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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, 1996.
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.)
66 Canal Center Plaza, Suite 510
Alexandria, Virginia 22314
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 549-5293
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 20, 1996, as quoted on the NASDAQ System, was approximately
$33,085,000. Shares of Common Stock held by each officer, director and
principal shareholder have been excluded in that such persons may be
deemed to be affiliates of the Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 17, 1996, the Registrant had 8,382,562 shares
of Common Stock issued and outstanding.
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PART I
TEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado
corporation during March l983, to acquire and finance research and
development of natural human interleukin-2 ("IL-2") and lymphokine-related
products and processes using the Company's proprietary cell culture
technologies. The Company's proprietary product is sometimes referred to
as MULTIKINETM, or buffy-coat interleukins, which is a combination, or
"cocktail" of IL-2 and certain lymphokines and cytokines. MULTIKINE is a
trade name of the Company. The Company was initially formed under the
name Interleukin-2, Inc. and changed its name to CEL-SCI Corporation in
March, 1988. The compounds, compositions and pro-
esses, to which the Company has acquired an exclusive world-wide license,
are being tested to determine if they are effective in improving the
immune re- sponse of advanced cancer patients.
Since its inception the focus of the Company's product
development efforts has been on conducting clinical trials to test its
proprietary tech nologies. The Company intends to continue testing its
MULTIKINE product in clinical trials with the objective of establishing
its efficacy as a treatment for solid tumors and possibly other diseases.
An additional aim of the Com- pany is to further corroborate the present
data (obtained in connection with the Company's research programs and
human clinical trials) in regard to the ability of MULTIKINE to restore
the immune system of people suffering from certain illnesses.
The cost of acquiring its exclusive license and the costs
associated with the clinical trials relating to the Company's MULTIKINE
technologies, the cost of research at various institutions and the
Company's administrative ex- penses have been funded with the public and
private sales of shares of the Company's Common Stock and borrowings from
third parties, including affiliates of the Company.
In October 1995 Viral Technologies, Inc. ("VTI") became a wholly
owned subsidiary of the Company. VTI is engaged in the development of a
possible vaccine for AIDS. VTI's technology may also have application in
the treatment of AIDS-infected individuals and the diagnosis of AIDS. VTI
is currently conducting Phase I human clinical trials using the HGP-30
vaccine.
PRODUCT DEVELOPMENT PLAN
In March l995, the Canadian Health Protection Branch, Health and
Welfare Ministry gave clearance to the Company to start a phase I/II
cancer study using MULTIKINE. The study, which will enroll up to 30 head
and neck cancer patients who have failed conventional treatments, is
designed to evaluate safety, tumor responses and immune responses in
patients treated with multiple courses of MULTIKINE. The length of time
that each patient will remain on the investigational treatment will depend
on the patient's response to treatment. In May l995, the U.S. Food and
Drug Administration (FDA) authorized the export of the Company's MULTIKINE
drug to Canada for purposes of this study.
In February 1996 the FDA authorized the Company to conduct two
human clinical studies using MULTIKINE. The studies will focus on
prostate and head and neck cancer. The prostate study is being conducted
at Jefferson Hospital in Philadelphia, Pennsylvania and will involve up to
15 prostate cancer pa- tients who have failed on hormonal therapy. The
head and neck cancer study will involve up to 30 cancer patients who have
failed using conventional ther- apies and will be conducted in part at
Wayne State University in Detroit, Michigan. The Company is currently
evaluating additional clinical centers in the U.S. for purposes of the
study. The head and neck cancer study in the U.S. will be conducted in
conjunction with the Company's Canadian head and neck cancer study.
Viral Technologies, Inc. ("VTI") completed its Phase I trials in
California and in April 1995, with the approval of the California Food and
Drug Branch ("FDB"), started a new clinical study with the HGP-30 AIDS
vaccine. The study involved HIV-negative volunteers who participated in
the 1992 Phase I study. Following vaccinations with HGP-30, certain
volunteers donated blood for a SCID mouse HIV challenge study. Infection
in the SCID mice by virus was determined and confirmed by two different
assays. Approximately 78% of the SCID mice given blood from vaccinated
volunteers showed no HIV infection after virus challenge as compared to
13% of the mice given blood from unvaccinated donors. In December 1995
VTI, with permission from the FDB, began Phase I human clinical trials
with HIV-infected volunteers. See "Viral Technologies, Inc." below for
additional information concerning VTI.
There can be no assurance that either the Company or VTI will be
successful in obtaining approvals from any regulatory authority to conduct
further clinical trials or to manufacture and sell their products. The
lack of regu- latory approval for the Company's or VTI's products will
prevent the Company and VTI from generally marketing their products.
Delays in obtaining regula- tory approval or the failure to obtain
regulatory approval in one or more countries may have a material adverse
impact upon the Company's operations.
BACKGROUND OF HUMAN IMMUNOLOGICAL SYSTEM
The function of the immunological system is to protect the body
against infectious agents, including viruses, bacteria, parasites and
malig nant (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 combatted effectively
and recovery follows. Severe infection can occur when the immune response
is inadequate. Such immune defi- ciency 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 chemo- therapeutic 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
sub stance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation
by Bcells, 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 mac- rophages are controlled, to a large extent, by a
specific group of hormones called lymphokines. Lymphokines regulate and
modify the various functions of both T-cells and B-cells. There are many
lymphokines, each of which is thought to have distinctive chemical and
functional properties. IL-2 is but one of these lymphokines and it is on
IL-2 and its synergy with other lymphokines that the Company has focused
its attention. Scientific and medical investiga- tion 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 lymphokines and cytokines support T-cell and B-cell
prolifera- tion. However, IL-2 is the only known lymphokine or cytokine
which causes the proliferation of T-cells. IL-2 is also known to activate
B-cells in the ab- sence of B-cell growth factors.
Although IL-2 is one of the best characterized lymphokines 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 lymphokines and cytokines,
i.e. as a "cocktail". This approach, which was pioneered by the Company,
makes use of the synergism between these lymphokines. 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 lymphokine re
search 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 indi- cated a correlation between administration of MULTIKINE to
advanced cancer pa- tients and immunological responses. On the basis of
these experimental re- sults, the Company believes that MULTIKINE may have
application for the treat- ment of solid tumors in humans.
The Company foresees three potential anti-cancer therapeutic uses
for MULTIKINE: (i) direct administration into the human body (in vivo) as
a modu- lator of the immune system, (ii) activation of a patient's white
blood cells outside the body with MULTIKINE, followed by returning these
activated cells to the patient; and (iii) a combination of (i) and (ii).
RESEARCH AND DEVELOPMENT
In the past, the Company conducted its research pursuant to
arrange ments with various universities and research organizations. The
Company pro vided grants to these institutions for the conduct of specific
research pro jects as suggested by the Company's scientists based upon the
results of pre viously completed projects.
In October 1994 the Company to consolidated its research
activities in its own laboratory. See Item 2 of this report.
Between 1983 and 1986 the Company was primarily involved in
funding pre-clinical and Phase I clinical trials of its proprietary
MULTIKINE tech nologies. These trials were conducted at St. Thomas's
Hospital Medical School located in London, England under the direction of
Dudley C. Dumonde, M.D., PhD., a former member of the SAB, and pursuant to
approvals obtained from England's Department of Health and Social
Security.
In the Phase I trial in England (completed in 1987), forty-nine
pa tients suffering with various forms of solid cancers, including
malignant melanoma, breast cancer, colon cancer, and other solid tumor
types were treated with MULTIKINE. The product was administered directly
into the lymphatic system in a number of patients. Significant and
lasting lymphnode responses, which are considered to be an indication of
improvement in the patient's immune responses, were observed in these
patients. A principal conclusion of the Phase I trials was that the side
effects of the Company's products in forty-nine patients were not severe,
the treatment was well tolerated and there was no long-term toxicity.
The results of the Phase I clinical study were encouraging, and
as a result the Company established protocols for future clinical trials.
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 pro- duct. The focus of the trial was unresectable
head and neck cancer (which is presently untreatable) and was the first
time that the natural MULTIKINE was administered to cancer patients in a
clinical trial in the United States.
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 termi- nal cancer. The patients had low levels of
lymphocytes and evidence of immune deficiency (generally a characteristic
of this type of cancer).
Significant tumor reduction occured 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.
See "Product Development Plan" above for information concerning
the Company's research and development plans.
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
ac cordingly, 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.
Since 1983, and through September 30, 1996, approximately
$12,976,000 has been expended on Company-sponsored research and
development, including ap- proximately $3,471,000, $1,825,000, and
$2,896,000 during the years ended Sep- tember 30, 1996, 1995 and 1994,
respectively. Research and development expenditures prior to October 1995
do not include amounts spent by Viral Technolo- gies, Inc. on research and
development. Since May, 1986 (the inception of VTI) and through September
30, 1996, VTI has spent approximately $3,964,000 on research and
development.
The Company has established a Scientific Advisory Board ("SAB")
com prised of scientists distinguished in biomedical research in the field
of lymphokines 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. Members of
the SAB receive $500 per month from the Company and have also been granted
options (for serving as members of the SAB) which collectively allow for
the purchase of up to 15,000 shares of the Company's Common Stock. The
options are exercisable at prices ranging from $13.80 to $19.70 per share.
The members of the Company's SAB are:
Dr. Michael Chirigos - former head of the Virus and Disease
Modifi cation Section, National Institutes of Health (NIH), National
Cancer Institute (NCI) from 1966-1981 and the Immunopharmacology Section,
NIH, NCI, Biological Response Modifier Program until 1985.
Dr. Evan M. Hersh - Vice-Chairman, Department of Internal
Medicine, Chief, Section of Hematology/Oncology, Department of Internal
Medicine, Tucson, AZ. Director of Clinical Research, Arizona Cancer
Center, Tucson.
Dr. Michael J. Mastrangelo - Director, Division of Medical Oncolo
gy; Professor of Medicine, Jefferson Medical College, Philadelphia, Penn
sylvania; and Associate Clinical Director, Jefferson Cancer Center,
Philadelphia, Pennsylvania.
Dr. Alan B. Morris, PhD. - Professor, Department of Biological
Sciences, University of Warwick, Coventry, U.K.
VIRAL TECHNOLOGIES, INC.
Prior to October 1995, Viral Technologies, Inc. ("VTI"), a
Delaware corporation, was 50% owned by the Company and 50% owned by Alpha
1 Biomedicals, Inc. VTI is developing a vaccine technology that may
prove of commercial value in the prevention, diagnosis and treatment of
AIDS. VTI holds the proprietary rights to certain synthesized components
of the p17 gag protein, which is the outer core region of the AIDS virus
(HIV-1). In October 1995, the Company acquired Alpha 1's interest in VTI
in exchange for 159,170 shares of the Company's common stock.
VTI is involved in the development of a prototype preventive and
therapeutic vaccine against AIDS that is based on HGP-30, a thirty amino
acid synthetic peptide derived from the p17 region of the AIDS virus.
Evidence compiled by scientists at George Washington University from
toxicology studies with different animal species indicates that the HGP-
30 prototype vaccine does not appear to be toxic in animals. The HGP-30
vaccine being tested differs from most other vaccines candidates in that
its active component, the HGP-30 peptide, is derived from the p17 core
protein particles of the virus. Since HGP-30 is a totally synthetic
molecule containing no live virus, it cannot cause infection. Unlike the
envelope (i.e. outside) proteins, the p17 region of the AIDS virus
appears to be relatively nonchanging. In January, 1991, VTI was issued a
United States patent covering the production, use and sale of HGP-30.
HGP-30 may also be effective in treating persons infected with the AIDS
virus.
Approval to start Phase I human clinical trials in Great Britain
using VTI's prototype AIDS vaccine HGP-30 was granted in April 1988. The
trial, the first in the European common market, began in May 1989 with 18
healthy (HIV- negative) volunteers given three different dosages and was
completed in Decem- ber 1990. The trial results indicated that five of
eight volunteers vacci- nated with HGP-30, and whose blood samples were
able to be tested, produced "killer" T-cell responses. The vaccine also
elicited cellmediated immunity responses in 7 out of 9 vaccinated
volunteers and antibody responses in 15 out of 18 vaccinated volunteers.
In March 1990, the California Department of Health Services Food
and Drug Branch (FDB) approved the first human testing (Phase I trials)
in the United States of HGP-30. The trials were conducted by scientists
at the University of Southern California and San Francisco General
Hospital. Twentyone healthy HIV-negative volunteers at medical centers in
Los Angeles and San Francisco received escalating doses of HGP-30 with no
clinically significant adverse side effects. The clinical studies
confirmed earlier clinical trials in London.
In April 1995 VTI, with the approval of the FDB, began another
clinical trial in California using volunteers who received two
vaccinations. The volunteers receiving the two lowest dosage levels were
asked to donate blood for a SCID mouse HIV challenge study. The SCID
mouse is considered to be the best available animal model for HIV because
it lacks its own immune system and therefore permits human cell growth.
White blood cells from the five (5) vac- cinated volunteers and from
normal donors were injected into groups of SCID mice. They were then
challenged with high levels of a different strain of the HIV virus than
the one from which HGP-30 is derived. Infection by virus was determined
and confirmed by two different assays, p24 antigen, a component of the
virus core, and reverse transcriptase activity, an enzyme critical to HIV
replication. Approximately 78% of the SCID mice given blood from
vaccinated volunteers showed no HIV infection after virus challenge as
compared to 13% of the mice given blood from unvaccinated donors.
In December 1995 VTI, with permission from the FDB, began Phase I
human clinical trials with HIV-infected volunteers. VTI's AIDS
vaccine/treatment is only in the initial stages of testing and it remains
to be seen if the vaccine/treatment will be effective against the AIDS
virus.
In December l987, VTI signed a licensing agreement with Nippon
Zeon
Co., Ltd. ("Nippon Zeon"), a Japanese chemical manufacturer, granting
Nippon Zeon exclusive rights to VTI's prototype AIDS vaccine and
improvements in the Pacific Area. Under the agreement, VTI received an
initial licensing payment, as well as a pre-commercialization payment, and
was also entitled to receive additional pre-commercialization payments
dependent upon receipt of certain regulatory approvals. In l995 Nippon
Zeon released its rights to VTI's tech- nology in consideration for VTI's
agreement to pay Nippon Zeon a royalty on sales of products made with
VTI's technology in the licensed area. In July l996 Nippon Zeon agreed to
surrender its royalty rights, as well as any other rights it may have had
to VTI's technology, in exchange for 45,000 shares of the Company's common
stock.
Although there has been important independent research showing
the possible significance of the p17 region of HIV-1, there can be no
assurance that any of VTI's technology will be effective in the
prevention, diagnosis or treatment of AIDS. There can be no assurance
that other companies will not develop a product that is more effective or
that VTI ultimately will be able to develop and bring a product to market
in a timely manner that would enable it to derive commercial benefits.
VTI's research and development efforts are presently focused on
the evaluation of second generation formulations and delivery systems for
HGP-30 and related peptides to enhance HIV-specific cellular immune
responses.
In January 1991, VTI was awarded a U.S. patent covering the
exclusive production, use and sale of HGP-30. This patent is thought to
be the first U.S. patent for a portion of a "core" protein of the HIV
virus. In February 1993, VTI was awarded a European patent covering HGP-
30 and certain other peptides.
T-CELL MODULATION PROCESS
In January 1996 the Company acquired a new patented T-cell
Modulation Process which uses "heteroconjugates" to direct the body to
choose a specific immune response. The heteroconjugate technology 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. Admin- istered like vaccines,
heteroconjugates combine 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
be
cause many diseases are often not combatted effectively due to the body's
selection of the "inappropriate" immune response. The capability to
specifi cally 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 new technology to improve the
cellu lar immune response of VTI's HIV HGP-30 immunogen which is currently
in two clinical studies. In addition, the Company intends to use the
technology to develop a potential Tuberculosis (TB) vaccine/treatment. TB
is the largest killer of all infectious diseases worldwide and new strains
of drug resistant TB are emerging daily. The technology is also a
potential platform technology which could also work with many other
peptides. Using this new technology, the Company is currently conducting
in vitro laboratory and in vivo animal studies.
In August 1996 the Company signed a 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
Company's heteroconjugate technology. Malaria affects about 300-500
million people per year and is responsible for about 2.7 million deaths
annually. It is a parasitic disease transmitted by mosquitoes. As with
tuberculosis, the emergence of drug resistant strains is a major problem,
as is the emergence of mosquitoes which are resistant to traditional
insecticides. While at the present the number of malaria cases are not a
major problem in the continential 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.
In October 1996 the Company and Northeastern Ohio University
College of Medicine signed a Collaborative Research Agreement to jointly
identify and evaluate Herpes Simplex Virus related peptides. This study
will make use of the Company's new heteroconjugate technology which
combines T-cell binding ligands with small, disease associated, peptide
antigens. Research conducted pursuant to this study may lead to the future
development of a herpes vaccine.
Conservative estimates of those individuals who have genital
infec tions are 30-40 million in the U.S. Oral herpetic infections are of
a greater frequency. In newborns or in immunosuppressed patients (e.g.
AIDS) herpes can lead to serious illness and death. Vaccination against
herpes simplex virus may prevent or treat herpes simplex infection.
Unlike most other viruses, once infected, a herpes virus remains in hiding
within an individual and is reactivated often by stress-inducing factors.
For some individuals, recurren- ces may take place on a monthly basis.
Although there are antiviral drugs which are used to prevent serious
disease and lessen the symptoms, there is currently no method to
effectively prevent initial infection, to eliminate the virus from an
infected person, or to prevent recurrences.
Scientists at Northeastern Ohio University College of Medicine
have been working on methods of treating and detecting the herpes virus
for over fifteen years.
The T-cell Modulation technology was acquired from Cell-Med,
Incor porated ("CELL-MED") in consideration for the Company's agreement to
pay certain liabilities of CELL-MED in the amount of approximately $6,000.
If the Company elects to retain ownership in the technology after March
30, 1997, the Company must pay CELL-MED $200,000, plus additional payments
ranging between $100,000 and $600,000, depending upon the Company's
ability to obtain regu- latory approval for clinical studies using the
technology. In addition, should the Company receive FDA approval for the
sale of any product incorpor-
ating the technology, the Company is obligated to pay CELL-MED an advance
royalty of $500,000, a royalty of 5% of the sales price of any product
using the technology, plus 15% of any amounts the Company receives as a
result of sublicensing the technology. So long as the Company retains
rights in the technology, the Company has also agreed to pay the future
costs associated with pursuing and or maintaining CELL-MED's patent and
patent applications relating to the technology. CELL-MED has been issued
patents in Australia and from the European Patent Office covering the
technology and has several U.S. and foreign patent applications pending.
COMPOUNDS AND PROCESSES LICENSED TO THE COMPANY
The Company acquired from Sittona Company, B.V., a Netherlands
corporation ("Sittona"), the exclusive worldwide rights to patented IL-2
com pounds, compositions and other processes and other lymphokine-related
com pounds, compositions and processes which are the subject of various
patents, patent applications and disclosure documents filed with the
United States Pa tent and Trademark Office as well as similar agencies of
various foreign coun-
tries. Sittona acquired its rights in the foregoing products and
technology from Hooper Trading Company N.V., and Shanksville Corporation
N.V., both Netherland Antilles corporations. Pursuant to the terms of the
license, the Company must pay to Sittona a royalty of l0% of all net sales
received by the Company in connection with the manufacture, use or sale of
the licensed compounds, compositions and processes and a royalty of l5% of
all license fees and royalties received by the Company in connection with
the grant by the Company of any sublicenses for the manufacture, use or
sale of the licensed compounds, compositions and processes. On November
30, l983, a $l.4 million advance royalty was paid by the Company to
Sittona to acquire the license. The license also requires the Company to
bear the expense of preparing, filing and processing patent applications
and to obtain and maintain patents in the United States and foreign
countries on all inventions, developments and improvements made by or on
behalf of the Company relating to the licensed compounds, compo- sitions
and processes. In this regard the Company has caused patent applica- tions
to be filed in
several foreign countries and has undertaken the pro- cessing of
previously filed patent applications. The exclusive license is to remain
in effect until the expiration or abandonment of all patent rights or
until the compounds, compositions and processes enter into the public
domain, whichever is later. Sittona may also terminate the license for
breach of the agreement, fraud on the part of the Company, or the
bankruptcy or insolvency of the Company. Sittona, Hooper Trading Company
and Shanksville Corporation were formerly controlled by Maximilian de
Clara, the Company's President. See Item 13 of this report.
In 1987 a German company filed an opposition with the European
Patent Office with respect to one of the Company's European patents,
alleging that certain aspects of the patent in question were previously
disclosed to inven- tors during a conference held in Germany. A hearing
on the opposition was held and on October 12, 1990 the European Patent
Office rejected the opposi- tion. The German company filing the
opposition appealed the decision of the European Patent Office. In 1992
the Appellate Tribunal of the European Patent Office upheld the Company's
process claims in the patent, while two minor claims were denied. The
Company does not believe that the denial by the Euro- pean Patent Office
of these two minor process patent claims impairs the value of this patent
in any significant degree.
In February 1996 the Company filed a lawsuit against ImmunoRx
and Dr. John Hadden for contract breach, tortious interference of
contract and patent infringement concerning the Company's MULTIKINE drug.
The lawsuit, filed in the U.S. District Court for the Middle District of
Florida, seeks damages and the termination of certain research and
clinical studies being conducted by ImmunoRx and Dr. Hadden. From 1984
to 1992, Dr. Hadden consulted with the Company, performed research on
MULTIKINE and manufactured MULTIKINE for the Company's head and neck
cancer study in Florida. In early 1993, Dr. Hadden signed a separation
agreement with the Company acknowledging the Company's ownership of both
MULTIKINE and the research results. The Company has learned that Dr.
Hadden and ImmunoRx are apparently making copies of MULTIKINE, in
contravention of the separation agreement and the patents covering
MULTIKINE, and have begun clinical studies in a foreign country using a
copy of MULTIKINE.
Process for the Production of IL-2 and IL-2 Product
The Company's exclusive license includes processes for the
production in high yields of natural human IL-2 using cell culture
techniques applied to normal human cells. Based upon the results of the
Company's research and human clinical trials, the Company believes that
"natural" IL-2 produced by cell culture technologies, such as the
Company's proprietary products, may have advantages over genetically
engineered, bacteria-produced IL-2 ("recombi- nant IL-2") manufactured by
other companies. There are basically two ways to produce IL-2 on a
commercial scale: (1) applying genesplicing techniques using bacteria or
other microorganisms to produce recombinant IL-2; or, (2) apply- ing cell
culture technology using mammalian cells. Substantive differences exist
between recombinant IL-2 and IL-2 produced through cell culture technol-
ogy. For example: (1) cell cultured IL-2 is glycosylated (has sugars at-
tached). Sugar attachments play a
crucial role in cell recognition and have a significant effect on how
fast a body clears out proteins. Proteins produced through bacteria have
no sugar attachments and while recombinant IL-2 products produced from
recombinant yeast or insect cells are glycosylated, they are not so to
the right degree, or at the right locations. Cell cultured IL-2 has the
"right" sugar attachments at the right places; (2) there are also
structural differences related to folding (the way human proteins work
depends on their sequence folding); and (3) the cell cultured IL-2
"cocktail" is administered in small dosages as pioneered by Company
researchers. This formulation and dosage mimics the way immune
regulators are naturally found and function with- in the body. This
stands in stark contrast to the huge dosages required when recombinant IL-
2 is administered to patients. In addition, patients treated with
recombinant
IL-2 usually suffer severe side effects.
Although mammalian cells (other than human cells) could be
genetically engineered to produce glycosylated IL-2 in larger quantities
than are produced by the Company's method, such mammalian cells could not
be genetically engineered to produce the combination of human lymphokines
and cytokines, which together with human glycosylated IL-2 form the
MULTIKINE product used by the Company. The Company is of the opinion that
glycosylated IL-2 genetically produced from mammalian cells must be
administered in large dosages before any benefits are observed. Even
then, the Company believes that only a small per- centage of patients will
benefit from treatments consisting only of glycosy- lated IL-2. In
addition, large dosages of glycosylated IL-2 can, as with re- combinant IL-
2, result in severe toxic reactions. In contrast, the Company
believes the synergy between glycosylated IL-2 and certain other
lymphokines/ cytokines allows MULTIKINE to be administered in low dosages,
thereby avoiding the severe toxic reactions which often result when IL-2
is administered in large dosages.
The technology licensed to the Company includes the basic
production method employing the use of normal white blood cells, an
improved production method based in part on this basic production method,
a serumfree and mitogenfree IL-2 product, and a method for using this
product in humans. Mitogens are used to stimulate cells to produce
specific materials (in this case, IL-2). Mitogens remaining in the product
of cell stimulation can cause allergic and anaphylactic reactions if not
removed from the cell product prior to introduc- tion into the body.
The Company's license also pertains to a cell culture process for
producing interleukin-2 and another type of cell process for producing
serum free and mitogen-free interleukin-2 preparations which avoids a
mitogen stimulation step and uses interleukin-1 and white blood cells.
The Company's license further includes a process for suppressing
graft rejection in organ transplantation. This process employs the use of
an agent which blocks the activity of IL-2 in proliferating T-cells which
would other- wise destroy the transplanted organ. The Company regards
further research and development of this process to involve a financial
commitment beyond its pre- sent ability; thus, the Company does not
presently intend to conduct further research into, or development of, this
process.
The Company has an agreement with an unrelated corporation for
the production, until 1997, of MULTIKINE for research and testing
purposes. At present, this is the Company's only source of MULTIKINE. If
this corporation could not, for any reason, supply the Company with
MULTIKINE, the Company estimates that it would take approximately six to
ten months to obtain supplies of MULTIKINE under an alternative
manufacturing arrangement. The Company does not know what cost it would
incur to obtain this alternative source of supply.
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 and manufacture of
pharmaceutical 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 ob
tained. Certain states, however, have passed laws which allow a state
agency having functions similar to the FDA to approve the testing and use
of pharmaceutical products within the state. In the case of either FDA or
state regulation, preclinical testing programs on animals, followed by
three phases of clinical testing on humans, are typically required in
order to establish product safety and efficacy.
The first stage of evaluation, preclinical testing, must be
conducted in animals. After lack of toxicity has been demonstrated, the
test results are submitted to the FDA (or state regulatory agency) along
with a request for approval for further testing which includes the
protocol that will be followed in the initial human clinical evaluation.
If the applicable regulatory auth- ority does not object to the proposed
experiments, the investigator can pro- ceed 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").
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") must be filed 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 and
quality control to ensure full technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. There can be no assurance that
regulatory approval will ever be obtained for products developed by the
Company. Approval of drugs and biologicals by regulatory authorities of
most foreign countries must also be obtained prior to initiation of
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 ap
proval from state authorities or conducted in foreign countries will be
accepted by the FDA. Product licensure in a foreign country or under
state authority 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
manufacturing and marketing of any Company product is, in all likelihood,
many years away.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental
institutions are conducting research on lymphokines. Competition in the
development of therapeutic agents and diagnostic products incorporating
lymphokines is in- tense. Large, well-established pharmaceutical
companies are engaged in lymph- okine research and development and have
considerably
greater resources than the Company has to develop products. The
establishment by these large compan- ies of in-house research groups and
of joint research ventures with other en- tities is already occurring in
these areas and will probably become even more prevalent. In addition,
licensing and other collaborative arrangements be- tween governmental and
other nonprofit institutions and commercial enterpris- es, as well as the
seeking of patent protection of inventions by nonprofit in- stitutions
and researchers, could result in strong competition for the Com- pany.
Any new developments made by such organizations may render the Com-
pany'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 IL2 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 be- lief, based upon growing scientific
evidence, that its
natural IL-2 products have advantages over the genetically engineered, IL-
2like 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 immu- nological system as a foreign agent,
leading to a measurable antibody build-up and thereby possibly voiding
their therapeutic value. Furthermore, the Com- pany'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 lymphokines 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.
Competition to develop treatments for the control of AIDS is
intense. Many of the pharmaceutical and biotechnology companies around the
world are devoting substantial sums to the exploration and development of
technologies useful in these areas. VTI's development of its experimental
HGP-30 AIDS Vac- cine, if successful, would likely face intense
competition from other compan- ies seeking to find alternative or better
ways to prevent and treat AIDS.
Both the Company and VTI may encounter problems, delays and
additional expenses in developing marketing plans with outside firms. In
addition, the Company and VTI may experience other limitations involving
the proposed sale of their products, such as uncertainty of third-party
reimbursement. There is no assurance that the Company or VTI can
successfully market any products which they may develop or market them at
competitive prices.
The clinical trials funded to date by VTI have not been approved
by the FDA, but rather have been conducted pursuant to approvals obtained
from certain states. Since the results of these clinical trials may not
be accepted by the FDA, companies which are conducting clinical trials
approved by the FDA may have a competitive advantage in that the products
of such companies are further advanced in the regulatory process than
those of VTI. ITEM 2. PROPERTIES
The Company's MULTIKINE product used in its pre-clinical and
Phase I clinical trials in England was manufactured at a pilot plant at
St. Thomas' Hospital Medical School using the Company's patented
production
methods and equipment owned by the Company. The MULTIKINE product used
in the Florida clinical trials was manufactured in Florida. In
February, 1993, the Company signed an agreement with a third party
whereby the third party constructed a facility designed to produce the
Company's MULTIKINE product. The Company paid the third party the cost
of constructing this facility (approximately $200,000) in accordance
with the Company's specifications.
In October, 1994 the Company completed the construction of a
research laboratory in space leased by the Company. The cost of
modifying and equipping this space for the Company's purposes was
approximately $1,200,000.
The Company leases office space at 66 Canal Center Plaza,
Alexandria, Virginia at a monthly rental of approximately $8,200 per
month. The Company believes this arrangement is adequate for the conduct
of its present business.
ITEM 3. LEGAL PROCEEDINGS
In February 1996 the Company filed a lawsuit against ImmunoRx
and Dr. John Hadden for contract breach, tortious interference of
contract and patent infringement concerning the Company's MULTIKINE drug.
The lawsuit, filed in the U.S. District Court for the Middle District of
Florida, seeks damages and the termination of certain research and
clinical studies being conducted by ImmunoRx and Dr. Hadden. From 1984
to 1992, Dr. Hadden consulted with the Company, performed research on
MULTIKINE and manufactured MULTIKINE for the Company's head and neck
cancer study in Florida. In early 1993, Dr. Hadden signed a separation
agreement with the Company acknowledging the Company's ownership of both
MULTIKINE and the research results. The Company has learned that Dr.
Hadden and ImmunoRx are apparently making copies of MULTIKINE, in
contravention of the separation agreement and the patents covering
MULTIKINE, and have begun clinical studies in a foreign country using a
copy of MULTIKINE. The Company believes the primary defense of Dr. Hadden
and ImmunoRx to the Company's lawsuit will be to challenge the validity
of the Company's MULTIKINE patents. See Item 1 of this report.
Other than the foregoing, the Company is not a party to any
pending legal proceedings.
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, 1996, there were approximately 3,000 record
holders of the Company's Common Stock and approximately 100 record
holders of the Company's Warrants. As of November 30, 1996 the Company
had issued 3,500 shares of Series A Preferred Stock and 5,000 shares of
Series B Preferred Stock. All the outstanding shares of the Series A
Preferred Stock have since been converted into 632,041 shares of the
Company's Common Stock. There is no public market for the Series B
Preferred Stock. The Company's Common Stock and Warrants are traded on
the National Association of Securities Dealers Automatic Quotation
("NASDAQ") System. Set forth below are the range of high and low bid
quotations for the periods indicated as reported by NASDAQ, and as
adjusted for the 10 for 1 reverse stock split which was approved by the
Com- pany's shareholders on April 28, 1995 and became effective on May 1,
1995. The market quotations reflect interdealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transac- tions.
Quarter
Ending Common Stock Warrants
High Low High Low
12/31/94 $ 7.50 $ 3.40 $0.25
$0.09
3/31/95 $ 4.00 $ 3.75 $0.22
$0.13 6/30/95 $ 5.30 $ 2.78 $0.15
$0.06
9/30/95 $ 5.46 $ 3.56 $0.28
$0.09
12/31/95 $ 4.75 $ 2.28 $0.25
$0.09
3/31/96 $ 7.12 $ 2.68 $0.28
$0.03
6/30/96 $14.38 $ 4.56 $0.41
$0.16
9/30/96 $12.00 $ 5.62 $0.44
$0.21
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 dividends 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. ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the more detailed financial statements, related notes and other
financial information included herein.
For the Years Ended September 30,
1996 1995 1994 1993 1992
Investment Income &
Other Revenues $ 322,370 $ 423,765 $ 624,670 $ 997,964 $
434,180
Expenses:
Research and
Development 3,471,477 1,824,661 2,896,l09 1,307,042
481,697
Depreciation
and Amortization 290,829 262,705 138,755 55,372
33,536
General and
Administrative 2,882,958 1,713,912 1,621,990 1,696,119
1,309,475
Equity in loss of
joint venture 3,772 501,125 394,692 344,423
260,388
Net Loss $(6,326,666) $(3,878,638) $(4,426,876) $(2,404,992)
$(1,650,916)
Loss per common share $(0.99) $(0.89) $(1.06) $(0.58)
$(0.42)
Weighted average
common shares
outstanding 6,425,316 4,342,628 4,185,240 4,155,431
3,953,233
Balance Sheet Data:
September 30,
1996 1995 1994 1993
1992
Working Capital $10,266,104 $3,983,699 $5,795,191 $10,296,472
$13,043,012 Total Assets 11,878,370 6,359,011 8,086,670
11,633,090 13,769,504
Total Liabilities 294,048 1,516,978 l,407,602 688,231
467,086
Shareholders'
Equity 11,584,322 4,842,033 6,679,068 10,944,859
13,302,4l8
No dividends have been declared on the Company's common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal 1996
Interest income during the year ending September 30, l996 reflects
interest accrued on investments. Other revenues were derived from commercial
services provided by the Company's laboratory. Research and development
expenses
increased significantly due to the Company's new clinical trials as well as the
consolidation of VTI, as explained below.
Prior to October 30, 1995, VTI was owned 50% by the Company and 50% by
Alpha 1 Biomedicals, Inc. Effective October 30, 1995 the Company acquired Alpha
1's interest in VTI in exchange for 159,170 shares of the Company's common
stock.
Prior to this acquisition the Company accounted for its investment in VTI using
the equity method of accounting. Following the acquisition of the remaining 50%
interest in VTI on October 30, 1995, the financial statements of VTI have been
consolidated with those of the Company.
The acquisition of VTI was accounted for under the purchase method of
accounting. Since the acquisition represented primarily research and develop-
ment
costs, the purchase price for the remaining 50% interest in VTI was expensed and
caused research and development expense for the year ended September
30, 1996 to increase.
The consolidation of VTI's financial statements with those of the
Company also had the following effects:
1. Interest income declined from the comparable period in the pre-
vious
year since interest income associated with the Company's loans to VTI was
eliminated upon consolidation.
2. Research and development expenses increased due to the inclusion
of
VTI's research and development expenses with those of the Company.
3. General and administrative expenses increased due to the inclusion
of VTI's general and administrative expenses with those of the Company.
4. Capitalized patent costs increased due to the inclusion of VTI's
patent expenditures with those of the Company.
Fiscal 1995
Revenues for the year ended September 30, 1995 consisted primarily of
interest earned on funds received from the Company's February 1992 public
offering. The interest income and investment balances have declined from the
previous year as funds were used for ongoing expenses and equipping the
Company's
new laboratory. Research and development expenses decreased due to the use of
the
Company's laboratory for research programs and the completion of a research and
development project relating to the Company's manufacturing process. General
and
administrative expenses increased as the result of the expenses (approximately
$100,000) associated with the Company's 1995 annual meeting of shareholders.
The
Company did not have any meetings of its shareholders during fiscal 1994.
Significant components of general and administrative expenses during this year
were salaries and employee benefits ($341,000), automobile, travel and expense
reimbursements ($271,000), shareholder communications and investor relations
($245,000), legal and accounting ($134,000), and officers and directors lia-
bility
insurance ($138,000). Losses associated with the Company's joint venture
interest in VTI increased due to an increase in VTI's research and development
expenditures.
Fiscal 1994
Interest income during the year ending September 30, 1994 decreased
from the prior year as a portion of the Company's investments were sold to pay
for operating expenses. Research and development expenses increased due to the
commencement of several new research projects, all of which pertained to the
Company's MULTIKINE product. Significant components of general and
administrative expenses during this year were salaries and employee benefits
($442,039), travel and expense reimbursements ($294,217), shareholder
communications and investor relations ($267,070), legal and accounting
($151,879), and officers and directors liability insurance ($147,564).
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its
inception in March l983. The Company has relied upon proceeds realized from
the public and private sale of its Common Stock to meet its funding
requirements. Funds raised by the Company have been expended primarily in
connection with the acquisition of an exclusive worldwide license to certain
patented and unpatented proprietary technology and know-how relating to the
human immunological defense
system, the funding of VTI's research and development program, 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 February, 1992, the Company received net proceeds of approximately
$13,800,000 from the sale, in a public offering, of 517,500 shares of Common
Stock and 5,175,000 Warrants. Every ten Warrants entitle the holder to
purchase one additional share of Common Stock at a price of $15.00 per share
prior to February 7, 1997.
In June and September, l995, the Company completed private offerings
whereby it sold a total of 1,150,000 units at $2.00 per unit. Each unit
consisted of one share of Common Stock and one Warrant. Each Warrant entitles
the holder to purchase one additional share of Common Stock at a price of $3.25
per share at any time prior to June 30, 1997. The net proceeds to the Company
from these offerings, after the payment of Sales Agent's commissions and other
offering expenses, were approximately $2,000,000. On November 30, 1995 the
Company and the investors in these Private Offerings agreed to reduce the
exercise price of the Warrants to $1.60 per share in return for the commitment
on the part of the investors to exercise 312,500 Warrants ($500,000) prior to
December 23, 1995 and an additional 312,500 Warrants ($500,000) prior to
January 31, 1996. All Warrants sold in this Offering have since been
exercised.
In March 1996 the Company sold $l,250,000 of Convertible Notes
("Notes") to two persons. The Notes were convertible from time to time in
whole or in part, into shares of the Company's Common Stock. The conversion
price was the lesser of (i) $5 per share or (ii) 80% of the average closing bid
price of the Company's Common Stock during the five trading days immediately
preceding the date of such conversion. The
Notes were payable on December 1, 1996 and accrued interest at 10% per annum.
All of the Notes have since been converted into 250,000 shares of the Company's
Common Stock.
In May 1996 the Company sold 3,500 shares of its Series A Preferred
Stock (the "Preferred Shares") for $3,500,000 or $1,000 per share. At the
purchasers' option, up to 1,750 Preferred Shares were convertible, on or after
60 days from the closing date of the purchase of such shares (the "Closing"),
into shares of the Company's Common Stock on the basis of one share of
Preferred Stock
for shares of Common Stock equal in number to the amount determined by dividing
$1,000 by 85% of the Closing Price of the Company's Common Stock. All
Preferred Shares were
convertible, on or after 90 days from the Closing, on the basis of one share of
Preferred Stock for shares of the Company's Common Stock equal in number to the
amount determined by dividing $1,000 by 83% of the Closing Price of the
Company's Common Stock. The term "Closing Price" was defined as the average
closing bid price of the Company's Common Stock over the five-day trading
period ending on the day prior to the conversion of the Preferred Stock. All
outstanding shares of the Series A Preferred Stock have since been converted
into 632,041 shares of the Company's Common Stock. The shares issued upon the
conversion of the Series A Preferred Stock are being offered for public sale by
means of a registration statement filed with the Securities and Exchange
Commission.
In August 1996 the Company sold, in a private transaction, 5,000
shares of its Series B Preferred Stock (the "Series B Preferred Shares") for
$5,000,000 or $1,000 per share. At the purchasers' option, up to 2,500 Series
B Preferred Shares are convertible, on or after ten days from the date the
shares have been registered for public sale (the "Effective Date"), into shares
of the Company's Common Stock on the basis of one share of Preferred Stock for
shares of Common Stock equal in number to the amount determined by dividing
$1,000 by 87% of the Closing Price of the Company's Common Stock. All
Preferred Shares are convertible, on or after 40 days from the Effective Date,
on the basis of one share of Preferred Stock for shares of the Company's Common
Stock equal in number to the amount determined by dividing $1,000 by 85% of the
Closing Price of the Company's Common Stock. The term "Closing Price" is
defined as the average closing bid price of the Company's Common Stock over the
five-day trading period ending on the day prior to the conversion of the
Preferred Stock. Notwithstanding the above, the conversion price may not be
less than $3.60 nor more than $14.75. Each Preferred Share is entitled to a
quarterly dividend, if, as, and when declared by the Board of Directors, of
$17.50. Any Series B Preferred Shares which are outstanding on the second
anniversary of the Effective Date will be automatically converted into shares
of the Company's Common Stock. By means of a Registration Statement filed with
the Securities and Exchange Commission, the shares issuable upon the conversion
of the Series B Preferred Shares have been registered for public sale. Prior
to December 20, 1996 1,900 Series B Preferred Shares were converted into
527,774 shares of the Company's common stock. In December 1996 the Company
repurchased 2,850 Series B Preferred Shares for $2,850,000 plus warrants which
allow the holders to purchase up to 99,750 shares of the Company's common stock
for $4.25 per share at any time prior to December 15, 1999. The Company raised
funds required for this repurchase from the sale of its Series C Preferred
Stock.
In December 1996 the Company raised $2,850,000 from the sale of units
consisting of 2,850 shares of the Comany's Series C Preferred Stock, 379,763
Series A Warrants and 379,763 Series B Warrants. The Series C Preferred Shares
are convertible into shares of the Company's Common Stock on the basis of one
share of Preferred Stock for shares of Common Stock equal in number to the
amount determined by dividing $1,000 by 85% of the Closing Price of the
Company's Common Stock (the "Conversion Price"). The term "Closing Price" is
defined as the average closing bid price of the Company's Common Stock over the
five day trading period ending on the day prior to the conversion of the
Preferred Stock. Notwithstanding the above, the Conversion Price may not be
more than $4.00. Beginning 90 days after December 17, 1996 one half of the
Series C Preferred Shares are convertible into shares of the Commpany's common
stock. All preferred shares are convertible into shares of the Company's
common stock beginning 180 days after December 17, 1996 provided however that
if the Company's common stock trades for more than $8.00 at any time, then all
shares of Preferred Stock will thereafter be immediately convertible into
shares of the Company's common stock. The Preferred Shares are not entitled to
any annual dividends, provided however that if the shares of common stock
issuable upon the conversion of the Series C Preferred Stock have not been
registered for public sale within 90 days after December 17, 1996, then the
Company will pay a dividend (based upon a variable formula) with respect to
each outstanding share of the Series C Preferred Stock. Any Series C Preferred
Shares which are outstanding on December 15, 1998 will be automatically
converted into shares of the Company's Common Stock, provided however the
shares of Common Stock issuable upon the conversion of the Series C
Preferred Shares have been registered for public sale and the Company's Common
Stock is listed on the Nasdaq System. The Preferred Shares have a liquidation
preference over the Company's Common Stock. Each Series A Warrant entitles the
holder to purchase one share of the Company's common stock
at a price fo $4.50 per share at any time prior to March 15, 1998. Each Series
B Warrant entitles the holder to purchase one share of the Company's common
stock at a price of $4.50 per share at any time prior to March 15, 1999. The
Company has agreed to make appropriate filings with the Securities and Exchange
Commission such that the shares issuable upon the conversion of the Series C
Preferred Shares and the exercise of the Warrants will be available for public
sale.
In October, 1994, the Company completed the construction of its own
research laboratory in a facility leased by the Company. The cost of modifying
the leased space and providing the equipment for the research laboratory was
approximately $1,200,000. In August 1994 the Company obtained a loan to fund
the majority of the costs for the research laboratory. The Company repaid this
loan during the quarter ending September 30, 1996.
During fiscal 1997 the Company plans to fund its U.S. and Canadian
clinical trials involving MULTIKINE and the HGP-30 vaccine. It should be noted
that substantial additional funds will be needed for more extensive clinical
trials which will be necessary before the Company or VTI 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.
The Company expects that it will spend approximately $2,500,000 on
research and development during the twelve month period ending September 30,
1997. This amount includes VTI's estimated research and development expenses
during fiscal 1997. Prior to October 1995, VTI's research and development
expenses were
shared 50% by the Company and 50% by Alpha 1 Biomedicals, Inc. VTI became a
whollyowned subsidiary of the Company in October 1995 when the Company
purchased Alpha 1's 50% interest in VTI. The Company plans to use its existing
financial resources to fund its research and development program during this
period.
Other than funding its research and development program and the costs
associated with its research laboratory, the Company does not have any material
capital commitments.
The Company expects that its existing financial resources, will
satisfy the Company's capital requirements at least through September 1998. 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 after that date. However, there can be
no assurance that such financing will be available or be available on favorable
terms.
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 68 Director and President
Geert R. Kersten, Esq. 38 Director, Chief Executive
Officer, Secretary and
Treasurer
Patricia B. Prichep 44 Vice President of
Operations
M. Douglas Winship 46 Vice President of Regulatory
Affairs and Quality
Assurance Dr. Eyal Talor 41 Vice President of Research
and
Manufac-
turing
Dr. Prem S. Sarin 62 Vice President of Research
for
Viral
Technologies, Inc.
Dr. Daniel H. Zimmerman 55 Vice President of Cellular
Immunology
Mark V. Soresi 44 Director
F. Donald Hudson 63 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 secretary and 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 Vice President of
Operations
since March, 1994. Between December, 1992 and March, 1994, Ms. Prichep was the
Company's Director of Operations. From June, 1990 to December, 1992, Ms.
Prichep was the Manager of Quality and Productivity for the NASD's Management,
Systems and Support Department. Between 1982 and 1990, Ms. Prichep was Vice
President and Operations Manager for Source Capital, Ltd.
M. Douglas Winship has been the Company's Vice President of Regulatory
Affairs and Quality Assurance since April, 1994. Between 1988 and April, 1994,
Mr. Winship held various positions with Curative Technologies, Inc., including
Vice President of Regulatory Affairs and Quality Assurance (1991-1994).
Dr. Eyal Talor has been the Company's Vice President of Research and
Manufacturing since March, 1994. From October, 1993 until March, 1994, Dr.
Talor was Director of Research, Manufacturing and Quality Control, as well as
the Director of the Clinical Laboratory, for Chesapeake Biological
Laboratories, Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA
Technologies, Inc., as well as the director of SRA's Flow Cytometry Laboratory
(1991-1993) and Clinical
Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held
various positions with the John Hopkins University, including course
coordinator for the School of Continuing Studies (1989-Present), research
associate and lecturer in the Department of Immunology and Infectious Diseases
(1987-1991), and associate professor (1991-Present).
Prem S. Sarin, Ph.D. has been the Vice President of Research for
Viral Technologies, Inc. (the Company's wholly-owned subsidiary) since May 1,
1993. Dr. Sarin was an Adjunct Professor of Biochemistry at the George
Washington University School of Medicine, Washington, D.C., from 1986-1992.
From 1975-1991 Dr. Sarin held the position of Deputy Chief, Laboratory of
Tumor Cell Biology at the National Cancer Institute (NCI), NIH, Bethesda,
Maryland. Dr. Sarin was a Senior Investigator (1974-1975) and a Visiting
Scientist (1972-1974) at the Laboratory of Tumor Cell Biology at NCI, NIH.
From 1971-1972 Dr. Sarin held the position of Director, Department of
Molecular Biology, Bionetics
Research Laboratory, Bethesda, Maryland.
Daniel H. Zimmerman, Ph.D. has been the Company's 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.
Mark V. Soresi. Mr. Soresi became a director of the Company in July,
1989. In 1982, Mr. Soresi founded, and since that date has been the president
and Chief Executive Officer of REMAC(R), Inc. REMAC(R) is involved in the
cleanup of hazardous and toxic waste dump sites. Mr. Soresi attended George
Washington University in Washington, D.C. where he earned a Bachelor of Science
in Chemistry.
F. Donald Hudson. F. Donald Hudson has been a director of the Company
since May, 1992. From December 1994 to October 1995 Mr. Hudson was President
and Chief Executive Officer of VIMRx Pharmaceuticals, Inc. Between 1990 and
1993, Mr. Hudson was President and Chief Executive Officer of Neuromedica,
Inc., a development stage company engaged in neurological research. Until
January, 1989, Mr. Hudson served as Chairman and Chief Executive Officer of
Transgenic Sciences, Inc. (now TSI Corporation), a publicly held biotechnology
corporation which he founded in January, 1987. From October, 1985 until
January, 1987, Mr. Hudson was
a
director of Organ- ogenesis, Inc., a publicly held biotechnology corporation of
which he was a founder, and for five years prior thereto was Executive Vice
President and a director of Integrated Genetics, Inc., a corporation also
engaged in biotechnology which he co-founded and which was publicly traded
until its acquisition in 1989 by Genzyme, Inc.
All of the Company's officers devote substantially all of their time
on the Company's business. Messrs. Soresi and Hudson, as directors, devote
only a minimal amount of time to the Company.
The Company has an audit committee whose members are Geert R. Kersten
and F. Donald Hudson.
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, 1996.
Annual Compensation Long Term Compensation
Re-
All Other stric-
Other
Annual ted LTIP
Com-
Compen- Stock Options Pay-
pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted outs
tion
pal Position Year (1) (2) (3) (4) (5) (6)
(7)
Maximilian 1996 $225,000 $75,000 $85,016 - 70,000 -
$88
de Clara, 1995 - - $95,181 - 225,000 -
- -
President 1994 - - $93,752 - 70,000 -
- -
Geert R. Kersten, 1996 $172,531 $75,000 $9,420 - 294,000 -
$8,869
Chief Executive 1995 $164,801 - $ 9,426 - 224,750 -
$3,911
Officer, Secretary 1994 $182,539 - $ 8,183 - 50,000 -
$4,497
and Treasurer
M. Douglas Winship, 1996 $119,100 - $2,400 - - -
$2,488
Vice President of 1995 $113,500 - $ 1,200 - 22,000 -
$2,100
Regulatory Affairs
Prem S. Sarin, 1996 $102,379 - - - 32,000 -
$3,160
Vice President of
Research, Infectious
Deseases
Eyal Talor, 1996 $107,458 - $3,000 - 8,000 -
$3,312
Vice President of
Research and
Manufacturing
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or
bonus, including perquisites and other personal benefits, securities
or property. Amounts in the table represent automobile, parking and
other transportation expenses.
(4) During the period covered by the Table, no shares of restricted stock
were issued as compensation for services to the persons listed in the
table. As of September 30, 1996, 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 - -
Geert R. Kersten 95,940 $551,655 M. Douglas Winship
-- -Prem S. Sarin -- -Eyal Talor
1,500 $8,625
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 period covered by the Table.
Includes certain options issued in connection with the Company's l996
Salary Reduction Plan as well as certain options purchased from the
Company. See "Options Granted During Fiscal Year Ending September 30,
l996" below.
(6) "LTIP" is an abbreviation for "Long-Term Incentive Plan". An LTIP is
any plan that is intended to serve as an incentive for performance to
occur over a period longer than one fiscal year. Amounts reported in
this column represent payments received during the applicable fiscal
year by the named officer pursuant to an LTIP.
(7) 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 pre- miums paid by, or on
behalf of, the Company. Amounts in the table repre- sent life
insurance permiums and/or contributions made by the Company to a
401(k) pension plan on behalf of persons named in the table.
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
retire ment plan, qualifying under Section 401(k) of the Internal Revenue
Code and covering substantially all the Company's employees. The
Company's contribution is equal to the lesser of 3% of each employee's
salary, or 50% of the em- ployee's contribution. The 1996 expenses for
this plan were $29,779. 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
$1,500 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: Mr. Soresi and Mr. Hudson. See Stock
Options below for additional information concerning options granted to
the Company's directors.
Employment Contracts
Effective January 2, 1996, the Company entered into a three-year
employment agreement with Mr. de Clara. The employment agreement
provides that during the period between January 2, 1996 and January 2,
1997, the Company will pay Mr. de Clara an annual salary of $300,000.
During the years ending January 2, 1998 and 1999, the Company will pay
Mr. de Clara a salary of $330,000 and $363,000 respectively. 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 lumpsum 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, 1994, the Company entered into a three-year
em ployment agreement with Mr. Kersten. The employment agreement
provides that during the period between August 1, 1994 and July 31, 1995,
the Company will pay Mr. Kersten an annual salary of $198,985. During the
years ending August 31, 1996 and 1997, the Company will pay Mr. Kersten a
salary of $218,883 and
$240,771 respectively. In the event that there is a material reduction
in Mr. Kersten's authority, duties or activities, or in the event there
is a change in the control of the Company, then the agreement allows Mr.
Kersten to resign from his position at the Company and receive a lump-sum
payment from the Com- pany 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.
Pursuant to the agreement, the Company also agreed to grant Mr. Kersten,
in accordance with the Company's 1994 Incentive Stock Option Plan,
options to purchase 50,000 shares of the Company's Common Stock.
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, 1996, Mr. de Clara was the only officer participating
in deliberations of the Company's compensation committee concerning
executive officer compensation. See Item 13 of this report for
information concerning transactions between the Company and Mr. de Clara.
During the year ended September 30, 1996, 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, 1996, 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 Ending September 30, l996
Potential
Individual Grants Realizable
Value at
% of Total Assumed Annual
Rates
Options of Stock
Price Granted to Exercise
Appreciation for
Options Employees in Price Per Expiration Option Term
(3)
Name Granted (#) Fiscal Year Share Date 5%
10%
Maximilian
de Clara 70,000 l6.5% $5.62 9/25/06 $247,l00
$626,500
Geert R.
Kersten 224,000 (1) 53% $2.38 1/10/00 $333,760
$848,960 20,000 (2) 4.7% $3.25 2/21/99 $
40,800
$104,800
50,000 4.8% $5.62 9/25/06 $l76,500
$447,500
M. Douglas
Winship -- -- -- -- --
- --
Prem S.
Sarin 20,000 (1) 4.7% $2.38 1/10/00 $ 29,800 $
75,000
12,000 2.8% $5.62 9/25/06 $ 42,360
$l07,400
Eyal Talor 8,000 (1) l.9% $2.38 1/10/00 $ 11,920 $
30,320
(1) Options were granted in accordance with the Company's 1996 Salary
Reduction Plan. Pursuant to the Salary Reduction Plan, any employee
of the Company was allowed to receive options in exchange for a one-
time reduction in such employee's salary.
(2) Option was acquired in connection with the purchase of 20,000 shares
of the Company's common stock in February l996. In this transaction,
Mr. Kersten paid $2.50 for one share of common stock and one option.
The options are exercisable at $3.25 per share and expire on February
2l, l999.
(3) 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%.
Option Exercises and Year End Option Values
Value of
Unexercise
d In-the-
Number of Money
Options
Unexercised at
Fiscal
Shares Options (3) Year-End
(4)
Acquired On Value Re- Exercisable/
Exercisable/
Name Exercise (1) alized (2) Unexercisable
Unexercisable
Maximilian de Clara 146,667 $574,486 8,334/139,999
$15,668/$164,031
Geert R. Kersten - - 183,417/335,333
$504,974/$904,686
M. Douglas Winship - - 13,667/8,333
$37,694/$20,626
Prem S. Sarin 10,000 $ 71,900 834/33,666
$1,568/$72,092
Eyal Talor 7,834 $ 32,354 5,167/21,500
$9,714/$55,506
(1) The number of shares received upon exercise of options during the
fiscal year ended September 30, 1996.
(2) With respect to options exercised during the Company's fiscal year
ended September 30, 1996, 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, 1996,
separated between those options that were exercisable and those
options that were not exercisable.
(4) For all unexercised options held as of September 30, 1996, the
aggregate dollar value of the excess of the market value of the stock
underlying those options (as of September 30, 1996) over the exercise
price of those unexercised options. Values are shown separately for
those options that were exercisable, and those options that were not
yet exercisable, on September 30, 1996.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified Stock
Option Plans and a Stock Bonus Plan. 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 800,000 shares of the
Company's Common Stock to persons that 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
Reve nue 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 the death or permanent
and total disabil- ity);
(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 op
tion 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 Plan. The Non-Qualified Stock Option
Plans collectively authorize the issuance of up to 1,360,000 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 ad visors 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 40,000 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 selec ted 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 NonQuali- fied 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 re- main an employee of the Company
or the period of time a nonemployee must pro- vide services to the
Company. At the time an employee ceases working for the Company (or at
the time a nonemployee ceases to perform services for the Com- pany), 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 un- derlying 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
op tion 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 op- tions previously granted. The Board of Directors may not,
without shareholder approval: make any amendment which would materially
modify the eligibility re- quirements 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 ac- cruing to employees
who are eligible to participate in the Plans.
Prior Stock Option and Bonus Plan. The Company previously had in
effect a Stock Option and Bonus Plan ("the 1987 Plan") which provided for
the grant to the Company's officers, directors, employees and consultants
of either (i) shares of the Company's Common Stock for services rendered
or (ii) options to purchase shares of Common Stock. The 1987 Plan was
terminated by the Company in 1992. Since the 1987 Plan was terminated, no
further options will be granted and no further bonus shares will be issued
pursuant to the 1987 Plan. However, options previously granted may
nevertheless still be exercised according to the terms of the options.
Prior to the termination of the 1987 Plan, the Company granted options to
purchase 189,250 shares of the Company's Common Stock. To date, options
to purchase 6,000 shares have been exercised. In June, 1995 the Company
cancelled options to purchase 176,250 shares that had previously been
granted under this Plan and reissued options for the same number of shares
under the Company's other stock option plans. See "Option Summary" below.
Option Summary. The following sets forth certain information, as
of December 15, 1996, concerning the stock options granted by the Company.
Each option represents the right to purchase one share of the Company's
Common Stock.
Total Shares
Shares Reserved for
Remaining Reserved Outstanding
Options
Name of Plan Under Plan Options Under
Plan
1987 Stock Option and Bonus Plan 200,000 7,000 (1)
1992 Incentive Stock Option Plan 100,000 83,216 2,783
1992 Non-Qualified Stock Option Plan 60,000 34,500 -
1994 Incentive Stock Option Plan 100,000 100,000 -
1994 Non-Qualified Stock Option Plan 100,000 50,583 2,750
1995 Non-Qualified Stock Option Plan 800,000 650,751 63,874
1996 Incentive Stock Option Plan 600,000 65,700 534,300
1996 Non-Qualified Stock Option Plan 400,000 170,000 230,000
TOTAL: 1,161,750 833,707
(1) This Plan was terminated in 1992 and as a result, no new options will
be granted pursuant to this Plan.
As of December 15, 1996, 1,500 shares had been issued pursuant
to the Company's 1992 Stock Bonus Plan. All of these shares were issued
during the fiscal year ending September 30, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 15, 1996,
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 (4)
Maximilian de Clara 8,334 (2) *
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 512,357 (3) 5.8%
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Patricia B. Prichep 47,530 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
M. Douglas Winship 13,667 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Dr. Eyal Talor 17,167 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Daniel H. Zimmerman 4,000 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Dr. Prem Sarin 20,834 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Mark Soresi 43,375 *
l0l0 Wayne Ave., 8th Floor
Silver Spring, MD 209l0
F. Donald Hudson 29,000 *
53 Mt. Vernon Street
Boston, MA 02108
All Officers and Directors
as a Group (9 persons) 696,264
7.8%
*Less than 1%
(1) Includes shares issuable prior to February 28, 1997 upon the
exercise of options or warrants granted to the following persons:
Options or Warrants
Exercisable Name Prior to February 28,
1997
Maximilian de Clara 8,334
Geert R. Kersten
407,417
Patricia B. Prichep
44,500
M. Douglas Winship
13,667
Dr. Eyal Talor
15,667
Daniel H. Zimmerman
4,000
Dr. Prem Sarin
20,834
Mark Soresi
41,500
F. Donald Hudson
29,000
See "Management" for information concerning outstanding stock
options.
(2) All shares are held of record by Milford Trading, Ltd., a
corporation organized pursuant to the laws of Liberia. All of the
issued and outstanding shares of Milford Trading, Ltd. are owned
beneficially by Mr. de Clara.
(3) 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.
(4) Amount 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
The MULTIKINE technology and know-how licensed to the Company
was developed by a group of researchers under the direction of Dr. Hans-
Ake
Fabricius and was assigned, during l980 and l98l, to Hooper Trading
Company, N.V., a Netherlands Antilles' corporation ("Hooper"), and
Shanksville Corporation, also a Netherlands Antilles corporation
("Shanksville"). Prior to October, 1996, Mr. de Clara and Dr. Fabricius
owned 50% and 30%, respectively, of each of these companies. In October,
1996, Mr. de Clara disposed of his interest in Hooper and Shanksville.
The technology and know how assigned to Hooper and Shanksville was
licensed to Sittona Company,
B.V., a Netherlands corporation ("Sittona"), effective September, l982
pursuant to a licensing agreement which requires Sittona to pay to Hooper
and Shanksville royalties on income received by Sittona respecting the
technology and know-how licensed to Sittona. In l983, Sittona licensed
this technology to the Company and received from the Company a $1,400,000
advance royalty payment. At such time as the Company generates revenues
from the sale or sublicense of this technology, the Company will be
required to pay royalties to Sittona equal to l0% of net sales and l5% of
the licensing royalties received from third parties. In that event,
Sittona, pursuant to its licensing agreements with Hooper and Shanksville,
will be required to pay to those companies a minimum of l0% of any royalty
payments received from the Company.
Between 1985 and October 1996 Mr. de Clara owned all of the
issued and outstanding stock of Sittona. In October 1996, Mr. de Clara
disposed of his interest in Sittona.
The Company has reached a tentative agreement to acquire from
Sittona Company, Hooper Trading Company, and Shanksville Corporation all
rights pertaining to the MULTIKINE technology for $500,000 in cash and
shares of the Company's common stock with a value of $3,500,000. The
acquisition of this technology is subject to the execution of a definitive
agreement between the parties.
ITEM 14. 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 quarter
ended September 30, 1996.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to
Exhibit
3(a) of the Company's combined
Regi stration 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 Incorporated by reference to
Exhibit
Stock Certificate 4(a) of the Company's Registration
Statement on Form S-1,
Registration Nos. 2-85547-D and 33-
7531.
4(c) Form of Common Stock Incorporated by reference to
Exhibit
Purchase Warrant 4(c) filed as an exhibit to the
Com-
pany's Registration Statement on
Form S-1 (Registration No. 33
43281).
10(a) Purchase Agreement Incorporated by reference to
Exhibit
dated April 21, 1986 10(a) of the Company's
Registration
with Alpha I Biomedical Statement on Form S-1,
Registration
Nos. 2-85547-D and 33-7531.
(b) Agreement with Sittona Incorporated by reference to
Exhibit
Company B.V. dated 10(c) of the Company's
Registration
May 3, 1983 Statement on Form S-1,
Registration
Nos. 2-85547-D and 33-7531.
(c) Addendum effective May 3, Incorporated by reference to
Exhibit 1983 to Licensing Agree- 10(e) of the Company's
Registration
ment with Sittona Company, Statement on Form S-1,
Registration
B.V. Nos. 2-85547-D and 33-7531.
(d) Addendum effective October Incorporated by reference to
Exhibit 13, 1989 to Licensing Agree- 10(d) of Company's Annual
Report on ment with Sittona Company, Form 10-K for the year
ended
September
B.V. 30, 1989.
10(e) Employment Agreement with Incorporated by reference to
Exhibit
Geert Kersten 10(e) filed as an exhibit to the
Com-
pany's Registration Statement on
Form S-1 (Registration No. 33
43281).
l0(f) Research Agreement between Incorporated by reference to
Exhibit
Viral Technologies, Inc. 10(f) filed as an exhibit to the
Com-
and the George Washington pany's Registration Statement on
Form
University S-1 (Registration No. 33-43281).
l0(g) Agreement between Viral Incorporated by reference to
Exhibit
Technologies, Inc. and 10(g) filed as an exhibit to the
Com-
Nippon Zeon Co., Ltd. pany's Registration Statement on
Form
S-1 (Registration No. 33-43281).
23 Consents of Experts and
Counsel
(d) Financial statement schedules.
None
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 20, 1996 By:/s/ Maximilian de Clara
Maximilian de Clara, President
By:/s/ Geert R. Kersten
Geert R. Kersten, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of l934, this Report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ MAXIMILIAN DE CLARA Director and Principal December 20,
1996
MAXIMILIAN DE CLARA Executive Officer
/s/ GEERT R. KERSTEN Director, Principal December 20,
1996
GEERT R. KERSTEN Financial Officer
and Chief Executive
Officer
/s/ MARK V. SORESI Director December 20,
1996
MARK V. SORESI
/s/ DONALD HUDSON Director December 20,
1996
F. DONALD HUDSON
2394D/l-38