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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, 1997.
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
15, 1997, as quoted on the American Stock Exchange, was approximately
$79,000,000. Shares of Common Stock held by each officer, director and principal
shareholder have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of December 15, 1997, the Registrant had 11,218,910 shares of Common
Stock issued and outstanding.
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado
corporation in 1983. The Company is involved in the research and development of
certain drugs and vaccines. The Company's first product, MULTIKINETM,
manufactured using the Company's proprietary cell culture technologies, is a
combination, or "cocktail", of natural human interleukin-2 ("IL-2") and certain
lymphokines and cytokines. MULTIKINE is being tested to determine if it is
effective in improving the immune response of cancer patients. The Company's
second product, HGP-30, is being tested to determine if it is an effective
treatment/vaccine against the AIDS virus. In addition, the Company recently
acquired a new patented T-cell Modulation Process which uses "heteroconjugates"
to direct the body to chose a specific immune response. The Company intends to
use this new technology to improve the cellular immune response of persons
vaccinated with HGP-30 and to develop potential treatments and/or vaccines
against various diseases. Present target diseases are herpes simplex, malaria,
tuberculosis, prostate cancer and breast cancer.
The costs associated with the clinical trials relating to the Company's
technologies, research expenditures and the Company's administrative expenses
have been funded with the public and private sales of shares of the Company's
Common Stock and borrowings from third parties, including affiliates of the
Company.
There can be no assurance that either the Company or the Company's
wholly owned subsidiary, Viral Technologies, Inc. ("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 regulatory
approval for the Company's or VTI's products will prevent the Company and VTI
from generally marketing their products. Delays in obtaining regulatory approval
or the failure to obtain regulatory approval in one or more countries may have a
material adverse impact upon the Company's operations.
MULTIKINE
The function of the immunological system is to protect the body against
infectious agents, including viruses, bacteria, parasites and malignant (cancer)
cells. An individual's ability to respond to infectious agents and to other
substances (antigens) recognized as foreign by the body's immune system is
critical to health and survival. When the immune response is adequate, infection
is usually combated effectively and recovery follows. Severe infection can occur
when the immune response is inadequate. Such immune deficiency can be present
from birth but, in adult life, it is frequently acquired as a result of intense
sickness or as a result of the administration of chemotherapeutic drugs and/or
radiation. It is also recognized that, as people reach middle age and
thereafter, the immune system grows weaker.
Two classes of white blood cells, macrophages and lymphocytes, are
believed to be primarily responsible for immunity. Macrophages are large cells
whose principal immune activity is to digest and destroy infectious agents.
Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes,
B-cells, produces antibodies in response to antigens. Antibodies have unique
combining sites (specificities) that recognize the shape of particular antigens
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and bind with them. The combination of an antibody with an antigen sets in
motion a chain of events which may neutralize the effects of the foreign
substance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation by
B-cells, and can also directly destroy "foreign" cells by activating "killer
cells."
It is generally recognized that the interplay among T-cells, B-cells
and the macrophages determines the strength and breadth of the body's response
to infection. It is believed that the activities of T-cells, B-cells and
macrophages are controlled, to a large extent, by a specific group of hormones
called 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 investigation has
established that IL-2 enhances immune responses by causing activated T-cells to
proliferate. Without such proliferation no immune response can be mounted. Other
lymphokines and cytokines support T-cell and B-cell proliferation. 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 absence of B-cell growth
factors.
Although IL-2 is one of the best characterized lymphokines with anti-
cancer 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 research
that IL-2 can increase the number of killer T-cells produced by the body, which
improves the body's capacity to selectively destroy specific tumor cells.
Research and human clinical trials sponsored by the Company have indicated a
correlation between administration of MULTIKINE to advanced cancer patients and
immunological responses. On the basis of these experimental results, the Company
believes that MULTIKINE may have application for the treatment of solid tumors
in humans.
Between 1983 and 1986 the Company was primarily involved in funding
pre-clinical and Phase I clinical trials of its proprietary MULTIKINE
technologies. These trials were conducted at St. Thomas's Hospital Medical
School located in London, England under the direction of Dudley C. Dumonde,
M.D., Ph.D., 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
patients 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 lymph node 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
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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
product. 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 terminal
cancer. The patients had low levels of lymphocytes and evidence of immune
deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects were observed
and the patients were treated as outpatients. Notwithstanding the above, it
should be noted that these trials were only preliminary and were only conducted
on a small number of patients. It remains to be seen if MULTIKINE will be
effective in treating any form of cancer.
In March 1995, 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, will be conducted at
several sites in the United States and Canada and 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 February 1996, the FDA authorized the Company to conduct two human
clinical studies using MULTIKINE and focusing on prostate and head and neck
cancer. The prostate study was conducted at Jefferson Hospital in Philadelphia,
Pennsylvania and involved prostate cancer patients who had failed on hormonal
therapy. Five patients completed the treatment and the data from this study
demonstrated the safety and feasibility of using MULTIKINE in the treatment of
prostate cancer. Biopsies from the patients in the study also suggest the
recruitment of inflammatory cells to the tumor site. Based on these findings,
investigators are currently preparing a new protocol for evaluation by the FDA
to study the ability of MULTIKINE to treat patients with prostate cancer. The
study is expected to test MULTIKINE as a therapy to be used prior to surgical
removal of the prostate gland. The head and neck cancer study will involve up to
30 cancer patients who have failed using conventional therapies. The head and
neck cancer study in the U.S. is being conducted in conjunction with the
Company's Canadian head and neck cancer study.
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In January 1997, the FDA authorized a clinical trial using MULTIKINE to
determine its safety in the potential treatment of HIV-infected individuals and
to determine its effect on various immune system responses.
In April 1997, pursuant to authorization from Israeli health
authorities, a clinical trial was begun using MULTIKINE to treat head and neck
cancer patients. In September 1997, the Company started a similar clinical trial
in Canada. The Canadian study will involve up to 21 patients who are scheduled
for surgery or radiation. The first clinical center to start treatment was
Hospital Notre Dame in Montreal, Canada.
Proof of efficacy for anti-cancer drugs is a lengthy and complex
process. At this early stage of clinical investigation, it remains to be proven
that MULTIKINE will be effective against any form of cancer. Even if some form
of MULTIKINE is found to be effective in the treatment of cancer, commercial use
of MULTIKINE may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that the Company's research efforts, even if successful from a
medical standpoint, can be completed before those of its competitors.
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 ("recombinant
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 micro-organisms to produce recombinant IL-2; or, (2) applying cell
culture technology using mammalian cells. Substantive differences exist between
recombinant IL-2 and IL-2 produced through cell culture technology. For example:
(1) cell cultured IL-2 is glycosylated (has sugars attached). 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
-5-
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
percentage of patients will benefit from treatments consisting only of
glycosylated IL-2. In addition, large dosages of glycosylated IL-2 can, as with
recombinant 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 Company's technology 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 serum-free and mitogen-free 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 introduction into the body.
The Company's technology also includes 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 has an agreement with an unrelated corporation for the
production, until August 31, 1998, 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.
HGP-30 VACCINE
The Company, through its wholly owned subsidiary Viral Technologies,
Inc. ("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. 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).
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. In October 1995, the Company acquired Alpha 1's interest in VTI in exchange
for 159,170 shares of the Company's common stock.
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 vaccine candidates in that its active
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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 non-changing. 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 December
1990. The trial results indicated that five of eight volunteers vaccinated with
HGP-30, and whose blood samples were able to be tested, produced "killer" T-cell
responses. The vaccine also elicited cell-mediated 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. Twenty-one
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 from the previous study. The volunteers
received two booster vaccinations. The volunteers, who had originally received
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) vaccinated 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. Of the SCID mice
given blood from vaccinated volunteers, 78% showed no HIV infection after virus
challenge as compared to 13% of the mice given blood from unvaccinated donors.
In September 1997, VTI completed a Phase I safety study of the HGP-30
AIDS vaccine in 24 HIV infected patients. The study showed that immunizations
with the HGP-30 vaccine coupled with KLH were safe in AIDS patients.
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
-7-
additional pre-commercialization payments dependent upon receipt of certain
regulatory approvals. In l995 Nippon Zeon released its rights to VTI's
technology 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.
In January 1991, VTI was awarded a U.S. patent covering the exclusive
production, use and sale of HGP-30. In February 1993, VTI was awarded a European
patent covering HGP-30 and certain other peptides.
T-CELL MODULATION PROCESS
In January 1997, 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, also known as L.E.A.P.S.
(Ligand Epitope Antigen Presentation System), is intended to selectively
stimulate the human immune system to more effectively fight bacterial, viral and
parasitic infections and cancer, when it cannot do so on its own. Administered
like vaccines, 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 because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
The Company intends to use this new technology to improve the cellular
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
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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 continental U.S., there are an
increasing number of cases involving Americans bringing the disease home from
overseas travels. Currently, there is no approved malaria vaccine anywhere in
the world.
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 made use of the
Company's new heteroconjugate technology which combines T-cell binding ligands
with small, disease associated, peptide antigens. In the past, some vaccines
have worked simply by vaccination with viral proteins (e.g. hepatitis B) to
immunize patients. In the case of herpes simplex, that strategy has yet to be
proven successful. The purpose of adding the T-cell binding ligand was to
increase the effectiveness of the vaccine by directing the immune response to
react in the way most likely to eliminate or control the disease agent. To test
this hypothesis in herpes simplex, the researchers administered the vaccine with
a T-cell binding ligand to one group of mice in order to direct the immune
response to the cellular side, which is thought to be protective. The
researchers also administered the vaccine to a separate group of mice using a
different T-cell binding ligand to direct the immune response to the humoral
(antibody) side, which is thought to be non-protective. For both vaccines, the
herpes simplex peptide was kept the same. The results of the study indicated
that the immunizations allowed the mice to resolve the infection quicker and
more effectively resulting in minimal symptoms and mortality. The vaccine
inducing a cellular immune response was protective while the vaccine inducing a
humoral (antibody) immune response was not protective and actually accelerated
disease progression. Research conducted pursuant to this study may lead to the
future development of a herpes simplex vaccine.
Conservative estimates of those individuals who have genital infections
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, recurrences
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.
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The T-cell Modulation technology was acquired from Cell-Med,
Incorporated ("CELL-MED") in consideration for the Company's payment of $56,000
plus the issuance, during the spring of 1997, of 33,378 shares of the Company's
common stock . The Company must pay CELL-MED additional payments of up to
$600,000, depending upon the Company's ability to obtain regulatory approval for
clinical studies using the technology. In addition, should the Company receive
FDA approval for the sale of any product incorporating 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. The technology
obtained from CELL-MED is covered by several U.S. and European patents.
Additional patent applications are pending.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 1997, approximately $18,988,000
has been expended on Company-sponsored research and development, including
approximately $6,012,000, $3,471,000, and $1,825,000, respectively during the
years ended September 30, 1997, 1996 and 1995. Research and development
expenditures prior to October 1995 do not include amounts spent by Viral
Technologies, Inc. on research and development. Since May, 1986 (the inception
of VTI) and through September 30, 1995, VTI has spent approximately $3,365,000
on research and development.
The Company has established a Scientific Advisory Board ("SAB")
comprised 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
Modification 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.
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Dr. Michael J. Mastrangelo - Director, Division of Medical Oncology;
Professor of Medicine, Jefferson Medical College, Philadelphia, Pennsylvania;
and Associate Clinical Director, Jefferson Cancer Center, Philadelphia,
Pennsylvania.
Dr. Alan B. Morris, Ph.D. - Professor, Department of Biological
Sciences, University of Warwick, Coventry, U.K.
GOVERNMENT REGULATION
The investigational agents and future products of the Company are
regulated in the United States under the Federal Food, Drug and Cosmetic Act,
the Public Health Service Act, and the laws of certain states. The Federal Food
and Drug Administration (FDA) exercises significant regulatory control over the
clinical investigation, manufacture and marketing of pharmaceutical and
biological products.
Prior to the time a pharmaceutical product can be marketed in the
United States for therapeutic use, approval of the FDA must normally be
obtained. Certain states, however, have passed laws which allow a state agency
having functions similar to the FDA to approve the testing and use of
pharmaceutical products within the state. In the case of either FDA or state
regulation, preclinical testing programs on animals, followed by three phases of
clinical testing on humans, are typically required in order to establish pro-
duct safety and efficacy.
The first stage of evaluation, preclinical testing, must be conducted
in animals. After lack of toxicity has been demonstrated, the test results are
submitted to the FDA (or state regulatory agency) along with a request for
clearance to conduct clinical testing, which includes the protocol that will be
followed in the initial human clinical evaluation. If the applicable regulatory
authority does not object to the proposed study, the investigator can proceed
with Phase I trials. Phase I trials consist of pharmacological studies on a
relatively few number of humans under rigidly controlled conditions in order to
establish lack of toxicity and a safe dosage range.
After Phase I testing is completed, one or more Phase II trials are
conducted in a limited number of patients to test the product's ability to treat
or prevent a specific disease, and the results are analyzed for clinical
efficacy and safety. If the results appear to warrant confirmatory studies, the
data is submitted to the applicable regulatory authority along with the protocol
for a Phase III trial. Phase III trials consist of extensive studies in large
populations designed to assess the safety of the product and the most desirable
dosage in the treatment or prevention of a specific disease. The results of the
clinical trials for a new biological drug are submitted to the FDA as part of a
product license application ("PLA"), a New Drug Application ("NDA") or Biologics
License Application ("BLA"), depending on the type or derivation of the product
being studied.
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") may need to be filed in the case of
biological products derived from blood, or not considered to be sufficiently
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well characterized, in order to obtain FDA approval of the testing and
manufacturing facilities in which the product is produced. To the extent all or
a portion of the manufacturing process for a product is handled by an entity
other than the Company, the Company must similarly receive FDA approval for the
other entity's participation in the manufacturing process. Domestic
manufacturing establishments are subject to inspections by the FDA and by other
Federal, state and local agencies and must comply with Good Manufacturing
Practices ("GMP") as appropriate for production. In complying with GMP
regulations, manufacturers must continue to expend time, money and effort in the
area of production, quality control and qualify assurance 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 clinical studies and marketing in
those countries. The approval process varies from country to country and the
time period required in each foreign country to obtain approval may be longer or
shorter than that required for regulatory approval in the United States.
There are no assurances that clinical trials conducted under approval
from state authorities or conducted in foreign countries will be accepted by the
FDA. Product licensure in a foreign country does not mean that the product will
be licensed by the FDA and there are no assurances that the Company will receive
any approval of the FDA or any other governmental entity for the manufacturing
and/or marketing of a product. Consequently, the commencement of the marketing
of any Company product is, in all likelihood, many years away.
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 intense.
Large, well-established pharmaceutical companies are engaged in lymphokine
research and development and have considerably greater resources than the
Company has to develop products. The establishment by these large companies of
in-house research groups and of joint research ventures with other entities is
already occurring in these areas and will probably become even more prevalent.
In addition, licensing and other collaborative arrangements between governmental
and other nonprofit institutions and commercial enterprises, as well as the
seeking of patent protection of inventions by nonprofit institutions and
researchers, could result in strong competition for the Company. Any new
developments made by such organizations may render the Company's licensed
technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds.
The Company believes, however, that it is the only producer of a patented IL-2
product using a patented cell-culture technology with normal human cells. The
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Company foresees that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is the Company's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore, the
Company's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2 rich
mixture of certain 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 research and development of technologies useful
in these areas. VTI's development of its experimental HGP-30 AIDS Vaccine, if
successful, would likely face intense competition from other companies 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 and foreign countries. 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.
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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. In February
l997, the Company added an additional 3,900 square feet to this facility at a
cost, including equipment, of approximately $l20,000.
The Company leases office space at 66 Canal Center Plaza, Alexandria,
Virginia at a monthly rental of approximately $8,500 per month. The Company
believes this arrangement is adequate for the conduct of its present business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding.
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, 1997, there were approximately 2,800 record holders
of the Company's Common Stock and approximately 100 record holders of the
Company's Warrants. Prior to June 5, 1997, the Company's Common Stock and
Warrants were traded on the National Association of Securities Dealers Automatic
Quotation ("NASDAQ") System. Since June 5, 1997 the Company's Common Stock and
Public Warrants have traded on the American Stock Exchange. Set forth below are
the range of high and low quotations for the periods indicated as reported by
NASDAQ and the American Stock Exchange, and as adjusted for the 10 for 1 reverse
stock split which was approved by the Company's shareholders on April 28, 1995
and became effective on May 1, 1995. The market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter
Ending Common Stock Warrants
High Low High Low
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
12/31/96 $ 6.63 $ 3.50 $0.28 $0.12
3/31/97 $ 6.12 $ 4.19 $0.22 $0.12
6/30/97 $ 5.12 $ 2.75 $0.44 $0.09
9/30/97 $ 8.06 $ 3.12 $0.69 $0.19
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
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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,
1997 1996 1995 1994 1993
Investment Income &
Other Revenues $ 438,145 $ 322,370 $ 423,765 $ 624,670 $ 997,964
Expenses:
Research and
Development 6,011,670 3,471,477 1,824,661 2,896,l09 1,307,042
Depreciation
and Amortization 3l3,547 290,829 262,705 138,755 55,372
General and
Administrative 2,302,386 2,882,958 1,713,912 1,621,990 1,696,119
Equity in loss of
joint venture -- 3,772 501,125 394,692 344,423
Net Loss $(8,189,458) $(6,326,666) $(3,878,638) $(4,426,876) $(2,404,992)
Loss per common share $(0.88) $(0.98) $(0.89) $(1.06) $(0.58)
Weighted average
common shares
outstanding 9,329,419 6,425,316 4,342,628 4,185,240 4,155,431
Balance Sheet Data:
September 30,
1997 1996 1995 1994 1993
Working Capital $4,581,247 $10,266,104 $3,983,699 $5,795,191 $10,296,472
Total Assets 6,334,397 11,878,370 6,359,011 8,086,670 11,633,090
Total Liabilities 508,617 294,048 1,516,978 l,407,602 688,231
Shareholders'
Equity 5,825,780 11,584,322 4,842,033 6,679,068 10,944,859
No dividends have been declared on the Company's common stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal 1997
Interest income during the year ending September 30, l997 reflects
interest earned on investments. Research and development expenses have increased
due to the beginning of new clinical studies with cancer and AIDS patients.
Research and development expenses also increased due to the purchase of the
MULTIKINE rights from the Sittona Company ($2,250,000), which was expensed as
research and development expenses, as well as the payment to Cell-Med ($125,000)
to retain ownership of the L.E.A.P.S. technology.
Fiscal 1996
Interest income during the year ending September 30, l996 reflects
interest earned 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 development
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 previous
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.
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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 liability 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.
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 five Warrants entitle the holder to purchase
one additional share of Common Stock at a price of $6.00 per share prior to
February 7, 1998.
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
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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 con- version 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.
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
were 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
were 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 could not be less than $3.60 nor
more than $14.75. 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
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prior to December 15, 1999. The Company raised funds required for this
repurchase from the sale of its Series C Preferred Stock. In May 1997 all
remaining 250 shares of the Series B Preferred Stock were converted into 69,444
shares of common stock. As of November 30, 1997 Warrants for the purchase of
17,500 shares of common stock had been exercised.
In December 1996, the Company raised $2,850,000 from the sale of units
consisting of 2,850 shares of the Company's Series C Preferred Stock, 379,763
Series A Warrants and 379,763 Series B Warrants. The Series C Preferred Shares
were 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" 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. Notwithstanding the above, the Conversion Price could not be
more than $4.00. Beginning 90 days after December 17, 1996 one half of the
Series C Preferred Shares were convertible into shares of the Company's common
stock. All preferred shares were convertible into shares of the Company's common
stock beginning 180 days after December 17, 1996. Each Series A 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, 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. As of November 30,
1997 all shares of the Series C Preferred Stock have been converted into 915,271
shares of the Company's common stock, 273,163 Series A Warrants had been
exercised and 253,175 Series B Warrants had been exercised.
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. In February l997, the Company
added an additional 3,900 square feet to this facility at a cost, including
equipment, of approximately $l20,000.
On December 22, 1997, the Company sold 10,000 shares of its Series D
Preferred Stock, 550,000 Series A Warrants and 550,000 Series B Warrants, to ten
institutional investors for $10,000,000. The Series D Preferred Shares may be
converted into shares of the Company's Common Stock. Prior to September 19, 1998
(or such earlier date as the market price of the Company's Common Stock is $3.45
or less for five consecutive trading days) the number of shares issuable upon
the conversion of each Series D Preferred Share is to be determined by dividing
$1,000 by $8.28. On or after September 19, 1998 the number of shares issuable
upon the conversion of each Series D Preferred Share is to be determined by
dividing $1,000 by the lower of (i) $8.28, or (ii) the average price of the
Company's common stock for any two trading days during the ten trading days
preceding the conversion date. Each Series A Warrant allows the holder to
purchase one share of the Company's common stock for $8.62 at any time prior to
December 22, 2001. Each Series B Warrant allows
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the holder to purchase one share of the Company's Common Stock for $9.31 at any
time prior to December 22, 2001. The Company has agreed to file a registration
statement with the Securities and Exchange Commission covering the sale of the
common stock issuable upon the conversion of the Series D Preferred Stock and/or
the exercise of the Series A and Series B Warrants.
During the twelve month period ending September 30, l998, the Company
expects that it will spend approximately $3,500,000 on research, development,
and clinical trials. This amount includes VTI's estimated research and
development expenses during fiscal l998. Prior to October l995, VTI's research
and development expenses were shared 50% by the Company and 50% by Alpha 1
Biomedicals, Inc. VTI became a wholly-owned subsidiary of the Company in October
l995 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.
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. In the absence of
revenues, the Company will be required to raise additional funds through the
sale of securities, debt financing or other arrangements in order to continue
with its research efforts. However, there can be no assurance that such
financing will be available or be available on favorable terms.
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 69 Director and President
Geert R. Kersten, Esq. 39 Director, Chief Executive
Officer, Secretary and Treasurer
Patricia B. Prichep 45 Vice President of Operations
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Name Age Position
M. Douglas Winship 47 Vice President of Regulatory
Affairs and Quality Assurance
Dr. Eyal Talor 42 Vice President of Research and
Manufacturing
Dr. Prem S. Sarin 63 Vice President of Research for Viral
Technologies, Inc.
Dr. Daniel H. Zimmerman 56 Vice President of Cellular Immunology
Mark V. Soresi 45 Director
F. Donald Hudson 64 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
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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).
Eyal Talor, Ph.D. has been the Company's Vice President of Research and
Manufacturing since March 1994. From October 1993 until March 1994, Mr. 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, Mr. 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, Mr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Mr. 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
clean-up of hazardous and toxic waste dump sites. Mr. Soresi
-22-
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 Organogenesis, 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 1997 $319,104 - $76,290 - 333,000 - $88
de Clara, 1996 $225,000 $75,000 $85,016 - 70,000 - $88
President 1995 - - $95,181 - 225,000 - -
Geert R. Kersten, 1997 $228,888 - $12,314 - 313,000 - $8,888
Chief Executive 1996 $172,531 $75,000 $9,420 - 294,000 - $8,869
Officer, Secretary 1995 $164,801 - $ 9,426 - 224,750 - $3,911
and Treasurer
M. Douglas Winship, 1997 $129,926 - $2,400 - 45,000 $3,152
Vice President of 1996 $119,100 - $2,400 - - - $2,488
Regulatory Affairs 1995 $113,500 - $ 1,200 - 22,000 - $2,100
and Quality Assur-
ance
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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)
Prem S. Sarin, Ph.D. 1997 $113,385 - - - 34,000 - $3,473
Vice President of 1996 $102,379 - - - 32,000 - $3,160
Research, Infectious
Diseases
Eyal Talor, Ph.D. 1997 $119,333 - $3,000 - 58,000 - $3,668
Vice President of 1996 $107,458 - $3,000 - 8,000 - $3,312
Research and
Manufacturing
Daniel Zimmerman, 1997 $104,000 - - - 34,000 - $3,208
Ph.D.,
Vice President of
Cellular Immunology
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
compensation received for serving as a member of the Company's Board of
Directors.
(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, 1997, 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 104,940 $763,963
M. Douglas Winship - -
Prem S. Sarin, Ph.D. - -
Eyal Talor, Ph.D. 1,500 $10,920
Dan Zimmerman, Ph.D. - -
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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 l997 Salary Reduction Plan as well as
certain options purchased from the Company. See "Options Granted During Fiscal
Year Ending September 30, l997" 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 premiums paid by, or on behalf
of, the Company. Amounts in the table represent life insurance premiums 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 retirement
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 employee's
contribution. The fiscal 1997 expenses for this plan were $35,732. Other than
the 401(k) Plan, the Company does not have a defined benefit, pension plan,
profit sharing or other retirement plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its directors $2,000
per quarter, plus expenses. The Company has no standard arrangement pursuant to
which directors of the Company are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. The Company has from time to time granted
options to its outside directors: Mr. Soresi and Mr. Hudson. See Stock
Options below for additional information concerning options granted to the
Company's directors.
-25-
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 lump-sum payment from the Company
equal to 18 months salary. For purposes of the employment agreement, a change in
the control of the Company means the sale of more than 50% of the outstanding
shares of the Company's Common Stock, or a change in a majority of the Company's
directors.
Effective August 1, 1997, the Company entered into a three-year
employment agreement with Mr. Kersten. The employment agreement provides that
during the period between August 1, 1997 and July 31, 1998, the Company will pay
Mr. Kersten an annual salary of $264,848. During the years ending July 31, 1999
and 2000, the Company will pay Mr. Kersten a salary of $291,333 and $320,466
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, the agreement allows Mr. Kersten to resign from his
position at the Company and receive a lump-sum payment from the Company equal to
18 months salary. For purposes of the employment agreement, a change in the
control of the Company means the sale of more than 50% of the outstanding shares
of the Company's Common Stock, or a change in a majority of the Company's
directors.
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, 1997, 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, 1997, 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, 1997, to the persons named
below, and the fiscal year-end value of all unexercised options (regardless of
when granted) held by these persons.
-26-
Options Granted During Fiscal Year Ending September 30, l997
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 (2)
Name Granted (#) Fiscal Year Share Date 5% 10%
Maximilian 163,000 (1) $3.12 1/10/01 $109,210 $236,350
de Clara 170,000 $3.25 5/1/07 $346,800 $880,600
333,000 34.5%
Geert R. 163,000 (1) $3.12 1/10/01 $109,210 $236,350
Kersten 150,000 $3.25 5/1/07 $306,000 $777,000
313,000 32.4%
M. Douglas 45,000 4.7% $4.31 4/1/07 $41,400 $90,000
Winship
Prem S. 24,000 (1) $3.12 1/10/01 $16,080 $34,800
Sarin, Ph.D. 10,000 $3.25 5/1/07 $20,400 $51,800
34,000 3.5%
Eyal
Talor, Ph.D. 8,000 (1) $3.12 1/10/01 $5,360 $11,600
50,000 $5.18 3/16/07 $162,500 $412,500
58,000 6.0%
Daniel 24,000 (1) $3.12 1/10/01 $16,080 $34,800
Zimmerman, 10,000 $3.94 6/19/07 $24,800 $62,700
Ph.D. 34,000 3.2%
(1) Options were granted in accordance with the Company's 1997 Salary Reduction
Plan. Pursuant to the Salary Reduction Plan, any employee of the Company
was allowed to receive options (exercisable at market price at time of
grant) in exchange for a one-time reduction in such employee's salary.
(2) 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 (in $) of
Unexercised
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 15,000 $31,950 78,334/402,999 249,617/1,520,211
Geert R. Kersten - - 451,751/379,999 2,015,214/1,469,312
M. Douglas Winship - - 20,334/ 46,666 86,339/ 139,331
Prem S. Sarin - - 25,667/ 42,833 110,324/ 156,261
Eyal Talor - - 21,500/ 63,166 88,401/ 155,896
Daniel Zimmerman - - 4,000/ 42,000 15,360/ 163,030
-27-
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 1997.
(2) With respect to options exercised during the Company's fiscal year ended
September 30, 1997, 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, 1997,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 1997, the aggregate
dollar value of the excess of the market value of the stock underlying
those options (as of September 30, 1997) 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, 1997.
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 Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, with- in 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.
-28-
Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years from
the date of grant. Any other option granted pursuant to the Plan may not be
exercisable by its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an
option is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110% of the
fair market value in the case of a person owning more than 10% of the Company's
outstanding shares).
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plans
collectively authorize the issuance of up to 2,460,000 shares of the Company's
Common Stock to persons that exercise options granted pursuant to the Plans. The
Company's employees, directors, officers, consultants and advisors are eligible
to be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is deter- mined 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 ad- visors are
eligible to receive a grant of the Company's shares, provided how- ever that
bona fide services must be rendered by consultants or advisors and such services
must not be in connection with the offer or sale of securities in a
capital-raising transaction.
Other Information Regarding the Plans. The Plans are administered by
the Company's Compensation Committee ("the Committee"), each member of which is
a director of the Company. The members of the Committee were selected by the
Company's Board of Directors and serve for a one-year tenure and until their
successors are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the Committee
will be filled by the Board of Directors. The Committee is vested with the
authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is empowered to select
those persons to whom shares or options are to be granted, to determine the
number of shares subject to each grant of a stock bonus or an option and to
determine when, and upon what conditions, shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established
-29-
by the Committee administering the Plan at the time of the grant is not met. For
this purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company. At the time an employee ceases working for the Company
(or at the time a non-employee ceases to perform services for the Company), any
shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Committee payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of the Company's Common Stock
having an aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner they
deem appropriate, provided that such amendment, termination or suspension will
not adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Option Summary. The following sets forth certain information, as of
November 30, 1997, 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
1992 Incentive Stock Option Plan 100,000 78,550 3,283
1992 Non-Qualified Stock Option Plan 60,000 14,000 2,500
1994 Incentive Stock Option Plan 100,000 100,000 --
1994 Non-Qualified Stock Option Plan 100,000 27,250 2,750
1995 Non-Qualified Stock Option Plan 800,000 562,417 43,874
1996 Incentive Stock Option Plan 600,000 392,666 207,334
1996 Non-Qualified Stock Option Plan 1,500,000 950,000 550,000
TOTAL: 2,124,883 809,741
As of November 30, 1997, 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.
-30-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1997, information
with respect to the only persons owning beneficially 5% or more of the
outstanding Common Stock and the number and percentage of outstanding shares
owned by each director and officer and by the officers and directors as a group.
Unless otherwise indicated, each owner has sole voting and investment powers
over his shares of Common Stock.
Name and Address Number of Shares (1) Percent of Class (3)
Maximilian de Clara 33,342 *
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 556,691 (2) 4.8%
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Patricia B. Prichep 55,530 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
M. Douglas Winship 20,334 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Eyal Talor, Ph.D. 11,834 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Daniel H. Zimmerman, Ph.D. 9,000 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Prem Sarin, Ph.D. 25,667 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Mark Soresi 85,000 *
1010 Wayne Ave., 8th Floor
Silver Spring, MD 209l0
F. Donald Hudson 65,000 *
53 Mt. Vernon Street
Boston, MA 02108
-31-
All Officers and Directors
as a Group (9 persons) 862,398 7.2%
*Less than 1%
(1) Includes shares issuable prior to February 28, 1998 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 1998
Maximilian de Clara 23,334
Geert R. Kersten 462,751
Patricia B. Prichep 52,500
M. Douglas Winship 20,324
Eyal Talor, Ph.D. 10,334
Daniel H. Zimmerman, Ph.D. 9,000
Prem Sarin, Ph.D. 25,667
Mark Soresi 65,000
F. Donald Hudson 65,000
See Item 10 of this report for information concerning outstanding stock
options.
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount 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 being tested by the Company was developed by a
group of researchers and was assigned, during 1980 and 1981, to Hooper Trading
Company, N.V., a Netherlands Antilles' corporation ("Hooper"), and Shanksville
Corporation, also a Netherlands Antilles corporation ("Shanksville"). The
MULTIKINE technology assigned to Hooper and Shanksville was licensed to Sittona
Company, B.V., a Netherlands corporation ("Sittona"), effective September, 1982
pursuant to a licensing agreement which required Sittona to pay Hooper and
Shanksville royalties on income received by Sittona with respect to the
MULTIKINE technology. In 1983, Sittona licensed the MULTIKINE 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, was required to pay to those companies a minimum of l0% of any
royalty payments received from the
-32-
Company. The license agreement with Sittona also required 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 MULTIKINE technology. The license was to remain in effect until
the expiration or abandonment of all patent rights or until the MULTIKINE
technology entered into the public domain, whichever was later.
Prior to October, 1996, Maximilian de Clara, an Officer, Director and
shareholder of the Company, owned 50% and 30%, respectively, of Hooper and
Shanksville. 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 Hooper, Shanksville and Sittona.
In January 1997 Hooper and Shanksville sold all of their rights in the
MULTIKINE technology to Sittona. Immediately following these transactions,
Sittona sold all of its rights in the MULTIKINE technology to the Company,
including all rights acquired from Hooper and Shanksville, in consideration for
$500,000 in cash and 751,678 shares of the Company's common stock. The shares of
the Company's Common Stock acquired by Sittona as a result of this transaction
are being offered for public sale by means of a registration statement filed
with the Securities and Exchange Commission.
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, 1997.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by
reference to Exhibit 3(a) of the
Company's combined Registration
Statement on Form S-1 and
Post-Effective Amendment ("Registration
Statement"), Registration Nos.
2-85547-D and 33-7531.
(b) Amended Articles Incorporated by reference to
Exhibit 3(a) of the Company's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and 33-7531.
(c) Amended Articles Incorporated by reference to
Exhibit (Name change only) 3(c) filed
with Registration Statement on Form S-1
(No. 33-34878).
(d) Bylaws Incorporated by reference to
Exhibit 3(b) of the Company's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and 33-7531.
-33-
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
1983 to Licensing Agreement Exhibit 10(e) of the Company's
with Sittona Company, B.V. Registration Statement on Form S-1,
Registration Nos. 2-85547-D and
33-7531.
(d) Addendum effective October Incorporated by reference to 13, 1989 to
Licensing Agree- Exhibit 10(d) of Company's Annual Report ment with
Sittona Company, on 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
Company's Registration Statement on Form
S-1 (Registration No. 33-43281).
l0(f) Research Agreement between Incorporated by reference to
Viral Technologies, Inc. Exhibit 10(f) filed as an exhibit to the
George Washington University Company's Registration Statement on Form
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
Nippon Zeon Co., Ltd. Company's Registration Statement on Form
S-1 (Registration No. 33-43281).
23 Consent of accountants Filed with this report
27 Financial data schedule Filed with this report
(d) Financial statement schedules.
None
-34-
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 1997, 1996, and 1995,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996,
AND 1995:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation (the Company) as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CEL-SCI Corporation
as of September 30, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
December 8, 1997
F - 1
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $3,508,606 $3,549,810
Investment securities available for sale 745,216 6,498,812
Interest and other receivables 106,443 76,515
Prepaid expenses 410,788 272,404
Advances to officer/shareholder and employees 291,781 142,973
----------- -----------
Total current assets 5,062,834 10,540,514
RESEARCH AND OFFICE EQUIPMENT - Less accumulated
depreciation of $1,128,410 and $863,899 791,964 871,983
DEPOSITS 18,178 18,178
PATENT COSTS - Less accumulated amortization
of $402,025 and $352,990 461,421 447,695
----------- -----------
$6,334,397 $11,878,370
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 481,587 274,410
Total current liabilities
481,587 274,410
DEFERRED RENT 27,030 19,638
----------- -----------
Total liabilities 508,617 294,048
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.01 par value - authorized, 3,500 shares; issued
and outstanding, -0- and 600 shares (Liquidation
preference of $1,000) - 6
Series B Preferred stock, $.01 par value - authorized, 5,000 shares;
issued and outstanding, -0- and 5,000 shares (liquidation - 50
preference of $1,000)
Series C Preferred stock, $01 par value - authorized, 3,600 shares;
issued and outstanding, -0- shares - -
Common stock, $.01 par value - authorized, 100,000,000 shares;
issued and outstanding, 10,445,691 and 7,831,481 shares 104,457 78,315
Additional paid-in capital 44,419,244 41,918,036
Net unrealized loss on marketable equity securities (3,499) (16,078)
Accumulated deficit (38,694,422) (30,396,007)
----------- -----------
Total stockholders' equity 5,825,780 11,584,322
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,334,397 $11,878,370
=========== ===========
See notes to consolidated financial statements.
F - 2
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
INVESTMENT INCOME $386,547 $255,053 $365,049
OTHER INCOME 51,598 67,317 58,716
--------- --------- ---------
Total income 438,145 322,370 423,765
--------- --------- ---------
OPERATING EXPENSES:
Research and development 6,011,670 3,471,477 1,824,661
Depreciation and amortization 313,547 290,829 262,705
General and administrative 2,302,386 2,882,958 1,713,912
--------- --------- ---------
Total operating expenses 8,672,603 6,645,264 3,801,278
--------- --------- ---------
EQUITY IN LOSS OF
JOINT VENTURE - (3,772) (501,125)
--------- --------- ---------
NET LOSS 8,189,458 6,326,666 3,878,638
========= ========= =========
LOSS PER COMMON SHARE $ 0.88 $ 0.98 $ 0.89
========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,329,419 6,425,316 4,342,628
========= ========= =========
See notes to consolidated financial statements.
F - 3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
Preferred Preferred Preferred
Series A Stock Series B Stock Series C Stock Common Stock
--------------------- ----------------- ------------------ ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
BALANCE, OCTOBER 1, 1994 - $ - - $- - $- 4,188,244 $41,882
Common stock issued for cash - - - - - - 1,150,000 11,500
Change in market value of marketable
securities available for sale - - - - - - - -
Net loss - - - - - - - -
------- ------- ----- ----- ----- ----- --------- -------
BALANCE, SEPTEMBER 30, 1995 - - - - - - 5,338,244 53,382
Common stock issued for cash - - - - - - 23,000 230
Exercise of stock options - - - - - - 171,711 1,717
Exercise of warrants - - - - - - 1,332,780 13,328
Conversion of convertible debentures - - - - - - 257,480 2,575
Stock issued for acquisition of VTI
and Nippon-Zeon rights - - - - - - 204,170 2,042
Issuance - Series A preferred stock 3,500.00 35.00 - - - - - -
Issuance - Series B preferred - - 5,000 50 - - - -
Preferred Series A conversion (2,900.00) (29) - - - - 504,096 5,041
Cash dividends on Series A and
Series B preferred stock - - - - - - - -
Change in market value of marketable
securities available for sale - - - - - - - -
Net loss - - - - - - - -
------- ------- ----- ----- ----- ----- --------- -------
BALANCE, SEPTEMBER 30, 1996 600.00 6.00 5,000 50 - - 7,831,481 78,315
Exercise of stock options - - - - - - 127,500 1,275
Exercise of warrants - - - - - - 61,220 612
Stock issued for acquisition of Multikine
and Cell-Med's Heteroconjugate rights - - - - - - 785,056 7,851
Stock options issued to nonemployees
- - - - - - - -
Issuance - Series C preferred stock - - - - 2,850 29 - -
Repurchase of Preferred B shares - - (2,850) (29) - - - -
Preferred Series A conversion (600.00) (6) - - - - 127,945 1,279
Preferred Series B conversion - - (2,150) (21) - - 597,218 5,972
Preferred Series C conversion - - - - (2,850) (29) 915,271 9,153
Cash dividends on Series A and B - - - - - - - -
Change in market value of marketable
securities available for sale - - - - - - - -
Net loss - - - - - - - -
------- ------- ----- ----- ----- ----- --------- -------
BALANCE, SEPTEMBER 30, 1997 - $- - $- - $- 10,445,691 104,457
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
Additional
Paid in
Capital Other Deficit Total
BALANCE, OCTOBER 1, 1994 $26,854,848 $(85,753) $(20,131,909) $6,679,068
Common stock issued for cash 1,944,350 - - 1,955,850
Change in market value of marketable
securities available for sale - 85,753 - 85,753
Net loss - - (3,878,638) (3,878,638)
---------- ------- ----------- ----------
BALANCE, SEPTEMBER 30, 1995 28,799,198 - (24,010,547) 4,842,033
Common stock issued for cash 57,270 - - 57,500
Exercise of stock options 491,113 - - 492,830
Exercise of warrants 2,330,226 - - 2,343,554
Conversion of convertible debentures 1,284,825 - - 1,287,400
Stock issued for acquisition of VTI
and Nippon-Zeon rights 834,117 - - 836,159
Issuance - Series A preferred stock 430,034 - - 430,069
Issuance - Series B preferred stock 4,799,950 - - 4,800,000
Preferred Series A conversion 2,891,303 - - 2,896,315
Cash dividends on Series A and
Series B preferred stock - - (58,794) (58,794)
Change in market value of marketable
securities available for sale - (16,078) - (16,078)
Net loss - - (6,326,666) (6,326,666)
---------- ------- ----------- ----------
BALANCE, SEPTEMBER 30, 1996 41,918,036 (16,078) (30,396,007) 11,584,322
Exercise of stock options 427,650 - - 428,925
Exercise of warrants 168,084 - - 168,696
Stock issued for acquisition of Multikine
and Cell-Med's Heteroconjugate rights 1,817,149 - - 1,825,000
Stock options issued to nonemployees
for services 104,673 - - 104,673
Issuance - Series C preferred stock 2,849,971 - - 2,850,000
Repurchase of Preferred B shares (2,849,971) - - (2,850,000)
Preferred Series A conversion (1,273) - - -
Preferred Series B conversion (5,951) - - -
Preferred Series C conversion (9,124) - - -
Cash dividends on Series A and B - - (108,957) (108,957)
Change in market value of marketable
securities available for sale - 12,579 - 12,579
Net loss - - (8,189,458) (8,189,458)
=========== ======== ============ ===========
BALANCE, SEPTEMBER 30, 1997 $44,419,244 $ (3,499) $(38,694,422) $5,825,780
See notes to consolidated financial statements.
F - 4
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- -------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,189,458) $(6,326,666) $(3,878,638)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 313,547 290,829 262,705
Equity in loss of Joint Venture - 3,772 501,125
Issue of stock options for services 104,673 - -
Research and development expenses related to stock
purchase of Cell-Med 75,000 - -
Research and development expenses related to stock
purchase of Multikine rights from Sittona 1,750,000 - -
Research and development expenses related to
purchase of Viral Technologies, Inc. - 515,617 -
Research and development expenses related to
purchase of licensing agreement from Nippon Zeon - 219,375 -
Net realized loss on sale of securities - - 42,490
Amortization of investment premiums and discounts (158,825) 22,558 6,407
Changes in assets and liabilities:
Decrease (increase) in advances 137,567 (129,739) 4,147
(Increase) decrease in prepaid expenses, deposits,
interest receivable, and receivable from joint
venture (168,312) 56,456 (396,705)
Increase (decrease) in accounts payable,
accrued expenses, and deferred rent 214,569 20,601 (68,330)
---------- ---------- ----------
Net cash used in operating activities (5,921,239) (5,327,197) (3,526,799)
---------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of investments (1,700,000) (6,492,955) (389,688)
Sales and maturities of investments 7,625,000 170,000 2,951,299
Advances to Joint Venture - - (346,081)
Repayment on note receivable from shareholder 13,625 - -
Issuance of note receivable to shareholder (300,000) - -
Expenditures for property and equipment (184,543) (16,727) (151,006)
Expenditures for patents (62,762) (63,379) -
---------- ---------- ----------
Net cash provided by 5,391,320 (6,403,061) 2,064,524
---------- ---------- ----------
(Continued)
F - 5
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of note payable - - 184,915
Issuance of convertible debentures - 1,250,000 -
Issuance of preferred and common stock 597,672 10,927,075 1,955,850
Repayment of note receivable for stock option exercise - 86,100 -
Repayment of note payable - (811,263) (162,253)
Dividends paid (108,957) (58,794) -
---------- ---------- ----------
Net cash provided by financing activities 488,715 11,393,118 1,978,512
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (41,204) (337,140) 516,237
CASH, BEGINNING OF YEAR 3,549,810 3,886,950 3,370,713
---------- ---------- ----------
CASH, END OF YEAR $3,508,606 $3,549,810 $3,886,950
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
In October 1995, CEL-SCI issued 159,170 shares of common stock as
consideration for the purchase of the remaining 50% of Viral Technology,
Inc. In conjunction with this acquisition, CEL-SCI obtained net assets with
a fair value of $170,000.
In March 1996, a shareholder of the Company exercised options to purchase
40,000 shares of common stock. The shareholder signed a note for the stock,
agreeing to pay the note by the end of June 1996. The note was repaid in
June 1996.
During 1996, $1,250,000 of the convertible debentures were converted into
250,000 shares of common stock.
During 1997 and 1996, the net unrealized loss on investments available-for-sale
was $3,499 and $16,078, respectively.
During the quarter ended December 31, 1996, 600 shares of Series A Preferred
Stock were converted into 127,945 shares of common stock and 1,900 shares
of Series B Preferred Stock were converted into 527,774 shares of common
stock. During the quarter ended March 31, 1997, 500 shares of Series C
Preferred Stock were converted into 125,000 shares of common stock. During
the quarter ended June 30, 1997,250 shares of Series B Preferred Stock was
converted into 69,444 shares of common stock and 2,350 shares of Series C
Preferred Stock were converted into 790,271 shares of common stock
In March 1997, CEL-SCI issued 751,678 shares of common stock as consideration
for the purchase of the rights to its Multikine technology. In addition,
the Company paid $500,000 in cash for the rights, included in research and
development expense.
In April 1997, CEL-SCI issued 33,378 shares of common stock to Cell-Med as a
payment for the company's heteroconjugate technology. CEL-SCI also paid
$50,000 in cash to Cell-Med, included in research and development expense.
(Concluded)
See notes to consolidated financial statements.
F - 6
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22, 1983, in the
State of Colorado, to finance research and development in biomedical science and
ultimately to engage in marketing products.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial statements include the
accounts of CEL-SCI Corporation and its wholly owned subsidiary, Viral
Technologies, Inc. All significant intercompany transactions have been
eliminated upon consolidation.
Investments - Investments that may be sold as part of the liquidity management
of the Company or for other factors are classified as available-for-sale and are
carried at fair market value. Unrealized gains and losses on such securities are
reported as a separate component of stockholders' equity. Realized gains and
losses on sales of securities are reported in earnings and computed using the
specific identified cost basis.
Research and Office Equipment - Research and office equipment is recorded at
cost and depreciated using the straight-line method over estimated useful lives
of five to seven years.
Research and Development Costs - Research and development expenditures are
expensed as incurred.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate adjustment in
the asset value and period of amortization will be made.
Net Loss Per Share - Net loss per common share is computed by dividing the net
loss, after increasing the loss for the effect of any preferred stock dividends,
by the weighted average number of common shares outstanding during the period.
Common stock equivalents, including options to purchase common stock, were
excluded from the calculation for all periods presented as they were
antidilutive.
Investment in Joint Venture - Through October 1995, the investment in joint
venture was accounted for by the equity method. The Company's proportionate
share of the net loss of the joint venture has been included in the respective
statements of operations. In October 1995, the Company purchased the remaining
50% interest in the joint venture, and as of October 15, 1995, the operations of
the joint venture are consolidated in the financial statements of the Company.
F - 7
Statement of Cash Flows - For purposes of the statements of cash flows, cash
consists principally of unrestricted cash on deposit, and short-term money
market funds. The Company considers all highly liquid investments with a
maturity of less than three months to be cash equivalents.
Prepaid Expenses - The majority of prepaid expenses consist of bulk purchases of
laboratory supplies to be consumed in the manufacturing of the Company's product
for clinical studies and for its further development.
Income Taxes - Income taxes are provided using the liability method under which
deferred tax liabilities or assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities (i.e.,
temporary differences) and are measured at the enacted tax rates. Deferred tax
expense is determined by the change in the liability or asset for deferred
taxes.
Reclassifications - Certain reclassifications have been made to the 1996 and
1995 financial statements for comparative purposes with the 1997 financial
statements.
2. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 1997 and 1996, are as follows:
September 30, 1997
-------------------------------------------------------------
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 1997
U. S. Government Securities $ 249,713 $ - $ (213) $ 249,500
--------- ------- ------ ---------
Corporate Debt Securities 499,002 - (3,286) 495,716
--------- ------- ------ ---------
Total $ 748,715 $(3,499) $ - $ 745,216
========= ======= ====== =========
September 30, 1997
-------------------------------------------------------------
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 1997
U. S. Government Securities $ 249,713 $ - $(213) $ 249,500
Corporate Debt Securities 499,002 - (3,286) 495,716
--------- ------- ----- ---------
Total $ 748,715 $ - (3,499) $ 745,216
========= ======= ===== =========
While management has classified investments as available-for-sale, management
intends to hold such securities to maturity for the foreseeable future.
F - 8
The gross realized gains and losses of sales of investments available-for-sale
for the years ended September 30, 1997, 1996, and 1995, are as follows:
1997 1996 1995
Realized gains $ - $ - $17,839
Realized losses - - 60,329
---- ---- --------
Net realized gain (loss) $ - $ - $(42,490)
==== ==== ========
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1997 and 1996, consist of the
following:
1997 1996
Research equipment $1,700,173 $1,548,778
Furniture and equipment 200,929 167,832
Leasehold improvements 19,272 19,272
---------- ----------
1,920,374 1,735,882
Less accumulated depreciation and
amortization (1,128,410) (863,899)
---------- ----------
Net research and office equipment $ 791,964 $ 871,983
========== ==========
4. JOINT VENTURE
In October 1995, the Company purchased the remaining 50 percent interest in VTI
from Alpha 1. Prior to this date, VTI was wholly owned by the Company and Alpha
1, each having a 50% ownership interest. The Company conveyed 159,170 shares of
CEL-SCI common stock as the consideration for the net assets of VTI with a fair
value of approximately $170,000. The acquisition was accounted for under the
purchase method of accounting with substantially all of the value of the
purchase price being expensed as research and development expense for the year
ended September 30, 1996, as the acquisition represents primarily research and
development costs. Effective October 31, 1995, the Company has consolidated
CEL-SCI's and VTI's financial statements, and the consolidated financial
statements reflect the results of VTI's operations since the date of
acquisition.
During the year ended September 30, 1995, VTI had no sales and incurred expenses
of $1,002,250 with a net loss of $1,002,250 for the year.
In July 1996, VTI purchased all of the remaining rights to HGP-30 in return for
45,000 shares of the Company's common stock which was charged to expense as
purchased research and development.
F-9
5. CREDIT ARRANGEMENTS
As of September 30, 1997, the Company had a line of credit outstanding with a
bank in the total amount of $973,500, which can be used through January 5, 1999.
Interest on the line of credit is based on the bank's prime rate plus two
percent. No amounts have been borrowed under this agreement for the years ended
September 30, 1997 and 1996.
6. RELATED-PARTY TRANSACTIONS
On March 10, 1997, the Company purchased from Sittona Company, B.V.,
Netherlands, all rights to its Multikine technology, including all patents and
trade secrets. The previous agreement with Sittona required CEL-SCI to pay a 10%
royalty on sales and a 15% royalty on sublicenses for the use of the technology,
know-how, and trade secrets. The Company purchased these rights with $500,000 in
cash and 751,678 shares of its common stock. The total purchase price of
$2,250,000 was charged to expense as purchased research and development.
The technology and know-how licensed to the Company, called Multikine, was
developed by a group of researchers under the direction of Dr. Hans-Ake
Fabricius and was assigned during 1980 and 1981 to Hooper Trading Company, N.V.,
a Netherlands Antilles corporation (Hooper) and Shanksville Corporation, also a
Netherlands Antilles corporation (Shanksville). Maximillian de Clara, an officer
and director in the Company, and Dr. Fabricius owned 50% and 30%, respectively,
of each of these companies. The technology and know-how assigned to Hooper and
Shanksville was licensed to Sittona Company, B.V., a Netherlands corporation
(Sittona), effective September, 1982 pursuant to a licensing agreement which
required Sittona to pay to Hooper and Shanksville royalties on income received
by Sittona respecting the technology and know-how licensed to Sittona. In 1983,
Sittona licensed this technology to the Company. At such time as the Company
generates revenues from the sale or sublicense of this technology, the Company
was to pay royalties to Sittona equal to 10% of net sales and 15% of licensing
royalties received from third parties. In that event, Sittona, pursuant to its
licensing agreements with Hooper and Shanksville, would have been required to
pay to those companies a minimum of 10% of any royalty payments received from
the Company.
In 1985 Mr. de Clara acquired 100% of the issued and outstanding stock of
Sittona. In this arrangement Mr. de Clara and Dr. Fabricius, because of their
ownership interests in Hooper and Shanksville, would have received approximately
50% and 30%, respectively, of any royalties paid by Sittona to Hooper and
Shanksville; and Mr. de Clara, through his interest in all three companies
(Hooper, Shanksville, and Sittona), could have received up to 95% of any
royalties paid by 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.
During the year ended September 30, 1996, a shareholder and officer of the
Company borrowed $86,100 from the Company to exercise the purchase of 40,000
shares of common stock, which was evidenced by a short-term promissory note. The
note was subsequently repaid during the year. In addition, at September 30, 1997
and 1996, $-0- and $138,000, respectively, was receivable from the officer in
Company advances.
In October 1996, the Company loaned $300,000 to an officer and shareholder. The
loan carried an interest rate of 5% and was due on December 31, 1996. At that
time, the loan was extended and the balance is now due March 31, 1998. Payments
have been made on the note, and the balance on September 30, 1997, was $286,875.
F-10
7. INCOME TAXES
The approximate tax effect of each type of temporary differences and
carryforward that gave rise to the Company's deferred tax assets and liabilities
at September 30, 1997 and 1996, is as follows:
1997 1996
Depreciation $ (18,258) $(17,989)
Prepaid expenses (91,186) (25,588)
Net operating loss carryforward 14,811,399 11,658,132
Other 10,261 7,455
Less: Valuation allowance
(14,712,216) (11,622,010)
------------ -----------
Net deferred $ - $ -
============ ===========
The Company has available for income tax purposes net operating loss
carryforwards of approximately $39,063,000, expiring from 1998 through 2008.
In the event of a significant change in the ownership of the Company, the
utilization of such carryforwards could be substantially limited.
The difference in the Company's U.S. federal statutory income tax rate and the
Company's effective rate is primarily attributed to the recording of a valuation
allowance for the amount of future tax benefits that is more likely than not to
be realized.
8. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
1996 Plans: During the year ended September 30, 1996, the shareholders of the
Company approved the adoption of two new Plans, the 1996 Incentive Stock Option
Plan (1996 Incentive Plan) and the 1996 Non-Qualified Stock Option Plan (1996
Non-Qualified Plan). Shares are reserved under each plan and total 600,000 and
400,000 shares, respectively. In August 1997, the 1996 Non-Qualified Plan was
amended to provide for 1,500,000 shares to be reserved under the 1996
Non-Qualified Plan.
1995 Plans: The shareholders of the Company approved the adoption of the 1995
Non-Qualified Stock Option Plan (1995 Non-Qualified Plan) and reserved 400,000
shares under the plan. Terms of the options are to be determined by the
Company's Compensation Committee, but in no event are options to be granted for
shares at a price below fair market value at the date of grant. In December
1995, the 1995 Non-Qualified Plan was amended to provide for 800,000 shares to
be reserved under the 1995 Non-Qualified Plan.
During the year ended September 30, 1995, the Board of Directors canceled
certain options under the various stock option plans and replaced them with new
options. Under this conversion the number of options outstanding did not
increase or decrease as the conversion was an exchange of options within the
plans to maximize reserved shares in the Plans with the options granted.
1994 Plans: Shares are reserved under the 1994 Incentive Stock Option Plan (1994
Incentive Plan) and the 1994 Non-Qualified Stock Option Plan (1994
Non-Qualified) and total 100,000 shares for each plan. Only employees of the
Company are eligible to receive options under the 1994 Incentive Plan, while the
Company's employees, directors, officers, and consultants or advisors are
eligible to be granted options under the 1994 Non-Qualified Plan. Terms of the
F-11
options are to be determined by the Company's Compensation Committee, which will
administer all of the plans, but in no event are options to be granted for
shares at a price below fair market value at date of grant. Options granted
under the option plans must be granted, or shares issued under the bonus plan
issued, before July 29, 2004.
1992 Plans: The 1992 Incentive Stock Option Plan (1992 Incentive Plan), the 1992
Non-Qualified Stock Option Plan (1992 Non-Qualified Plan), and the Stock Bonus
Plan (1992 Bonus Plan) include shares that are reserved under each plan and
total 100,000, 60,000, and 40,000 shares, respectively. Only employees of the
Company are eligible to receive options under the Incentive Plan, while the
Company's employees, directors, officers, and consultants or advisors are
eligible to be granted options under the Non-Qualified Plan or issued shares
under the Bonus Plan. Terms of the options are to be determined by the Company's
Compensation Committee, which will administer all of the plans, but in no event
are options to be granted for shares at a price below fair market value at date
of grant. Options granted under the option plans must be granted, or shares
issued under the bonus plan issued, before August 20, 2002.
1987 Plan: The 1987 Nonqualified Stock Option and Stock Bonus Plan (the 1987
Plan) reserved 200,000 shares of the Company's previously unissued common stock
to be granted as incentive stock options to employees. The 1987 Plan reserved
50,000 shares of the Company's previously unissued common stock to be granted as
stock bonuses to employees. The exercise price of the options could not be
established at less than fair market value on the date of grant and the option
period could not be greater than ten years. During 1993, the 1987 Plan was
terminated and no further options will be granted and no further bonus shares
will be issued pursuant to the 1987 Plan. In June 1997, all options outstanding
under the 1987 Plan expired.
F-12
Information regarding the Company's stock option plans are summarized as
follows:
Outstanding Exercisable
--------------------- --------------------------
Range Weighted Weighted
of Average Average
Option Exercise Exercise
Prices Shares Prices Shares Prices
1987 Stock Option and Bonus Plan:
Balance, September 30, 1994 $3.40 - 20.90 183,250 17.58 143,249 17.19
Canceled $3.40 - 20.90 (176,250) 17.59 (136,249) 16.34
-------- ------ -------- ------
Balance, September 30, 1995 and $16.50 - 19.70 7,000 17.41 7,000 17.41
Forfeitures $16.50 - 19.70 7,000 17.41 7,000 17.41
-------- ------ -------- ------
Balance, September 30, 1997
- - - -
======== ====== ======== ======
1992 Incentive Stock Option Plan:
Balance, September 30, 1994 $6.80 - 15.60 42,000 11.41 4,166 15.29
Canceled $6.80 - 15.60 (42,000) 11.41 (4,166) 15.29
Granted $2.87 - 3.87 57,550 3.01 20,917 2.87
-------- ------ -------- ------
Balance, September 30, 1995 $2.87 - 3.87 57,550 3.01 20,917 2.87
Forfeitures $2.94 - 3.44 (5,833) 2.96 - -
Granted $2.87 - 3.87 45,500 3.23 - -
Exercised $2.87 (14,001) 2.87 (14,001) 2.87
Became exercisable $2.87 - 3.87 - - 39,102 3.13
-------- ------ -------- ------
Balance, September 30, 1996 $2.87 - 3.87 83,216 3.16 46,018 3.12
Forfeitures $2.87 (500) 2.87 - -
Exercised $2.87 (1,000) 2.87 (1,000) 2.87
Became exercisable $2.87 - 3.87 - - 19,516 3.12
-------- ------ -------- ------
Balance, September 30, 1997 81,716 3.16 64,534 3.13
======== ====== ======== ======
1992 Nonqualified Stock Option Plan:
Balance, September 30, 1994 $8.70 - 15.60 36,000 12.54 18,000 9.71
Canceled $2.87 (7,500) 2.87 - -
Granted $2.87 31,500 2.87 - -
Became Exercisable $2.87 - - 42,000 2.87
-------- ------ -------- ------
Balance, September 30, 1995 $2.87 - 15.60 60,000 4.92 60,000 4.92
Granted - - - -
Exercised $2.87 (25,500) 2.87 (25,500) 2.87
-------- ------ -------- ------
Balance, September 30, 1996 $2.87 - 15.60 34,500 6.44 34,500 6.44
Forfeitures $13.40 (2,500) 13.40 (2,500) 13.40
Exercised $2.87 (11,500) 2.87 (11,500) 2.87
-------- ------ -------- ------
Balance, September 30, 1997 $2.87 - 15.60 20,500 7.59 20,500 7.59
======== ====== ======== ======
1994 Incentive Stock Option Plan:
Balance, September 30, 1994 $2.87 50,000 2.87 - -
Granted $2.87 50,000 2.87 -
Became Exercisable $2.87 - - 61,000 2.87
-------- ------ -------- ------
Balance, September 30, 1995 $2.87 100,000 2.87 61,000 2.87
Became exercisable $2.87 - - 11,000 2.87
-------- ------ -------- ------
Balance, September 30, 1996 $2.87 100,000 2.87 72,000 2.87
Became exercisable $2.87 - - 11,000 2.87
-------- ------ -------- ------
Balance, September 30, 1997 $2.87 100,000 2.87 83,000 2.87
======== ====== ======== ======
F-13
Outstanding Exercisable
--------------------- --------------------------
Range Weighted Weighted
of Average Average
Option Exercise Exercise
Prices Shares Prices Shares Prices
1994 Nonqualified Stock Option Plan:
Balance, September 30, 1994 $2.87 70,000 2.87 - -
Granted $2.87 - 3.87 27,250 2.96 - -
Became exercisable $2.87 - 3.87 - - 48,084 2.94
-------- ------ -------- ------
Balance, September 30, 1995 $2.87 - 3.87 97,250 2.90 48,084 2.94
Exercised $2.87 (46,667) 2.87 (46,667) 2.87
Became exercisable $2.87 - - 24,167 2.87
-------- ------ -------- ------
Balance, September 30, 1996 $2.87 - 3.87 50,583 2.92 25,584 2.90
Became exercisable $2.87 - 3.87 - - 24,166 2.90
-------- ------ -------- ------
Balance, September 30, 1997 50,583 2.92 49,750 2.90
======== ====== ======== ======
1995 Nonqualified Stock Option:
Granted in 1995 $2.87 - 3.87 329,251 3.26 - -
Became exercisable $2.87 - - 70,000 2.87
-------- ------ -------- ------
Balance, September 30, 1995 $2.87 - 3.87 329,251 3.26 70,000 2.87
Forfeitures $2.87 (12,625) 2.87 - -
Granted $2.38 - 5.62 419,500 2.75 - -
Exercised $2.87 - 3.87 (85,375) 2.88 (85,375) 2.88
Became exercisable $2.87 - 3.87 - - 146,628 3.32
-------- ------ -------- ------
Balance, September 30, 1996 $2.38 - 5.62 650,751 2.97 131,253 2.75
Granted $5.25 20,000 5.25 - -
Exercised $2.38 - 3.87 (19,000) 3.56 (19,000) 3.56
Became exercisable $2.38 - 5.62 - - 449,501 2.74
-------- ------ -------- ------
Balance, September 30, 1997 651,751 3.02 561,754 2.72
======== ====== ======== ======
1996 Incentive Stock Option Plan:
Granted in 1996 $5.62 - 11.00 65,700 5.70 - -
-------- ------ -------- ------
Balance, September 30, 1996 $5.62 - 11.00 65,700 5.70 - -
Forfeitures $3.25 - 6.88 (5,500) 4.08 - -
Granted $3.25 - 5.18 331,800 3.89 - -
Became exercisable $5.62 - 11.00 - - 21,234 5.57
-------- ------ -------- ------
Balance, September 30, 1997
392,000 4.19 21,234 5.57
======== ====== ======== ======
1996 Nonqualified Stock Option
Plan:
Granted in 1996 $5.62 70,000 5.62 - -
-------- ------ -------- ------
Balance, September 30, 1996 $5.62 70,000 5.62 - -
Granted $3.12 - 5.25 880,000 3.52 - -
Became exercisable $5.62 - - 23,334 5.62
-------- ------ -------- ------
Balance, September 30, 1997
950,000 3.67 23,334 5.62
======== ====== ======== ======
F-14
The weighted average remaining contractual life for options outstanding at
September 30, 1997, is as follows:
Plan Weighted Average
Remaining Contractual
Life Years
1992 Incentive Stock Option Plan 2.41
1992 Nonqualified Stock Option Plan 3.00
1994 Incentive Stock Option Plan 2.00
1994 Nonqualified Stock Option Plan 5.40
1995 Nonqualified Stock Option Plan 3.92
1996 Incentive Stock Option Plan 9.47
1996 Nonqualified Stock Option Plan 5.27
Other Options and Warrants: During 1991, the Company granted a consultant an
option to purchase 50,000 shares of the Company's common stock. The options were
exercisable at $13.80 per share and expired in March 1996. The holder of the
option had the right to have the shares issuable upon the exercise of the option
included in any registration statement filed by the Company.
In connection with the 1992 public offering, 5,175,000 common stock purchase
warrants were issued and outstanding at September 30, 1997. Every ten warrants
entitled the holder to purchase one share of common stock at a price of $15.00
per share. Subsequently, the expiration date of the warrants has been extended
to February 1998. Effective June 1, 1997, the exercise price of warrants was
lowered from $15 to $6 and only five warrants rather than 10 warrants are
required to purchase one share of common stock. Subsequent to September 30,
1997, warrant holders who tender five warrants and $6.00 between January 9,
1998, and February 7, 1998, will receive one share of the Company's common stock
and one new warrant. The new warrant will permit the holder to purchase one
share of the Company's common stock at a price of $18.00 per share prior to
February 7, 2000.
Also in connection with the 1992 offering, the Company issued to the underwriter
warrants to purchase 9,000 equity units, each unit consisting of 5 shares of
common stock and 5 warrants entitling the holder to purchase one additional
share of common stock. The equity unit warrants were outstanding at September
30, 1996, and were exercisable through February 8, 1997, at a price of $255.70
per unit. The common stock warrants included in the units were exercisable at a
price of $76.70 per share. As of September 30, 1997, all warrants have expired.
During 1995, the Company granted another consultant options to purchase 17,858
shares of the Company's common stock. These shares became exercisable on
November 2, 1995, and will expire November 1, 1999. These options are
exercisable at $5.60 per share and as of September 30, 1997, 17,858 shares
remain outstanding.
In connection with a private equity offering in June and September 1995, the
Company issued to the underwriter warrants to purchase 230,000 equity units.
Each unit consisted of one share of the Company's common stock. For the June
1995 private placement, 57,500 equity units were issued at $2.00 per unit and
another 57,500 equity units were issued at $3.25 per unit. All units issued in
June 1995 private placement were exercised at September 30, 1996. For the
September 1995 private placement, 57,500 equity units were issued at $2.40 per
unit and another 57,500 equity units were issued at $3.25 per unit. As of
September 30, 1996, 21,890 equity units had been at $3.25 per unit and 21,890
F-15
equity units were issued at $2.40 per unit. As of September 30, 1997, 35,610
equity units had been exercised at $2.40 per unit and 25,610 equity units were
exercised at $3.25 per unit. Remaining equity units of 10,000 were outstanding
at September 30, 1997 and expire on December 30, 1997.
During 1996, the Company granted two consultants options to purchase a total of
70,000 shares of the Company's common stock. The fair value of the options is
expensed over the life of the consultants' contracts. The 50,000 options became
exercisable on August 21, 1996, at $3.25. Of the 50,000 options, 24,000 shares
were exercised in August 1996 and 26,000 were exercised in February of 1997. An
additional 20,000 options became exercisable at August 31, 1996, at $3.25 and
were exercised in February of 1997.
During 1997, the Company granted four consultants options to purchase a total of
290,000 shares of the Company's common stock. The fair value of the options is
expensed over the life of the consultants' contracts. Options of 240,000 shares
became exercisable during 1997 that were exercisable at prices ranging from
$3.50 to $4.50. During 1997, 50,000 options were exercised at $3.50. At
September 30, 1997, 240,000 options related to the grant to four consultants
remain outstanding.
In October 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement encourages but does not require
companies to account for employee stock compensation awards based on their
estimated fair value at the grant date with the resulting cost charged to
operations. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. If the Company had elected to recognize
compensation expense based on the fair value of the awards granted in 1997 and
1996, consistent with the provisions of SFAS 123, the Company's net loss and net
loss per common share would have been increased to the pro forma amounts
indicated below:
Year Ended September 30,
-------------------------------
1997 1996
(In thousands)
Net loss
As reported $(8,262,125) $(6,326,666)
Pro forma (9,687,999) (7,032,936)
Loss per common share:
As reported $ 0.89 $ 0.98
Pro forma 1.04 1.09
The weighted average fair value at the date of grant for options granted during
1997 and 1996 was $1.16 and $1.18 per option, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1997 1996
Expected stock price volatility 74 % 91 %
Risk-free interest rate 5.36 % 5.82 %
Expected life options 2 2
Expected dividend yield 0 0
F-16
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts. SFAS 123 does not apply
to awards granted prior to fiscal 1996.
The Company's stock options are not transferable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess of
the market price on the date of exercise over the exercise price. The Company
has based its assumption for stock price volatility on the variance of monthly
closing prices of the Company's stock from its initial offering date to the
present. The risk-free rate of return used equals the yield on one to three year
zero-coupon U.S. Treasury issues on the grant date. No discount was applied to
the value of the grants for nontransferability or risk of forfeiture.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying under
Section 401(k) of the Internal Revenue Code, subject to the Employee Retirement
Income Security Act of 1974, as amended, and covering substantially all CEL-SCI
employees. The employer contributes an amount equal to 50% of each employee's
contribution not to exceed 3% of the participant's salary. The expense for the
years ended September 30, 1997, 1996, and 1995, in connection with this plan was
approximately $35,800, $29,800, and $24,900, respectively.
10. LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as follows:
Year Ending September 30,
1998 $ 55,965
1999 59,378
2000 61,815
2001 61,815
2002 65,569
Thereafter 96,688
=========
Total minimum lease payments $ 401,230
Rent expense for the years ended September 30, 1997, 1996, and 1995, was
approximately $185,776, $177,858, and $124,059, respectively.
11. STOCKHOLDERS' EQUITY
In December 1996, the Company authorized 3,600 shares of Series C Preferred
Stock (Series C Stock) with a par value of $.01 per share and sold 2,850 shares
of Series C for $1,000 per share.
Series C Stock is convertible into shares of the Company's common stock on the
basis of one share of Series C Stock for shares of common stock equal in number
to the amount determined by dividing $1,000 by 85% of the average closing price
of the Company's common stock over the five-day trading period ending on the day
prior to the conversion of the Series C Stock. The conversion price may not be
more than $4.00. Beginning 90 days after December 17, 1996, one-half of the
Series C Stock is convertible into shares of the Company's common stock. All
preferred shares are convertible into shares of the Company's common stock
F-17
beginning 180 days after December 17, 1996 provided that, if the Company's
common stock trades for more than $8.00 at any time, then all shares of the
Series C Stock will thereafter be immediately convertible into shares of the
Company's common stock. During 1997, 2,850 shares of Series C stock were
converted into 915,271 shares of the Company's common stock.
In addition, 379,793 Series A warrants and 379,763 Series B warrants were sold
with the Series C Preferred Stock. The Series A warrants entitle 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, 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.
In April 1997, the Company purchased the rights to Cell-Med's heteroconjugate
technology for consideration of $50,000 in cash and 33,378 shares of the
Company's common stock. The total purchase price of $125,000 was expensed as
research and development expense.
In March 1996 the Company sold $1,250,000 of Convertible Notes (the 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.
During the year ended September 30, 1996, the Company authorized 3,500 shares of
Series A Preferred Stock (Series A Stock) with a par value of $.01 per share.
The Company also authorized 5,000 shares of Series B Preferred Stock (Series B
Stock) with a par value of $.01 per share. Holders of Series A Stock and Series
B Stock are entitled to dividends, payable quarterly if declared, at the rate of
$17.50 per quarter. Dividends which are not declared will not accrue nor be
cumulative.
During 1996, the Company issued 3,500 shares of Series A Stock for cash
consideration of $3,500,000 and 5,000 shares of Series B Stock for cash
consideration of $5,000,000. Commissions of $375,000 were paid relative to the
preferred stock offerings and were recorded as a reduction of additional paid-in
capital on the transaction.
Each share of Series A Stock was convertible into 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 on or after 60 days from issuance, and 83%
of the closing price on or after 90 days from issuance, with the conversion
price not less than $3.00 nor more than $8.00. Each share of Series B Stock is
convertible into 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 on
or after 10 days from the effective registration date of the common shares, and
85% of the closing price on or after 40 days from the effective date, with the
conversion price not less than $3.60 nor more than $14.75.
Also during 1996, 2,900 shares of Series A Stock were converted into 504,096
shares of the Company's common stock. In August 1996, the Board of Directors
declared dividends on Series A Stock ($17.50 per quarter) and cash dividends of
$58,794 were paid as of September 31, 1996. In November 1996, the Board of
Directors declared dividends on Series A Stock ($17.50 per quarter) and Series B
Stock ($17.50 per quarter) and cash dividends of $108,957 were paid.
In December 1996 the Company repurchased 2,850 shares of 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 prior to
December 15, 1999. During 1997, the remaining 2,150 and 600 shares,
respectively, of Series B and A stock were converted into 597,218 and 127,945
shares of the Company's common stock, respectively.
F-18
On April 28, 1995, the stockholders of the Company approved a 10-for-1 reverse
split of the Company's outstanding common stock, which became effective on May
1, 1995. All shares and per-share amounts have been restated to reflect the
stock split.
The Company also participated in a private offering during 1995. This offering
allowed for the purchase of one share of common stock and one warrant (a unit)
for the price of $2.00 per unit. All 1,150,000 shares authorized for the
offering were purchased during the year ended September 30, 1995. Cash of
$2,300,000 was received in June and September 1995. Commissions of $344,150 were
paid or payable relative to the offering at September 30, 1995.
12. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share, which is
effective for all periods ending after December 15, 1997. SFAS 128 establishes
standards for computing and presenting earnings per share. As the Company has a
loss from continuing operations, potential exercise of warrants and options
would have an anti-dilutive effect and the pro-forma effect of adopting SFAS 128
has no impact on the earnings-per-share calculation for the years ended
September 30, 1997 and 1996.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) and requires that items of other comprehensive
income be classified by their nature in the financial statements and that the
accumulated balance of other comprehensive income be displayed separately from
retained earnings and additional paid-in-capital in the equity section. The
Company does not believe that the adoption of SFAS 130 will have a material
effect on its financial position or results of operation.
* * * * * *
F-19
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 22, 1997 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 22, 1997
MAXIMILIAN DE CLARA Executive Officer
/s/ GEERT R. KERSTEN Director, Principal December 22, 1997
GEERT R. KERSTEN Financial Officer
and Chief Executive
Officer
/s/ MARK V. SORESI Director December 22, 1997
MARK V. SORESI
/s/ DONALD HUDSON Director December 22, 1997
F. DONALD HUDSON