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, 2002.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission file number 0-11503
CEL-SCI CORPORATION
---------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0916344
- -------------------------------- ------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
-------------------------------------- ------------
(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 10, 2002, as quoted on the American Stock Exchange, was approximately
$11,000,000. 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 November 30, 2002, the Registrant had 44,799,615 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 190 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.
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 approximately 190 patients. 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 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
may safely boost the patients' immune systems to the point where their immune
systems can 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.
Results from this ongoing Phase I clinical trial of MULTIKINE in cervical
dysplasia in HPV/HIV co-infected women indicated elimination or reduction of
dysplasia in seventy-one percent (71%) of the patients, excellent treatment
tolerance, and the confirmation of dysplasia elimination or reduction in
severity by histopathology.
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, malaria, and myocarditis.
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 myocarditis with researchers at the Department of Pathology, the
Johns Hopkins Medical Institutions, Baltimore, Maryland.
An outgrowth of the Company's L.E.A.P.S. technology is a new compound
called CEL-1000. CEL-1000 has shown protection in animal testing against
malaria, herpes simplex and cancer in early studies.
In the Spring of 2002, CEL-SCI, in conjunction with The Naval Medical
Research Center, announced that CEL-1000 provided 100% protection against
malaria infection in a mouse model. The same peptide also induced protective
effects in mouse models for herpes simplex virus and cancer. In the Fall of 2002
CEL-SCI announced that it had signed a Cooperative Research and Development
Agreement (CRADA) with the U.S. Navy for CEL-1000 in malaria. The Company also
announced an agreement with the Cincinnati Children's Hospital Medical Center
(CHMR) of the University of Cincinnati to evaluate CEL-1000 for protection
against herpes in the guinea pig vaginal challenge model.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2002, approximately $44,700,000 has
been expended on the Company-sponsored research and development, including
approximately $4,700,000, $7,762,000 and $5,186,000, respectively during the
years ended September 30, 2002, 2001 and 2000.
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, preferred 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.
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 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 approvals
from 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 $7,800. The Company believes this
arrangement is adequate for the conduct of its present business.
The Company has a 17,900 square foot laboratory which is leased by the
Company at a cost of approximately $11,200 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 November 30, 2002 there were approximately 2,460 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
12/31/01 $1.80 $0.72
3/31/02 $1.28 $0.52
6/30/02 $0.56 $0.27
9/30/02 $0.52 $0.16
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.
Potential Issuance of Additional Shares
As of November 30, 2002 the Company had 44,799,615 outstanding shares of
common stock. The following table lists additional shares of the Company's
common stock which may be issued by the Company:
Number of Note
Shares Reference
Shares issuable upon conversion of
convertible notes Unknown A
Shares issuable upon exercise of Series G
warrants 900,000 A
Shares issuable upon conversion of Series E 357,201 B
Preferred stock
Shares issuable upon exercise of Series E 815,351 B
warrants
Shares issuable pursuant to equity line of
credit Unknown C
Shares issuable upon exercise of equity line
warrants 200,800 C
Shares issuable upon exercise of Series F
warrants 751,000 D
Shares issuable upon exercise of options 205,000 E
granted to investor relations
consultants
Shares issuable upon exercise of options and
warrants granted to the Company's officers,
directors, employees, consultants, and third
parties 5,676,642 F
Shares issuable upon exercise of Public
Warrants 116,405 G
A. In July and September 2002, the Company sold convertible notes, plus Series G
warrants, to a group of private investors for $1,300,000. At the holder's option
the notes are 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 is 76% of the average of
the three lowest daily trading prices of the Company's common stock on the
American Stock Exchange during the 15 trading days immediately prior to the
conversion date. The Conversion Price may not be less than $0.18. However, if
the Company's common stock trades for less than $0.24 per share for a period of
20 consecutive trading days, the $0.18 minimum price will no longer be
applicable. The Conversion Price will decline from 76% to 60% if (i) on any
trading day after September 9, 2002 the closing daily price of the Company's
common stock multiplied by the total number of shares of common stock traded on
that day is less than $29,977, (ii) the Company defaults in the performance of
any material covenant, condition or agreement with the holders of the notes or,
(iii) the Company's common stock is delisted from the American Stock Exchange.
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 prior to July 12, 2002;
- pursuant to the Company's equity line of credit;
- to key officers of the Company in lieu of their respective
salaries.
The Company's agreement with the note holders places 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 later of January 1, 2003 or the date that 50% 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 without penalty. After January 1, 2003 the minimum balance
requirement will be increased to $1,500,000 when 50% of the balance of each
Note is no longer outstanding and 50% of all of the Notes in the aggregate
are no longer outstanding.
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 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 Series G warrants.
- The Company files for protection from its creditors under the
federal bankruptcy code.
- The Company exceeds its drawdown limits under it equity line of
credit.
As of November 30, 2002 convertible notes in the principal amount of
$650,000 had been converted into 4,291,818 shares of the Company's common stock.
The actual number of additional shares issuable upon the conversion of the notes
which remain outstanding will vary depending upon a number of factors, including
the price of the Company's common stock at certain dates. Accordingly, the
number of shares which may be issued upon the conversion of the notes cannot be
determined at this time.
The Series G warrants allow the holders to purchase up to 900,000 shares
of the Company's common stock at a price of $0.18 per share at any time prior to
July 12, 2009.
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.
Every three months after December 9, 2002, 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.
B. In December 1999 and January 2000, the Company sold 1,148,592 shares of its
common stock, plus Series A and Series B warrants, to Advantage Fund II, Koch
Investment Group Limited and Mooring Capital Fund LLC for $2,800,000. The Series
A warrants allowed the holders to purchase up to 402,007 shares of the Company's
common stock at a price of $2.925 per share at any time prior to December 8,
2002. The Company issued 274,309 shares of common stock upon the exercise of the
Series B warrants, which have since expired.
In March 2000, the Company sold 1,026,666 shares of its common stock, plus
Series C and Series D warrants, to the same private investors referred to above
for $7,700,000. The Series C warrants allowed the holders to purchase up to
413,344 shares of the Company's common stock at a price of $8.50 per share at
any time prior to March 21, 2003. The Series D warrants allowed the holders, to
the extent they held any shares purchased in the March 2000 offering, to acquire
additional shares of the Company's common stock at a nominal price in the event
the price of the Company's common stock fell below $7.50 per share prior to
certain fixed vesting dates. On the first fixed vesting date the price of the
Company's common stock was $1.47 and on the second, and final vesting date, the
price of the Company's common stock was $1.08. As a result, and in accordance
with the terms of the Series D warrants, the private investors were entitled to
receive 5,734,155 additional shares of the Company's common stock, of which
3,520,123 shares had been issued and 959,340 shares had been sold as of August
15, 2001.
On August 16, 2001 the Company, Advantage Fund II and Koch Investment
Group agreed to restructure the terms of the Series A, C and D warrants in the
following manner:
Advantage Fund II, Koch Investment Group Limited and Mooring Capital Fund
LLC exchanged the 3,588,564 shares of the Company's common stock which they
owned, plus their unexercised Series D Warrants, for 6,288 shares of the
Company's Series E Preferred Stock. At the holder's option, 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 (the "Conversion Price") of the Company's common
stock on the American Stock Exchange for the five days prior to the date of each
conversion notice.
Notwithstanding the above, a maximum 923 shares of common stock are
issuable upon the conversion of each Series E Preferred share prior to August
16, 2003.
Each Series E Preferred share can be redeemed by the Company at a price of
$1,200 per share, plus accrued dividends, at any time prior to July 18, 2003. At
any time on or after July 18, 2003 and prior to the close of business on August
16, 2003 the Company may redeem any outstanding Series E Preferred shares at a
price of $1,000 per share. As of September 30, 2002, accrued dividends payable
totaled $69,884.
Preferred shares that have not been redeemed or converted by August 16,
2003 will automatically convert to twice the number of shares of common stock
which such shares would otherwise convert into based upon the Conversion Price
on such date. On August 16, 2003 the Company will also be required to issue the
holders of any Series E Preferred shares which are then outstanding Series E
warrants which will allow the holders of the warrants to purchase shares of the
Company's common stock equal in number to 33% of the common shares which were
issued upon the conversion of the remaining Series E Preferred shares. These
warrants, if issued, will be exercisable at any time prior to August 17, 2006 at
a price equal to 110% of the volume weighted average price of the Company's
common stock for the five days prior to August 16, 2003.
Each Series E Preferred share is entitled to a quarterly dividend of $60
per share, payable in cash. Dividends not declared will accumulate. Except as
otherwise provided by law the Series E Preferred shares do not have any voting
rights. The Series E Preferred shares have a liquidation preference over the
Company's common stock.
As part of this transaction the three investors exchanged their Series A
and Series C warrants for new Series E warrants. The Series E warrants
collectively allow the holders to purchase up to 815,351 additional shares of
the Company's common stock at a price of $1.19 per share at any time prior to
August 16, 2004.
With respect to the shares issuable upon the conversion of the Series E
Preferred shares or the exercise of the Series E warrants, Advantage II and Koch
have each agreed to limit their respective weekly sales of the Company's common
stock to 9% of the average of the four prior weeks traded volume as listed by
Bloomberg, while Mooring Financial will limit its weekly sales of the Company's
common stock to 2.14% of the average of the four prior weeks trading volume as
listed by Bloomberg. If the Company's trading volume reaches 200,000 shares or
more on any given day, each of Advantage II and Koch will be allowed to sell an
additional 4.5% of that day's trading volume on each of that day and the
following day, while Mooring Financial will be allowed to sell an additional 1%
of that day's trading volume on each of that day and the following day.
As of November 30, 2002 5,901 Series E Preferred shares had been converted
into 5,546,326 shares of the Company's common stock. The actual number of shares
issuable upon the conversion of the Series E Preferred shares will vary
depending upon a number of factors, including the price of the Company's common
stock at certain dates. Accordingly, the number of shares of common stock which
will be issued upon the conversion of the Series E Preferred shares cannot be
determined at this time. However, prior to August 16, 2003, the Company would
not be required to issue more than additional 357,201 shares of its common stock
upon the conversion of the Series E Preferred shares.
C. An unknown number of shares of common stock are issuable under the equity
line of credit agreement between the Company and Paul Revere Capital Partners.
As consideration for extending the equity line of credit, the Company granted
Paul Revere Capital Partners warrants to purchase 200,800 shares of common stock
at a price of $1.64 per share at any time prior to April 11, 2004.
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 twenty-four month 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 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 amount 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%.
The Company may request a drawdown by faxing a drawdown notice to Paul
Revere Capital Partners, Ltd., stating the amount of the drawdown and the lowest
daily volume weighted average price, if any, at which the Company is willing to
sell the shares. The lowest volume weighted average price will be set by the
Company's Chief Executive Officer in his sole and absolute discretion.
If the Company sets a minimum price which is too high and the Company's
stock price does not consistently meet that level during the 22 trading days
after its drawdown request, the amount the Company can draw and the number of
shares the Company will sell to Paul Revere Capital Partners will be reduced. On
the other hand, if the Company sets a minimum price which is too low and its
stock price falls significantly but stays above the minimum price, the Company
will have to issue a greater number of shares to Paul Revere Capital Partners
based on the reduced market price.
As of November 30, 2002 the Company had received net proceeds of
$1,504,328 from the sale of 3,279,245 shares of common stock pursuant to the
terms of the equity line of credit.
D. In December 2001 and January 2002, the Company sold convertible notes, plus
Series F warrants, to a group of private investors for $1,600,000. The notes
bore interest at 7% per year. At the holder's option the notes were 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 was 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.
As of November 30, 2002 all of the convertible notes had been converted
into 6,592,461 shares of the Company's common stock.
As of November 30, 2002, 104,500 Series F warrants had been exercised. The
remaining Series F warrants allow the holders to purchase up to 751,000 shares
of the Company's common stock at a price of $0.153 per share at any time prior
to December 31, 2008. 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.
Every three months after October 17, 2002, 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.
The notes and Series G warrants sold by the Company in July and September
2002 will not result in any change to the conversion price of the notes referred
to above or to the exercise price of the Series F warrants.
E. The Company has granted options for the purchase of 205,000 shares of common
stock to certain investor relations consultants in consideration for services
provided to the Company. The options are exercisable at prices ranging between
$1.63 and $3.50 per share and expire between February 2004 and June 2006.
F. The options are exercisable at prices ranging from $0.16 to $11.00 per share.
The Company may also grant options to purchase additional shares under its
Incentive Stock Option and Non-Qualified Stock Option Plans.
G. The Public Warrants are exercisable at $3.00 per share and expire on February
6, 2003.
The shares referred to in Notes A through E are being, or will be, offered
for sale by means of registration statements which have been filed with the
Securities and Exchange Commission.
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. Certain amounts reported in previous years have
been reclassified to conform to the classifications being used as of and for the
year ended September 30, 2002.
For the Years Ended September 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Grant Revenue
and Other $ 384,939 $293,871 $ 40,540 $66,687 $ 64,573
Operating Expenses:
Research and Development 4,699,909 7,762,213 5,186,065 4,662,226 3,833,854
Depreciation and Amorti-
zation 226,514 209,121 220,994 268,210 295,331
General and Adminis-
trative 1,754,332 3,432,437 3,513,889 3,029,807 3,106,492
Interest Income ( 85,322) ( 376,221) (402,011) (402,831) ( 728,421)
Interest Expense 2,131,750 -- -- -- --
-----------------------------------------------------------------
Net Loss $(8,342,244) $(10,733,679) $(8,478,397) $(7,490,725) $(6,442,683)
===================================================================
Net loss attributable
to common stockholders $(9,989,988) $(11,104,251) $(8,478,397) $(7,490,725) $(6,442,683)
====================================================================
Net loss per common share
(basic and diluted) $(0.35) $(0.51) $(0.44) $(0.52) $(0.74)
===================================================================
Weighted average common
shares outstanding 28,746,341 21,824,273 19,259,190 14,484,352 11,379,437
=================================================================
Balance Sheet Data:
September 30,
------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working Capital $690,804 $2,801,299 $11,725,940 $6,152,715 $12,926,014
Total Assets 3,771,258 4,508,920 13,808,882 7,559,772 14,431,813
Convertible Debt
(included in total
liabilities) 639,288 -- -- -- --
Total Liabilities 2,709,087 507,727 847,423 461,586 456,529
Stockholders' Equity 1,062,171 4,001,193 12,961,459 7,098,186 13,975,284
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, 2002 are shown below:
Net Loss
Quarter Net Loss per Share
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)
Net Loss
Quarter Net Loss per Share
12-31-01 $(2,920,620) $(0.16)
03-31-02 $(1,937,912) $(0.10)
06-30-02 $(2,111,479) $(0.08)
09-30-02 $(1,372,233) $(0.05)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal 2002
Grant revenue and other is primarily grant money received in payment of
some research and development expenses. Research and development expenses in
fiscal year 2002 declined significantly because the Company completed its
current production of MULTIKINE(TM) during the first quarter. This supply will
be used in future clinical trials. During the fiscal year, the Company
instituted a cost reduction program and reduced its workforce significantly.
Hence, both research and development costs and general and administrative costs
declined from the previous fiscal years. General and administrative expenses
also declined due to the reversal of compensation charges of $593,472 resulting
from a decline in the intrinsic value of options repriced to employees. Interest
income during the year ended September 30, 2002 reflects interest accrued and
received on certificates of deposit. Because the Company issued Series F and
Series G convertible notes during fiscal year 2002, there is a significant
charge to interest expense during the year for the expensing of the discount on
the notes and the deferred financing costs incurred for the issuance of these
notes. This discount relates primarily to the value of the warrants received in
the offering and the value of the beneficial conversion feature of the notes.
Fiscal 2001
Research and development expenses in fiscal year 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 $316,500 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.
Interest income during the year ended September 30, 2001 reflects interest
accrued and received on investments.
Fiscal 2000
Research and development expense in fiscal year 2000 is higher than in
fiscal year 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. Interest income during the
year ended September 30, 2000 reflects interest received and accrued on
investments.
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 and preferred 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.
In fiscal year 2002, the Company reduced its discretionary expenditures.
If necessary, the Company plans to further reduce discretionary expenditures in
fiscal 2003; however such reductions would further delay the development of the
Company's products.
During fiscal year 2003, the Company expects that it will spend
significantly less on research, development, and clinical trials, mainly due to
the completion of the Company's manufacturing validation program. 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 operating losses, funding its research and development
program, and paying its liabilities, the Company does not have any material
capital commitments. However, material future obligations are as follows:
Contractual Obligations:
Years Ending September 30
-------------------------------
Total 2003 2004
----- ---- ----
Notes Payable $1,172,517 $ 375,000 $ 797,517
Convertible Debt 1,390,000 -- 1,390,000
Leases 260,036 202,643 57,393
Interest and Dividends 91,529 91,529 --
----------- --------- ---------
$2,914,082 $669,172 $2,244,910
========== ======== ==========
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. It is the
opinion of management that sufficient funds will be available from external
financing and additional capital and/or expenditure reduction in order to meet
the Company's liabilities and commitments as they come due during fiscal year
2003. Ultimately, the Company must complete the development of its products,
obtain appropriate regulatory approvals and obtain sufficient revenues to
support its cost structure.
The Company's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its certificates of deposit, and, to an immaterial
extent, foreign currency exchange rates.
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%. As of November 30, 2002 the Company has sold
3,279,245 shares of its common stock to Paul Revere Capital Partners and
received net proceeds of $1,504,320 from the sale of these shares.
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 was in
the principal amount of $1,172,517 and represented the cost of the Company's use
of the Cambrex manufacturing facility for the three months ended January 10,
2002. The amount due Cambrex bears interest at the prime interest rate, plus 3%,
which is adjusted monthly. In December 2001, the note was amended to extend the
due date to January 2, 2003. In December 2002, the Company negotiated an
agreement to extend the note which is due in full, including accrued interest,
on January 2, 2004. Pursuant to the agreement, the Company surrendered a cash
deposit and transferred title to certain equipment to Cambrex, which reduced the
amount due by $225,000. The amount due Cambrex at December 30, 2002, excluding
accrued interest, was $947,517. Until the note is paid in full, the Company has
agreed to pay Cambrex $150,000 from its next financing, plus 10% of all other
amounts received by the Company, net of financing costs, from any future
financings, including amounts received by the Company from its equity line of
credit. Cambrex, at its option, may convert all or part of the amount due
Cambrex into shares of the Company's common stock. The number of shares to be
issued to Cambrex upon any conversion of the note will be determined by dividing
that portion of the note to be converted by the Conversion Price. The
"Conversion Price" is an amount equal to 90% of the average of the closing
prices of the Company's common stock for the three trading days immediately
prior to the conversion date. However, the Conversion Price may not be less than
$0.22.
Convertible Notes
In December 2001 and January 2002, the Company sold convertible notes,
plus Series F warrants, to a group of private investors for $1,600,000. As of
November 30, 2002 these notes had been converted into 6,592,461 shares of the
Company's common stock.
In July and September 2002, the Company sold convertible notes, plus
Series G warrants, to a group of private investors for $1,300,000. The notes
bear interest at 7% per year, are due and payable on July 12, 2004 and are
secured by substantially all of the Company's assets. Interest is payable
quarterly. If the Company fails to make any interest payment when due, the notes
will become immediately due and payable. See Item 5 of this report for further
information regarding the terms of these notes.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in
Note 1 to the Consolidated Financial Statements. However, certain accounting
policies are particularly important to the portrayal of financial position and
results of operations and require the application of significant judgments by
management. As a result, the consolidated financial statements are subject to an
inherent degree of uncertainty. In applying those policies, management uses its
judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. These estimates are based on the Company's
historical experience, terms of existing contracts, observance of trends in the
industry and information available from outside sources, as appropriate. Our
significant accounting policies include:
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.
Stock Options - In October 1996, the Financial Accounting Standards Board
(FASB) 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. Options to non-employees are accounted
for in accordance with FASB's Emerging Issues Task Force (EITF) Issue 96-18
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is measured
using the Black-Scholes valuation model. The Black-Scholes model requires
management to make assumptions regarding the fair value of the options at the
date of grant and the expected life of the options.
Asset Valuations and Review for Potential Impairments - The Company reviews
its fixed assets every fiscal quarter. This review requires that the Company
make assumptions regarding the value of these assets and the changes in
circumstances that would affect the carrying value of these assets. If such
analysis indicates that a possible impairment may exist, the Company is then
required to estimate the fair value of the asset and, as deemed appropriate,
expense all or a portion of the asset. The determination of fair value includes
numerous uncertainties, such as the impact of competition on future value. The
Company believes that it has made reasonable estimates and judgments in
determining whether our long-lived assets have been impaired; however, if there
is a material change in the assumptions used in our determination of fair values
or if there is a material change in economic conditions or circumstances
influencing fair value, the Company could be required to recognize certain
impairment charges in the future.
Convertible Notes - Convertible notes were issued during the year. The
Company initially offset a portion of the notes with a discount representing the
relative fair value of the warrants and a beneficial conversion feature
discount. This discount is amortized to interest expense over the period the
notes are outstanding. The fair value of the warrants and the beneficial
conversion discount are calculated based on available market data using
appropriate valuaton models. These valuations require that the Company make
assumptions and estimates regarding the convertible notes and warrants.
Management uses its judgment, as well as outside sources, to determine these
assumptions and estimates.
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, 2002. The Company has a note payable with an
interest rate at prime plus 3%. This represents a market risk if the prime
interest rate rises. However, based on the Federal Reserve Board's actions, the
Company believes that a large increase in the prime rate is unlikely in the near
future.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("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 is required to adopt SFAS No. 142 on October 1,
2002. The Company does not expect that there will be a material impact from the
implementation of SFAS No. 142 on its consolidated financial position, results
of operations or cash flows.
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 does not expect that
there will be a material impact from the adoption of SFAS No. 143 on its
consolidated financial position, results of operations, or cash flows.
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 Accounting Principles Board Statement ("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 does not expect
that the adoption of SFAS No. 144 will have a material effect on its
consolidated financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires the classification of gains and losses from
extinguishments of debt as extraordinary items only if they meet certain
criteria for such classification in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". Any
gain or loss on extinguishments of debt classified as an extraordinary item in
prior periods that does not meet the criteria must be reclassified to other
income or expense. These provisions are effective for fiscal years beginning
after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. These lease provisions are effective for
transactions occurring after May 15, 2002. The Company does not expect the
adoption of SFAS No. 145 to have a material effect on its consolidated financial
position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146 , "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces "Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of SFAS No.
146 to have a material effect on its consolidated financial position, results of
operations or cash flows.
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 73 Director and President
Geert R. Kersten, Esq. 43 Director, Chief Executive Officer and
Treasurer
Patricia B. Prichep 50 Senior Vice President of Operations and
Secretary
Dr. Eyal Talor 46 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 60 Senior Vice President
of Research, Cellular Immunology
Alexander G. Esterhazy 57 Director
Dr. C. Richard Kinsolving 67 Director
Peter R. Young 57 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.
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 Johns 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).
Peter R. Young, Ph.D. has been a Director of the Company since August
2002. Dr. Young has been a senior executive within the pharmaceutical industry
in the United States and Canada for most of his career. Over the last 20 years
he has primarily held positions of Chief Executive Officer or Chief Financial
Officer and has extensive experience with acquisitions and equity financings.
Since November 2001 Dr. Young has been the Chief Operating Officer of Immune
Therapies International, Inc., which has its principal operations in Tucson,
Arizona. Immune Therapies International treats patients requiring immune system
therapy to fight serious diseases such as cancer, multiple sclerosis and
hepatitis. Dr. Young received his Ph.D. in Organic Chemistry from the University
of Bristol, England (1969), and his Bachelor's degree in Honors Chemistry,
Mathematics and Economics also from the University of Bristol, England (1966).
All of the Company's officers devote substantially all of their time to
the Company's business. Messrs. Esterhazy, Kinsolving and Young, 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, C. Richard Kinsolving and
Peter Young. 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, 2002.
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, 2002 $363,000 -- $46,079 $ 89,334 75,000 --
President 2001 $357,167 -- $52,186 $262,000 95,000 $ 64
2000 $345,583 -- $72,945 $550,000 60,000 $ 64
Geert R. Kersten, 2002 $346,324 -- $15,044 $10,929 105,000 --
Chief Executive 2001 $265,175 -- $10,462 $ 8,313 655,000 $4,114
Officer and 2000 $303,049 -- $15,349 $10,375 60,000 $4,114
Treasurer
Patricia B. Prichep 2002 $140,464 -- $3,000 $5,597 90,500 --
Senior Vice President 2001 $104,505 -- $3,000 $6,270 260,000 $ 63
of Operations and 2000 $114,430 -- $3,000 $6,998 23,000 $ 63
Secretary
Eyal Talor, Ph.D. 2002 $187,075 -- $3,000 $5,702 85,000 --
Senior Vice President 2001 157,420 -- $3,000 $9,269 200,000 $ 63
of Research and 2000 $150,334 -- $3,000 $9,020 50,000 $ 63
Manufacturing
Daniel Zimmerman, 2002 $143,583 -- $3,000 $5,763 91,000 --
Ph.D., 2001 $117,145 -- $3,000 $6,962 175,000 $ 64
Senior Vice President 2000 $124,165 -- $3,000 $7,450 20,000 $ 64
of Cellular Immunology
(1) The dollar value of base salary (cash and non-cash) received. During the
year ended September 30, 2002, $468,703 of the total salaries paid to the
persons shown in the table were paid in restricted shares of the Company's
common stock.
(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. During the year ended September 30, 2002, $24,250
of the total Other Annual compensation paid to the persons shown in the
table were paid in restricted shares of the Company's common stock.
(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, 2002, 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 525,421 $ 95,296
Geert R. Kersten 667,762 $ 120,197
Patricia B. Prichep 206,484 $ 37,167
Eyal Talor, Ph.D. 192,527 $ 34,655
Daniel Zimmerman, Ph.D. 214,391 $ 38,590
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, 2002" 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 2002 expenses for this plan were $71,824. 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 - In March 2002 the Company entered into a three-year
employment agreement with Mr. de Clara which expires March 31, 2005. 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, 2002, 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, 2002, 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, 2002, 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, 2002
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 75,000 8.73% 0.54 3/14/12 $25,500 $64,500
Geert R. Kersten 75,000 8.73% 0.54 3/14/12 $25,500 $64,500
30,000 (2) 3.49% 0.54 3/14/12 $10,200 $25,800
--------
105,000
Patricia B. Prichep 30,000 3.49% 1.00 12/3/11 $18,900 $47,700
10,500 (2) 1.22% 0.54 3/14/12 $ 3,750 $ 9,030
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
90,500
Eyal Talor, Ph.D. 35,000 4.07% 1.00 12/3/11 $22,050 $55,650
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
85,000
Daniel Zimmerman,
Ph.D. 30,000 3.49% 0.54 3/14/12 $10,200 $25,800
11,000 (2) 1.28% 0.54 3/14/12 $ 3,740 $ 9,460
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
91,000
(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
Options (3) Year-End (4)
Shares ------------ ---------------
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- --------------
Maximilian de Clara -- -- 439,999/135,000 0/0
Geert R. Kersten -- -- 1,725,000/165,000 0/0
Patricia Prichep -- -- 465,168/114,832 0/0
Eyal Talor 272,500/101,666 0/0
Daniel Zimmerman -- -- 281,001/110,999 0/0
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2002.
(2) With respect to options exercised during the Company's fiscal year ended
September 30, 2002, 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, 2002,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 2002, the market value
of the stock underlying those options as of September 30, 2002.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved
by the stockholders. 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 1,440,000 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,
2002, 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 Remaining
Shares Reserved for Shares Options/
Reserved Outstanding Issued as Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
- ------------ ----------- --------- ---------- ------------
Incentive Stock Option
Plans 2,100,000 1,251,000 N/A 762,315
Non-Qualified Stock Option
Plans 5,760,000 4,073,434 N/A 589,105
Stock Bonus Plans 1,440,000 N/A 1,090,700 349,300
Of the shares issued pursuant to the Company's Stock Bonus Plans 353,584
shares were issued as part of the Company's contribution to its 401(k) plan.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to the Company's Incentive and
Non-Qualified Stock Option Plans. The Company's Incentive and Non-Qualified
Stock Option Plans have been approved by the Company's shareholders.
Number of Securities
Remaining Available
Number For Future Issuance
of Securities Under Equity
to be Issued Weighted-Average Compensation Plans
Upon Exercise Exercise Price of (Excluding Securities
of Outstanding of Outstanding Reflected in
Options Options Column (a))
Plan category [a] [b] [c]
- ------------------------------------------------------------------------------
Incentive Stock 1,251,100 $1.62 762,315
Option Plans
Non-Qualified Stock 4,073,434 $1.10 589,105
Option Plans --------- ----- -------
5,324,534 $1.23 1,351,420
========= ===== =========
In January 2000 the Company issued Mr. de Clara 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 November 30, 2002, 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 1,183,172 2.6%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 2,637,354 (2) 5.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 761,384 1.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 563,935 1.3%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 581,308 1.3%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 35,000 *
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving 64,489 *
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young 16,250 *
8229 Boone Blvd., Suite 802
Vienna, VA 22182
All Officers and Directors 5,842,892 12.1%
as a Group (8 persons)
* Less than 1%
(1) Includes shares issuable prior to February 28, 2003 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2003
Maximilian de Clara 439,999
Geert R. Kersten 1,725,000
Patricia B. Prichep 491,167
Eyal Talor, Ph.D. 292,500
Daniel H. Zimmerman, Ph.D. 294,334
Alexander G. Esterhazy 35,000
C. Richard Kinsolving, Ph.D. 20,000
Peter R. Young, Ph.D. 0
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. CONTROLS AND PROCEDURES
Geert Kersten, the Company's Chief Executive and Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this report (the
"Evaluation Date"); and in his opinion the Company's disclosure controls and
procedures ensure that material information relating to the Company, including
the Company's consolidated subsidiaries, is made known to him by others within
those entities, particularly during the period in which this report is being
prepared, so as to allow timely decisions regarding required disclosure. To the
knowledge of Mr. Kersten there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect the
Company's internal controls subsequent to the Evaluation Date. As a result, no
corrective actions with regard to significant deficiencies or material weakness
in the Company's internal controls were required.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See the Financial Statements attached to this Report.
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 2002.
(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 Certificate Incorporated by reference to Exhibit
4(a) of the Company's Registration
Statement on Form S-1, Registration
Nos. 2-85547-D and 33-7531.
4(b) Designation of Series E Preferred Incorporated by reference to Exhibit 4
Stock to 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
Geert Kersten 10(e) of the Company's report on Form
10-K for the year ended
September 30, 2000.
10(q) Common Stock Purchase Agreement Incorporated by reference to Exhibit
with Paul Revere Capital Partners Ltd. 10(q) to Cel-Sci Registration
Statement on Form S-1
(Commission File Number 333-59798).
10(r) Stock Purchase Warrant issued to Incorporated by reference to Exhibit
Paul Revere Capital Partners Ltd. 10(r) to Cel-Sci Registration Statement
on Form S-1 (Commission File Number
333-59798).
10(s) Securities Exchange Agreement Incorporated by reference to Exhibit
(together with Schedule required 10.1 to report on Form 8-K dated August
by Instruction 2 to Item 601 21, 2001.
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, 2002, 2001, and 2000,
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, 2002, 2001, AND 2000:
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-9
Notes to Consolidated Financial Statements F-10 - F-27
INDEPENDENT AUDITORS' REPORT
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, 2002 and 2001,
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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
McLean, Virginia
December 23, 2002
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
- ----------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $2,079,276 $1,783,990
Investment securities available for sale - 593,384
Interest and other receivables 31,477 40,376
Prepaid expenses 452,123 866,058
Deferred financing costs 176,995 -
--------- ---------
Total current assets 2,739,871 3,283,808
RESEARCH AND OFFICE EQUIPMENT--Less accumulated
depreciation of $2,027,225 and $1,864,182 473,555 620,608
DEPOSITS 139,828 139,828
PATENT COSTS--Less accumulated amortization
of $641,711 and $623,235 418,004 464,676
--------- ---------
$3,771,258 $4,508,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 735,646 $ 422,895
Accrued expenses 148,812 53,153
Due to officer/shareholder and employees 29,592 461
Note payable 1,135,017 -
--------- ---------
Total current liabilities 2,049,067 476,509
DEFERRED RENT 20,732 31,218
CONVERTIBLE DEBT, NET 639,288 -
--------- ---------
Total liabilities 2,709,087 507,727
--------- ---------
STOCKHOLDERS' EQUITY:
Series E cumulative convertible redeemable
preferred stock, $.01 par value, $1,000 liquidation
value--authorized, 6,288 shares; issued and
outstanding, 1,192 and 5,863 shares at
September 30, 2002 and 2001, respectively 12 59
Common stock, $.01 par value--authorized,
100,000,000 shares; issued and outstanding,
37,255,142 and 21,952,082 shares at
September 30, 2002 and 2001, respectively 372,551 219,521
Additional paid-in capital 80,871,758 75,641,365
Unearned compensation - (19,636)
Accumulated other comprehensive loss - (210)
Accumulated deficit (80,182,150) (71,839,906)
----------- -----------
Total stockholders' equity 1,062,171 4,001,193
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,771,258 $ 4,508,920
=========== ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
GRANT REVENUE AND OTHER $ 384,939 $ 293,871 $ 40,540
OPERATING EXPENSES:
Research and development 4,699,909 7,762,213 5,186,065
Depreciation and amortization 226,514 209,121 220,994
General and administrative 1,754,332 3,432,437 3,513,889
---------- ----------- ---------
Total operating expenses 6,680,755 11,403,771 8,920,948
---------- ------------ ---------
NET OPERATING LOSS (6,295,816) (11,109,900) (8,880,408)
INTEREST INCOME 85,322 376,221 402,011
INTEREST EXPENSE (2,131,750) - -
------------ ------------ ----------
NET LOSS (8,342,244) (10,733,679) (8,478,397)
ACCRUED DIVIDENDS ON PREFERRED STOCK (202,987) (53,153) -
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (1,444,757) (317,419) -
------------ ------------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (9,989,988) $(11,104,251)$(8,478,397)
============ ========================
NET LOSS PER COMMON SHARE (BASIC) $ (0.35) $ (0.51)$ (0.44)
============ ========================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.35) $ (0.51)$ (0.44)
============ ========================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 28,746,341 21,824,273 19,259,190
============ =========== ==========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
NET LOSS $ (8,342,244) $ (10,733,679) $(8,478,397)
OTHER COMPREHENSIVE LOSS--Unrealized
gain on investments 210 61,354 55,095
---------- ------------- -----------
COMPREHENSIVE LOSS $ (8,342,034) $ (10,672,325) $(8,423,302)
========== ============= ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- -------------------------------------------------------------------------------
Accumulated
Preferred Additional Other
Series E Stock Common Stock Paid-In Unearned Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation (Loss) Income Deficit Total
BALANCE, SEPTEMBER 30, 1999 $ - 17,002,341 170,023 59,672,653 $ - $ (116,659) $(52,627,830) $7,098,187
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
nonemployees for services 167,087 167,087
Stock issued to nonemployees
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)(10,733,679)
-------- ----------- -------- ------- -------- --------- ---------- -----------------------
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- ----------------------------------------------------------------------------
Accumulated
Preferred Additional Other
Series E Stock Common Stock Paid-In Unearned Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation (Loss) Income Deficit Total
BALANCE, SEPTEMBER 30, 2001 5,863 59 21,952,082 219,521 75,641,365 (19,636) (210) (71,839,906) 4,001,193
Exercise of warrants 104,500 1,045 21,668 22,713
Stock issued to employees
for service 1,885,600 18,856 502,038 520,894
Repriced options (613,108) 19,636 (593,472)
Stock options issued to
nonemployees for service (2,262) (2,262)
Stock issued to nonemployees
for service 45,596 456 45,140 45,596
Conversion of Preferred
Series E to common stock (4,671) (47) 4,282,150 42,822 (42,775) -
Dividends on Preferred Series
E paid in common stock 122,760 1,227 131,875 133,102
Dividend expense on Preferred
Series E stock (202,987) (202,987)
Issuance of Series F
convertible debt with
warrants and beneficial -
conversion feature 1,600,000 1,600,000
Conversion of Series F
convertible debt 5,611,344 56,113 1,403,885 1,459,998
Interest on Series F convertible
debt paid in common stock 1,269 13 752 765
Issuance of Series G
convertible debt with warrants
and beneficial conversion feature 690,709 690,709
Conversion of Series G
convertible debt 277,778 2,777 47,225 50,002
Issuance-common stock 150,000 1,500 148,500 150,000
401(k) contributions 193,818 1,938 69,885 71,823
Stock bonus to officer 75,071 751 88,583 89,334
Issuance of common stock
for equity line 2,553,174 25,532 1,341,265 1,366,797
Change in unrealized gain (loss)
of investment securities available
for sale 210 210
Net loss (8,342,244) (8,342,244)
---------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 1,192 $12 37,255,142 $372,551 $80,871,758 $ - $ - $(80,182,150) $1,062,171
===================================================================================================
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,342,244) $ (10,733,679) $ (8,478,397)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 226,514 209,121 220,994
Issuance of stock options for services (2,262) 167,087 -
Repriced options (593,472) 593,472 -
Common stock bonus granted to officer 89,334 262,000 550,000
Issuance of common stock for services 566,490 149,414 -
Common stock contributed to 401(k) plan 71,823 93,705 99,107
Net realized (gain) loss on sale of securities (2,758) 9,831 49,963
Impairment loss on abandonment of patents 39,960 30,439 -
R&D expenses paid with note payable 872,517 - -
Amortization of deferred financing costs 276,785 - -
Amortization of discount on note payable 262,500 - -
Amortization of discount associated with - - -
convertible notes 1,539,994 - -
Changes in assets and liabilities: - - -
Decrease (increase) in interest and other receivables 8,899 (1,124) 23,573
Decrease (increase) in prepaid expenses 413,935 972,318 (1,323,804)
Decrease in advances - 728 68,720
Increase in deposits - - (125,000)
Increase (decrease) in accounts payable and - - -
accrued expenses 321,297 (346,553) 389,336
Increase in due to officer/shareholder and employees 29,131 461 -
(Decrease) increase in deferred rent (10,486) 6,396 (3,499)
---------------------------------------------------------
Net cash used in operating activities (4,232,043) (8,586,384) (8,529,007)
---------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of investments - - (2,000,587)
Sales and maturities of investments 596,352 3,219,064 1,436,289
Expenditures for property and equipment (15,313) (168,537) (284,043)
Expenditures for patents (39,439) (35,797) (98,500)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 541,600 3,014,730 (946,841)
-----------------------------------------------------------------
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
2002 2001 2000
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Cash proceeds from issuance of preferred and common
stock and exercise of warrants for cash 172,713 590,351 13,637,467
Cash proceeds drawn on equity line (net) 1,366,797 -- --
Proceeds from convertible notes 2,900,000 -- --
Costs for convertible notes transactions (453,781) -- --
Costs for equity-related transactions -- (143,970) --
-----------------------------------------------------------------
Net cash provided by financing activities 3,985,729 446,381 13,637,467
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH 295,286 (5,125,273) 4,161,619
----------------------------------------------------
CASH, BEGINNING OF YEAR 1,783,990 6,909,263 2,747,644
----------------------------------------------------
CASH, END OF YEAR $ 2,079,276 $ 1,783,990 $ 6,909,263
====================================================
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS 2002 2001 2000
ACCRUAL OF DIVIDENDS ON PREFERRED STOCK:
Increase in accrued liabilities $202,987 $ 53,153 $ -
Decrease in additional paid-in capital (202,987) (53,153)
-------- -------- ------
$ - $ - $ -
======== ======== ======
COMMON STOCK IN LIEU OF CASH DIVIDENDS AND INTEREST:
Decrease in accrued liabilities $(133,102) $ - $ -
Increase in common stock 1,227
Increase in additional paid-in capital 131,875
--------- -------- -----
$ - $ - $ -
========= ======== =====
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK:
Decrease in preferred stock $ (47) $ (4) $ -
Increase in common stock 42,822 3,488
Decrease in additional paid-in capital (42,775) $ (3,484)
---------- -------- -----
$ - $ - $ -
========== ======== =====
CONVERSION OF COMMON STOCK INTO PREFERRED STOCK:
Increase in preferred stock $ - $ 63 $ -
Decrease in common stock (35,893)
Increase in additional paid-in capital 35,830
---------- -------- -----
$ - $ - $ -
========== ======== =====
ISSUANCE OF CONVERTIBLE DEBT WITH WARRANTS
AND BENEFICIAL CONVERSION:
Decrease in convertible debt $(2,290,709) $ - $ -
Increase in additional paid-in capital 2,290,709
----------- -------- -----
$ - $ - $ -
=========== ======== =====
CONVERSION OF CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in convertible debt $(1,510,000) $ - $ -
Increase in common stock 58,890
Increase in additional paid-in capital 1,451,110
----------- -------- -----
$ - $ - $ -
=========== ======== =====
CONVERSION OF INTEREST ON CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in accrued liabilities $ (765) $ - $ -
Increase in common stock 13
Increase in additional paid-in capital 752
----------- -------- -----
$ - $ - $ -
=========== ======== =====
CHANGES IN UNEARNED COMPENSATION
FOR VARIABLE OPTIONS:
Decrease in additional paid-in capital $ 19,636 $ - $ -
Decrease in unearned compensation (19,636)
----------- -------- -----
$ - $ - $ -
=========== ======== =====
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
2002 2001 2000
ACCRETION TO THE BENEFICIAL CONVERSION
ON PREFERRED STOCK:
Increase in additional paid-in capital $1,444,757 $ 317,419 $ -
Decrease in additional paid-in capital (1,444,757) (317,419)
---------- --------- -------
$ - $ - $ -
========== ========= =======
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in equipment costs $ 677 - -
Increase in accounts payable (677)
---------- --------- -------
$ - $ - $ -
========== ========= =======
PATENTS COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ 17,321 $ - $ -
Increase in accounts payable (17,321)
---------- --------- -------
$ - $ - $ -
========== ========= =======
(Concluded)
See notes to consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
- ------------------------------------------------------------------------
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:
a. 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.
b. 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.
c. 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.
d. 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.
e. Research and Development Grant Revenues--The Company's grant
arrangements are handled on a reimbursement basis. Grant revenues under
the arrangements are recognized as grant revenue when costs are
incurred.
f. 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
years ended September 30, 2002 and 2001, the Company recorded patent
impairment charges of $39,960 and $30,439 for the net book value of
patents abandoned during the year. These amounts are included in general
and administrative expenses. There were no impairment charges for the
fiscal year ended September 30, 2000.
g. Net Loss Per Common 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.
h. 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.
i. Deferred Financing Costs--Deferred financing costs are capitalized and
expensed over the period the notes are outstanding or on a pro-rata basis
as the notes are converted.
j. Income Taxes--Income taxes are accounted for using the asset and
liability method under which deferred tax liabilities or assets are
determined based on the difference between the financial statement and
tax basis 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.
k. 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.
l. 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.
m Reclassifications--Certain reclassifications have been made to the fiscal
year 2001 and 2000 financial statements to conform with the current-year
presentation.
n. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 is
required to adopt SFAS No. 142 on October 1, 2002. The Company does
not expect that there will be a material impact from the adoption of
SFAS No. 142 on consolidated financial position, results of
operations, or cash flows.
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 does not expect that there will be a material impact from the
adoption of Statement of Financial Accounting Standards No. 143 on its
consolidated financial position, results of operations or cash flows.
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 Accounting
Principles Board Statement ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a segment of a business. The
Company is required to adopt SFAS No. 144 on October 1, 2002. The
Company does not expect that there will be a material impact from the
adoption of SFAS No. 144 on its consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires the classification of
gains and losses from extinguishments of debt as extraordinary items
only if they meet certain criteria for such classification in APB No.
30, "Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions". Any gain or loss on
extinguishments of debt classified as an extraordinary item in prior
periods that does not meet the criteria must be reclassified to other
income or expense. These provisions are effective for fiscal years
beginning after May 15, 2002. Additionally, SFAS No. 145 requires
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. These lease
provisions are effective for transactions occurring after May 15,
2002. The Company does not believe that the adoption of SFAS No. 145
will have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces
"Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No.
146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have a material effect on its consolidated
financial position, results of operations or cash flows.
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 and preferred 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, 2002; however, there can be no assurances that the Company
will be able to raise additional capital or obtain additional financing. To
date, the Company has not generated any revenue from product sales. 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. In fiscal year 2002, the Company reduced its
discretionary expenditures. If necessary, the Company plans to further
reduce discretionary expenditures in fiscal year 2003; however such
reductions would further 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 2003. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure.
3. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 2001, are below. There were no
investments or associated unrealized gains or losses as of September 30,
2002.
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
====================================================
The gross realized gains and losses of sales of investments available-for-sale
for the years ended September 30, 2002, 2001, and 2000, are as follows:
2002 2001 2000
Realized gains $ 2,758 $ 14,997 $ -
Realized losses - (24,828) (49,963)
-------------------------------------------
Net realized gain (loss) $ 2,758 $ (9,831) $ (49,963)
=======================================
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2002 and 2001, consist of the
following:
2002 2001
Research equipment $2,192,054 $2,177,553
Furniture and equipment 265,685 265,581
Leasehold improvements 43,041 41,656
---------- ----------
2,500,780 2,484,790
Less: Accumulated depreciation
and amortization (2,027,225) (1,864,182)
---------- ----------
Net research and office equipment $ 473,555 $ 620,608
========== ==========
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, 2002 and 2001, are as follows:
2002 2001
Depreciation $ (17,244) $ (23,140)
Prepaid expenses (171,626) (300,068)
Net operating loss carryforward 31,578,427 27,611,749
Compensation expense for repriced options - 225,282
Other 7,870 9,422
Less: Valuation allowance (31,397,427) (27,523,245)
--------------------------------------
Net deferred $ - $ -
======================================
The Company has available for income tax purposes net operating loss
carryforwards of approximately $72,739,064, expiring from 2003 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 2002, 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, 2002, 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, 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
Options granted 860,000 0.44
Options exercised - -
Options forfeited (146,632) 1.50
---------
Options outstanding, September 30,
2002 4,073,434 1.10 3,159,938 1.25
==========
At September 30, 2002, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Range of Number Price - Remaining Number Price
Exercise Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
$0.16 - $0.24 20,000 $0.16 9.05 years - $ -
$0.33 - $0.50 435,000 $0.33 9.54 years - $ -
$0.54 - $0.81 291,500 $0.54 9.51 years - $ -
$1.05 - $1.58 2,526,766 $1.07 3.03 years 2,384,269 $ 1.07
$1.67 - $2.51 773,568 $1.81 2.06 years 749,069 $ 1.81
$3.25 - $4.88 25,800 $3.34 4.84 years 25,800 $ 3.34
$6.25 - $9.38 800 $6.25 6.00 years 800 $ 6.25
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, 2002, 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, and therefore, no
compensation expense was recorded. As of September 30, 2002, 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 originally 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. During the year ended September 30, 2002, the change in
the market value of the Company's common stock resulted in the reversal of
$364,532 of compensation expense. Changes in the fair market value of the
Company's stock may result in future changes to compensation expense. As of
September 30, 2002, all options remain outstanding.
In November 2001, the Company extended the expiration date on 242,000
options at $1.05 from the Nonqualified Plans. The options were to expire
between June 2002 and October 2002 and were extended by one year to June
2003 through October 2003. The options had originally been granted between
October 1989 to December 1995. These dates were considered a new measurement
date with respect to all of the modified options. In addition, in February,
April, and July of 2002, the Company modified options outstanding to
employees who had been terminated in conjunction with their change in
employee status so that all options vested on the date of termination. These
dates were considered a new measurement date with respect to all of the
newly vested options. At each of the dates of modification, the exercise
price of the options exceeded the fair market value of the Company's common
stock and no compensation expense was recorded.
Incentive Stock Option Plan--At September 30, 2002, 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, 1999 976,850 $ 3.71 20,688 $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
Options granted 81,000 1.08
Options exercised - -
Options forfeited - -
--------
Options outstanding, September 30, 2002 1,251,100 1.62 1,062,769 1.69
=========
At September 30, 2002, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Range of Number Price - Remaining Number Price
Exercise Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
$1.00 - $1.50 1,006,066 $ 1.08 5.63 years 835,068 $ 1.07
$1.85 - $2.78 81,167 $ 2.00 3.70 years 67,834 $ 2.03
$2.87 - $4.31 33,167 $ 3.35 1.37 years 33,167 $ 3.35
$4.50 - $6.75 129,600 $ 5.06 5.69 years 125,600 $ 5.08
$9.00 - $13.50 1,100 $10.09 3.73 years 1,100 $ 10.09
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, and therefore, no compensation expense was recorded. All options
remain outstanding as of September 30, 2002.
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 originally 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. During the year ended
September 30, 2002, this charge was completely reversed as the stock price
declined. As of September 30, 2002, all options remain outstanding. Changes
in the fair market value of the Company's common stock will result in future
changes in compensation expenses.
In November 2001, the Company extended the expiration date on 56,000 options
at $1.05 from the Incentive Stock Option Plans. The options were to expire
between November 2002 and December 2002, and were extended by one year to
November 2003 to December 2003. The options had originally been granted
between November 1999 and December 1992. This date was considered a new
measurement date with respect to the modified options. In addition, in
February, April, and July of 2002, the Company modified options outstanding
to employees who had been terminated in conjunction with their change in
employee status so that all options vested on the date of termination. At
each of the dates of modification, the exercise price of the options
exceeded the fair market value of the Company's common stock and no
compensation expense was recorded.
Stock Bonus Plan--At September 30, 2002, the Company has authorized the
issuance of 1,440,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted shares. During the year ended September 30, 2002, 327,530 shares
with related expenses of $186,594 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. In January 2002, the Company extended the
expiration date further to February 6, 2003. The additional incremental
value at the date of the modification of $5,997 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, 2002.
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. All outstanding options expired during the
year ended September 30, 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. On June 30,
2001, these 10,000 options expired. 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. In September 2002, the remaining 50,000
options at $5.00 expired. 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 were expensed over the life of
the consultant's contracts. All remaining options expired during the year
ended 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 which time they expired.
During fiscal year 1999, the Company granted a 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, 2002, 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. During
fiscal year 2000, all 120,000 options to purchase shares were exercised at
$2.50 per share.
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 to July of 2006. As of
September 30, 2002, all options were outstanding. The fair value of 30,000
options was expensed immediately. The fair value of the remaining 150,000
options was expensed on a monthly basis as the options were earned and vest
over a period of one year. Total compensation of $77,206 was expensed for
these options. 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 3.12% to 4.12%
Expected life of option 3 Years
Expected dividend yield -0-
In connection with the April 2001 common stock purchase agreement discussed
in Note 12, 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 Years
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 12.
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 Years
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.
Warrants were issued in connection with the issuance of the convertible
notes in December 2001 and January 2002. 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. The
warrant price is adjusted every three months 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. 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 was declared effective by the Securities and Exchange
Commission (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. In
accordance with the terms of the warrants, the exercise price was adjusted
to $0.65 per share on January 17, 2002. On April 17, 2002, the price was
adjusted to $0.24, on July 17, the price was adjusted to $0.19, and on
October 17, 2002 the price was adjusted to $0.153. As of September 30, 2002,
$1,460,000 of the notes had been converted into 5,611,344 shares of common
stock. As of November 30, 2002, all convertible notes had been converted
into a total of 6,592,461 shares of the Company's common stock. In addition,
104,500 warrants were exercised during the year ended September 30, 2002,
for proceeds of $22,713. As of September 30, 2002, 855,500 warrants remained
outstanding.
Warrants were also issued in connection with the issuance of the convertible
notes in July and September 2002. The Series G warrants will allow the
holders to purchase up to 900,000 shares of the Company's common stock at a
price equal to $0.25 per share at any time prior to July 12, 2009. 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. The warrant exercise price will be adjusted
every three months 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. 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.
In accordance with the terms of the warrants, the exercise price was
adjusted to $0.18 on December 9, 2002. As of September 30, 2002, all
warrants remain outstanding.
In October 1996, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". 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 APB 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,
---------------------------------------
2002 2001 2000
(In Thousands)
Net loss:
As reported $(8,342,244) $(10,733,679) $(8,478,397)
Pro forma (9,926,665) (12,308,073) (8,908,999)
Net loss per common share:
As reported $(0.35) $ (0.51) $ (0.44)
Pro forma (0.40) (0.58) (0.46)
The weighted average fair value at the date of grant for options granted
during fiscal years 2002, 2001, and 2000, was $0.49, $0.90, and $2.57, 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:
2002 2001 2000
Expected stock risk volatility 90 to 93% 98 to 109% 98%
Risk-free interest rate 4.10 to 4.12% 3.12 to 4.12% 6.32%
Expected life options 5 years 1 to 6 years 4.91 years
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 Company
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, 2002, 2001, and 2000, in connection with this plan was
$71,823, $93,705, and $99,107, 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,
2003 $202,649
2004 57,395
--------
Total minimum lease payments $260,044
========
Rent expense for the years ended September 30, 2002, 2001, and 2000, was
$229,428, $220,903, and $233,559, respectively.
10. NOTE PAYABLE
On November 15, 2001, the Company signed an agreement with Cambrex
Bioscience, Inc., (Cambrex) in which Cambrex provided manufacturing space
and support to the Company during November and December 2001 and January
2002. In exchange, the Company signed a note with Cambrex to pay a total of
$1,172,517, to Cambrex. 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 equipment. The imputed interest on this note has been capitalized
and is being expensed over the life of the loan. As shown in the
consolidated balance sheet, this liability is recorded at September 30,
2002, along with an unamortized discount of $37,500 representing imputed
interest. Interest expense of $262,500 has been recorded on the note for the
year ended September 30, 2002. In December 2002, the Company negotiated an
extension of the note with Cambrex. Per the agreement, the Company will give
Cambrex certain equipment and requires the Company to surrender a security
deposit, which will reduce the amount owed by $225,000. The remaining
balance is payable pursuant to a note due January 2, 2004. In addition, the
agreement requires the Company to pay $150,000 on the note from its next
financing agreement and 10% of all other future financing transactions,
including draws on the equity line-of-credit. There are also conversion
features allowing Cambrex to convert either all or part of the note into
shares of the Company's common stock. The stock can be converted at a price
no lower than $0.22 per share.
11. CONVERTIBLE DEBT
In December 2001, the Company agreed to sell redeemable convertible notes
and Series F warrants, to a group of private investors for proceeds of
$1,600,000, less transaction costs of $276,410 of which $15,116 is included
in deferred financing costs in the accompanying balance sheet as of
September 30, 2002. The notes bear interest at 7% per year and will be due
and payable December 31, 2003. Interest is payable quarterly beginning July
1, 2002. The notes are 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 are 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 $0.57; 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 drawdown 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 entire balance of the convertible notes was initially offset by a
discount of $1,600,000 which represents the relative fair value of the
Series F warrants of $763,000 and a beneficial conversion discount of
$837,000. The discount on outstanding convertible notes will be amortized to
interest expense over the two-year period. Any unamortized discount
associated with the convertible notes is fully amortized to interest expense
upon redemption. As of September 30, 2002, $1,460,000 of the notes had been
converted into 5,611,344 shares of common stock. In addition, $1,512,500 of
the discount had been amortized to interest expense as of September 30,
2002.
The Series F warrants 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. The warrant price is adjusted every three months 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. 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. In accordance with the terms of the warrants, the exercise price
was adjusted to $0.65 per share on January 17, 2002. On April 17, 2002, the
price was adjusted to $0.24, on July 17, 2002, the price was adjusted to
$0.19, and on October 17, 2002, the price was adjusted to $0.153. As of
November 30, 2002, all convertible notes had been converted into a total of
6,592,461 shares of the Company's common stock. In addition, 104,500
warrants were exercised during the year ended September 30, 2002, for
proceeds of $22,713. As of September 30, 2002, 855,500 warrants remained
outstanding.
In July and September 2002, the Company sold convertible notes, plus Series
G warrants, to a group of private investors for $1,300,000 less transaction
costs of $177,370, of which $161,879 is included in deferred financing costs
in the accompanying balance sheet as of September 30, 2002. The notes bear
interest at 7% per year and will be due and payable September 9, 2004.
Interest is payable quarterly beginning October 1, 2002. The notes are
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. At the holder's option the notes are
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 is 76% of the average of the
three lowest daily trading prices of the Company's common stock on the
American Stock Exchange during the 15 trading days immediately prior to the
conversion date. The Conversion Price may not be less than $0.18. However,
if the Company's common stock trades for less than $0.24 per share for a
period of 20 consecutive trading days, the $0.18 minimum price will no
longer be applicable. The Conversion Price will decline from 76% to 60% if
(i) on any trading day after September 9, 2002 the closing daily price of
the Company's common stock multiplied by the total number of shares of
common stock traded on that day is less than $29,977, (ii) the Company
defaults in the performance of any material covenant, condition or agreement
with the holders of the notes or, (iii) the Company's common stock is
delisted from the American Stock Exchange.
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.
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. A portion of the proceeds was initially offset by a
discount of $690,706, which represents the relative fair value of the Series
G warrants of $83,340 and a beneficial conversion discount of $607,366. As
of September 30, 2002, $50,000 of the notes had been converted into 277,778
shares of common stock. In addition, $27,496 of the discount on the debt had
been amortized to interest expense. As of November 30, 2002, $650,000 in
convertible notes had been converted into 4,291,818 shares of common stock.
The Series G warrants will allow the holders to purchase up to 900,000
shares of the Company's common stock at a price equal to $0.25 per share at
any time prior to July 12, 2009. 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. The
warrant exercise price will be adjusted every three months 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. 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. In accordance with the terms of the
warrants, the exercise price was adjusted to $0.18 on December 9, 2002. As
of September 30, 2002, all warrants remain outstanding.
In connection with both the Series F and Series G convertible debt certain
officers and directors of the Company signed a separate agreement. Pursuant
to this agreement, the officers and directors agreed to refrain from selling
any stock owned by them until October 18, 2002.
12. 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 expired December 22, 2001. 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 were 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. During the year ended September 30,
2002, the company sold 2,553,174 shares of its common stock pursuant to this
agreement for net proceeds of $1,366,797.
During fiscal year 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%. During the year ended
September 30, 2002, the Company incurred $202,987 in dividends. Dividends
paid in common stock totaled $133,103, interest expense on unpaid dividends
was $9,404 and accrued dividends and interest payable was $78,436 at
September 30, 2002.
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, 2002.
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 Years
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 years ended September 30,
2002 and September 30,2001, $1,444,757, and $317,419, respectively, 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. During the year ended September 30, 2002,
4,671 shares of the Series E Preferred Stock were converted into 4,282,150
shares of common stock. At September 30, 2002, 1,192 shares of Series E
Preferred Stock remained outstanding.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. 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.
13. NET LOSS PER COMMON SHARE
Basic earnings per share (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 11,118,168 and
6,876,972 potentially dilutive securities outstanding at September 30, 2002
and 2001, respectively, that were not included in the computation of diluted
loss per share because to do so would have been antidilutive 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.
2002 2001 2000
Net loss per common share (basic and diluted) $(0.35) $(0.51) $(0.44)
======= ======= =======
14. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" 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.
******
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 27, 2002 By: /s/ Maximilian de Clara
-----------------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten
-----------------------------------
Geert R. Kersten, Chief Executive
and Chief Financial 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 December 27, 2002
- ------------------------
Maximilian de Clara
/s/ Geert R. Kersten Director December 27, 2002
- ------------------------
Geert R. Kersten
/s/ Alexander G. Esterhazy Director December 27, 2002
- ------------------------
Alexander G. Esterhazy
/s/ D. Richard Kinsolving Director December 27, 2002
- -------------------------
D. Richard Kinsolving
/s/ Peter R. Young Director December 27, 2002
- ------------------------
Peter R. Young
CERTIFICATION
In connection with the Annual Report of Cel-SCI Corporation (the
"Company") on Form 10-K for the year ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I Geert
Kersten, the Chief Executive and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects the financial condition and results of the Company.
Date: December 27, 2002
By: /s/ Geert Kersten
--------------------------------
Geert Kersten, Chief Executive
and Chief Financial Officer
CERTIFICATION PURSUANT TO THE
SARBANES-OXLEY ACT
I, Geert R. Kersten, the Chief Executive and Financial Officer of CEL-SCI
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of CEL-SCI Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the effectiveness of
the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 27, 2002 /s/ Geert R. Kersten
-----------------------------------
Geert R. Kersten
Chief Executive and Financial Officer