,520,123 shares had been issued as of September 30, 2001.
The remaining 2,214,032 Series D Warrants were canceled pursuant to the
exchange of common shares and warrants for Series E Preferred Stock as
discussed in Note 10. Additionally, as discussed in Note 10, the Series C
Warrants were exchanged for new Series E Warrants, which entitles the holder
to purchase one share of common stock at $1.19 per share, expiring August
16, 2004.
During fiscal year 2001, the Company granted options to consultants to
purchase a total of 180,000 shares of the Company's common stock at exercise
prices ranging from $1.05 to $1.63 expiring from June 2006 to May 2007. As
of September 30, 2001, all options remain outstanding. The fair value of
30,000 options was expensed immediately. The fair value of the remaining
150,000 options is expensed on a monthly basis as the options are earned and
vest over a period of one year. Compensation expense of $101,759 was
recorded in the consolidated statement of operations for the year ended
September 30, 2001. The compensation expense was determined using the
Black-Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 98% to 104%
Risk-free interest rate 4.12%
Expected life of option 3
Expected dividend yield -0-
In connection with the April 2001 common stock purchase agreement discussed
in Note 10, the Company issued 200,800 common stock purchase warrants. Each
warrant entitles the holder to purchase one share of common stock at $1.64
per share, expiring in April 2004. The warrants have a relative fair value
of $200,000 calculated using the Black Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 98%
Risk-free interest rate 3.12%
Expected life of warrant 3
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to
additional paid-in capital and also a charge to additional paid-in capital
since the Company is in an accumulated deficit position.
In August 2001, the Company issued 272,108 common stock purchase warrants in
connection with a private offering of common stock as discussed in Note 10.
Each warrant entitles the holder to purchase one share of common stock at
$1.75 per share, expiring July 2004. The warrants have a relative fair value
of $224,000 calculated using the Black Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 98%
Risk-free interest rate 3.12%
Expected life of warrant 3
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to
additional paid-in capital and also a charge to additional paid-in capital
since the Company is in an accumulated deficit position.
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). This statement encourages but does not require
companies to account for employee stock compensation awards based on their
estimated fair value at the grant date with the resulting cost charged to
operations. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. If the Company had elected to
recognize compensation expense based on the fair value of the awards
granted, consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per common share would have been increased to the pro
forma amounts indicated below:
Year Ended September 30,
-----------------------------------------
2001 2000 1999
Net loss:
As reported $ (10,733,679) $(8,478,397) $ (7,490,725)
Pro forma $ (12,308,073) $(8,908,999) $ (8,124,159)
Net loss per common share:
As reported $ (0.51) $ (0.44) $ (0.52)
Pro forma (0.58) (0.46) (0.56)
The weighted average fair value at the date of grant for options granted
during 2001, 2000, and 1999, was $0.90, $2.57, and $1.21, per option,
respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Expected stock risk volatility 98 to 109% 98% 91%
Risk-free interest rate 3.12 to 4.12% 6.32% 5.48%
Expected life options 1 to 6 4.91% 3.23%
Expected dividend yield - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of
the stock options that an employee may realize, if any, will depend on the
excess of the market price on the date of exercise over the exercise price.
The Company has based its assumption for stock price volatility on the
variance of monthly closing prices of the Company's stock. The risk-free
rate of return used equals the yield on one- to three-year zero-coupon U.S.
Treasury issues on the grant date. No discount was applied to the value of
the grants for nontransferability or risk of forfeiture.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement Income Security Act of 1974, as amended, and covering
substantially all Company employees. Prior to January 1, 1998, the employer
contributed an amount equal to 50% of each employee's contribution not to
exceed 3% of the participant's salary. Effective January 1, 1998, the plan
was amended such that the Company's contribution is now made in shares of
the Company's common stock as opposed to cash. Each participant's
contribution is matched by the Company with shares of common stock that have
a value equal to 100% of the participant's contribution, not to exceed the
lesser of $10,000 or 6% of the participant's total compensation. The
Company's contribution of common stock is valued each quarter based upon the
closing price of the Company's common stock. The expense for the years ended
September 30, 2001, 2000, and 1999, in connection with this plan was
$93,705, $99,107, and $86,954, respectively.
8. OPTIONAL SALARY ADJUSTMENT PLAN
In July 2001, the Company issued an "Optional Salary Adjustment Plan" (the
Plan). The terms of the Plan allow certain employees the option to forgo
salary increments of $6,000 in exchange for stock options for the period
beginning from July 16, 2001, through October 15, 2001. In accordance with
the Plan, employees will receive 40,000 stock options for each salary
increment of $6,000. The total amount of options to be granted under the
Plan is limited to 1,200,000. For the year ended September 30, 2001, 900,000
options were issued in lieu of compensation in the amount of $135,000.
Additionally, 180,000 options were issued in lieu of compensation of $27,000
related to the year ended September 30, 2002. No compensation expense was
recorded for the options since such options were issued with exercise prices
equal to the fair market value of the Company's common stock on the date of
grant.
9. LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30,
2002 $229,424
2003 202,649
2004 57,395
2005 -
2006 -
--------
Total minimum lease payments $489,468
========
Rent expense for the years ended September 30, 2001, 2000, and 1999, was
$220,903, $233,559, and $214,205, respectively.
10. STOCKHOLDERS' EQUITY
During December 1997, the Company issued 10,000 shares of Series D Preferred
Stock for $10,000,000. The issuance included 550,000 Series A Warrants and
550,000 Series B Warrants. The number of common shares issuable upon
conversion of the Preferred Shares is determinable by dividing $1,000 by
$8.28 prior to September 19, 1998, or at any time at which the Company's
common stock is $3.45 or less for five consecutive days. On or after
September 19, 1998, the number of common shares to be issued upon conversion
is determined by dividing $1,000 by the lesser of (1) $8.28 or (2) the
average price of the stock for any two trading days during the ten trading
days preceding the conversion date. The Series A Warrants are exercisable at
any time for $8.62 prior to December 22, 2001, and the Series B Warrants are
exercisable at any time for $9.31 prior to December 22, 2001. Each warrant
entitles the holder to purchase one share of common stock. At September 30,
1998, 998 shares of Series D Preferred Stock had been converted into 441,333
shares of common stock. At September 30, 1999, 9,002 shares of Series D
Preferred Stock had been converted into 4,760,127 shares of common stock.
There are no remaining shares of Series D Preferred Stock. All Series A and
Series B Warrants issued remain outstanding at September 30, 2001 and 2000.
In connection with the Company's December 1997 $10,000,000 Series D
Preferred Stock offering, the Series A and Series B warrants were assigned a
relative fair value of $1,980,000 in accordance with APB No. 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants, (APB 14)
and have been recorded as additional paid-in capital. The $1,980,000
allocated to the warrants was accreted immediately.
In April 2001, the Company signed a common stock purchase agreement that
allows the Company at its discretion to draw up to $10 million of Common
Stock in increments of a minimum of $100,000 and the maximum of $2 million
for general operating requirements. The Company is restricted from entering
into any other equity line of credit arrangement and the agreement expires
in June 2003. As discussed in Note 6, the Company issued 200,800 warrants to
the issuer pursuant to this agreement. On November 9, 2001, the Company sold
277,684 shares of its common stock pursuant to this agreement for proceeds
of approximately $300,000.
During 2001, the Company issued 522,108 shares of common stock in two
private offerings of common stock. Pursuant to the private offerings, one of
the investors also received warrants to purchase 272,108 shares of common
stock as discussed in Note 6.
During August 2001, three private investors exchanged shares of the
Company's common stock and remaining Series D Warrants, which they owned,
for 6,288 shares of the Company's Series E Preferred Stock. These investors
also exchanged their Series A and Series C Warrants for new Series E
Warrants as discussed in Note 6. The preferred shares are entitled to
receive cumulative annual dividends in an amount equal to $60 per share and
have liquidation preferences equal to $1,000 per share. Each Series E
Preferred share is convertible into shares of the Company's common stock on
the basis of one Series E Preferred share for shares of common stock equal
in number to the amount determined by dividing $1,000 by the lesser of $5 or
93% of the average closing bid prices (Conversion Price) of the Company's
common stock for the five days prior to the date of each conversion notice.
The Series E Preferred stock has no voting rights and is redeemable at the
Company's option at a price of 120% plus accrued dividends until August 2003
when the redemption price will be fixed at 100%. As of September 30, 2001,
accrued dividends in the amount of $53,000 are included in the accompanying
financial statements.
All outstanding shares of the Company's Series E Preferred Stock will be
automatically converted after two years (the Automatic Conversion Date) into
common shares (the Automatic Conversion Shares). The number of common shares
for the conversion is 200% times the quotient obtained by dividing $1,000 by
the Conversion Price. The automatic conversion is subject to suspension for
certain occurrences. If the automatic conversion is suspended as a result of
limitations on beneficial ownership as defined by Section 13(d) of the
Securities and Exchange Act of 1934, the conversion price will be fixed on
the Automatic Conversion Date and the dividends payable will be increased to
20% until such time that conversion is permitted.
In addition, the Company will issue a common stock purchase warrant for each
share of the Series E Preferred stock outstanding after two years to acquire
shares equal to 33% of the Automatic Conversion Shares at an exercise price
of 110% of the volume weighted average price for the five trading days
preceding the date of issuance. The issuance of the warrants is not subject
to suspension. Since the terms of these warrants are contingent, no
accounting has been given to such warrants in the accompanying consolidated
financial statements as of September 30, 2001.
The common stock, preferred stock and warrants exchanged had different
rights, preferences and terms. However, since the equity securities were
exchanged for equity securities, the exchange had no effect on the Company's
total stockholders' equity. In connection with the exchange, the total
implied value of the equity securities received was $8,957,000 of which
$848,000 represented the relative fair value of the warrants which was
recorded to additional paid-in capital and the remaining value of $8,109,000
was allocated to preferred stock. The Series E Warrants were valued using
the Black-Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 105%
Risk-free interest rate 3.12%
Expected life of option 3
Expected dividend yield -0-
Pursuant to the exchange, the holders received a beneficial conversion
discount in the amount of $5,365,381, which is being accreted to additional
paid-in capital over a two-year period. During the year ended September 30,
2001, $317,419 of the beneficial conversion discount was accreted. During
the year ended September 30, 2001, 425 shares of the Series E Preferred
Stock were converted into 348,841 shares of common stock.
11. LOSS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants to purchase common stock and common
stock options using the treasury stock method) were exercised or converted
into common stock. The Company had 6,876,972 potentially dilutive securities
outstanding at September 30, 2001 that were not included in the computation
of diluted loss per share because to do so would have been anti-dilutive for
all periods presented. The loss attributable to common stockholders includes
the impact of the accretion of the beneficial conversion feature of Series E
Preferred Stock and the accrual of cumulative preferred stock dividends.
2001 2000 1999
---- ---- ----
Net loss per common share (basic
and diluted) $(0.51) $(0.44) $(0.52)
======= ======= =======
12. SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information (SFAS No.
131) in the fiscal year ended September 30, 1999. SFAS No. 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision
maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision maker, as
defined under SFAS No. 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as principally one segment, the research
and development of certain drugs and vaccines. As a result, the financial
information disclosed herein, materially represents all of the financial
information related to the Company's principal operating segment.
13. NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, the Company adopted SFAS No. 133, issued by FASB,
"Accounting for Derivative Instruments and Hedging Activities", (as amended
by SFAS No. 137 and SFAS No. 138). This statement requires companies to
record qualifying derivatives and their balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedging accounting. The
Company had no derivative or hedging activity in any of the periods
presented, and therefore there is no impact of these Standards on its
financial position or the results of its operations.
In June 2001, the FASB issued SFAS No. 141, Accounting for Business
Combinations. SFAS No. 141 requires that all business combinations initiated
after June 30, 2001, be accounted for under the purchase method and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. The Company has not
yet determined the impact that the adoption of SFAS No. 141 will have on its
results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite
lives not be amortized but will rather be tested at least annually for
impairment. The Company will adopt SFAS No. 142 on October 1, 2002. Upon
adoption of SFAS 142, the Company has not yet determined the impact that the
adoption of SFAS No. 142 will have on its financial position or the results
of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company has not yet determined the
impact that adopting Statement of Financial Accounting Standards No. 143
will have on its financial position or the results of operations when such
statement is adopted.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. It supersedes SFAS 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 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. The Company is
required to adopt SFAS No. 144 on October 1, 2002. The Company has not yet
determined the impact that the adoption of SFAS No. 144 will have on its
results of operations or its financial position.
14. SUBSEQUENT EVENTS
On November 15, 2001, the Company signed a promissory note to cover certain
production costs with the owner of the Company's manufacturing facility in
the amount of $1,159,000, which was payable on November 15, 2002. In
December 2001, the note was amended to extend the due date to January 2,
2003. Unpaid principal will begin accruing interest on November 16, 2002, at
the Prime Rate plus 3%. The note is collateralized by certain laboratory
equipment.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering. The investor also received warrants which entitled the
holder to purchase 75,000 shares of common stock at $1.50 per share,
expiring October 2004.
In December 2001, the Company agreed to sell redeemable convertible notes
and Series F warrants, to a group of private investors for proceeds of
$730,000, net of transaction costs of $70,000, subject to the satisfaction
of certain closing conditions. The notes will bear interest at 7% per year
and will be due and payable two years from the closing date. Interest will
be payable quarterly beginning July 1, 2002. The notes will be secured by
substantially all of the Company's assets and contain certain restrictions,
including limitations on such items as indebtedness, sales of common stock
and payment of dividends.
The notes will be convertible into shares of the Company's common stock at
the holder's option determinable by dividing each $1,000 of note principal
by 76% of the average of the three lowest daily trading prices of the
Company's common stock on the American Stock Exchange during the twenty
trading days immediately prior to the closing date. The conversion price may
not be less than a floor of 75% of the closing price which will be 75% of
the average of the three lowest daily trading prices of the Company's common
stock during the twenty trading days immediately prior to the closing;
however the floor may be lowered if the Company sells any shares of common
stock or securities convertible to common stock at a price below the market
price of the Company's common stock. Additionally, the notes are required to
be redeemed by the Company at 130% upon certain occurrences such as failure
to file a Registration Statement to register the notes with the Securities
and Exchange Commission (SEC) or the effectiveness of such statement lapses,
delisting of the Company's common stock, completion of certain mergers or
business combinations, filing bankruptcy and exceeding its draw down limits
under the Company's equity line of credit.
So long as the notes remain outstanding, the note holders will have a first
right of refusal to participate in any subsequent financings involving the
Company. If the Company enters into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the note
holders may exchange notes and warrants for the securities sold in the
subsequent financing.
The Series F warrants will allow the holders to purchase up to 960,000
shares of the Company's common stock at a price equal to 110% of the closing
price per share at any time prior to the date which is seven years after the
closing of the transaction. The warrant price is adjustable if the Company
sells any additional shares of its common stock or convertible securities
for less than fair market value or at an amount lower than the exercise
price of the Series F warrants. If the warrant exercise price is adjusted,
the number of shares of common stock issuable upon exercise of the warrant
will also be adjusted accordingly. On the date that the registration
statement which the Company has agreed to file is declared effective by the
SEC, and every three months following the effective date, the warrant
exercise price will be adjusted to an amount equal to 110% of the conversion
price of the convertible notes on such date, provided that the adjusted
price is lower than the warrant exercise price on that date.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CEL-SCI CORPORATION
Dated: December 28, 2001 By: /s/ Maximilian de Clara
------------------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten
-----------------------------
Geert R. Kersten, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of l934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Maximilian de Clara Director and Principal December 28, 2001
- ------------------------ Executive Officer
Maximilian de Clara
/s/ Geert R. Kersten Director, Principal December 28, 2001
- -------------------- Financial Officer and
Geert R. Kersten Chief Executive Officer
/s/ Alexander G. Esterhazy Director December 28, 2001
- --------------------------
Alexander G. Esterhazy
/s/ D. Richard Kinsolving Director December 28, 2001
- --------------------------
D. Richard Kinsolving