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THIS DOCUMENT IS A COPY OF THE 10-K REPORT FILED ON JANUARY 14, 1999 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-11503
CEL-SCI CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0916344
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 506-9460
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on December
15, 1998, as quoted on the American Stock Exchange, was approximately
$23,600,000. 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, 1998, the Registrant had 12,715,529 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, MULTIKINE(TM),
manufactured using the Company's proprietary cell culture technologies, is a
combination, or "cocktail", of natural human interleukin-2 ("IL-2") and certain
lymphokines and cytokines. MULTIKINE is being tested to determine if it is
effective in improving the immune response of cancer patients. The Company's
second product, HGP-30, is being tested to determine if it is an effective
vaccine/treatment against the AIDS virus. The third technology the Company is
developing, LEAPS (Ligand Epitope Antigen Presentation System) is a T-cell
modulation technology which can be used to direct a specific immune response and
which is thought to be particularly important in the case of diseases which have
no approved vaccinations (e.g. herpes simplex, malaria, AIDS, etc.) 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 AIDS, 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
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
anticancer potential, the Company is of the opinion that to have optimum
therapeutic value, IL-2 should be administered not as a single substance but
rather as a mixture of IL-2 and certain lymphokines and cytokines, i.e. as a
"cocktail". This approach, which was pioneered by the Company, makes use of the
synergism between these lymphokines. It should be noted, however, that neither
the FDA nor any other agency has determined that the Company's MULTIKINE product
will be effective against any form of cancer.
It has been reported by researchers in the field of lymphokine research
that IL-2 can increase the number of killer T-cells produced by the body, which
improves the body's capacity to selectively destroy specific tumor cells.
Research and human clinical trials sponsored by the Company have indicated a
correlation between administration of MULTIKINE to cancer patients and
immunological responses. On the basis of these experimental results, the Company
believes that MULTIKINE may have application for the treatment of solid tumors
in humans.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using the Company's
MULTIKINE product. The focus of the trial was unresectable head and neck cancer
(which is presently untreatable).
In 1991, four patients with regionally advanced squamous cell cancer of
the head and neck were treated with the Company's MULTIKINE product. The
patients had previously received radical surgery followed by x-ray therapy but
developed recurrent tumors at multiple sites in the neck and were diagnosed with
terminal cancer. The patients had low levels of lymphocytes and evidence of
immune deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects were observed
and the patients were treated as outpatients. Notwithstanding the above, it
should be noted that these trials were only preliminary and were only conducted
on a small number of patients. It remains to be seen if MULTIKINE will be
effective in treating any form of cancer.
These results caused the Company to embark on a major manufacturing
program for MULTIKINE with the goal of being able to produce a MULTIKINE that
would meet the stringent regulatory requirements for advanced human studies.
This program included building a pilot scale manufacturing facility.
Today the Company is involved in the following clinical human studies
of MULTIKINE for treatment of cancer and AIDS:
ISRAEL: MULTIKINE is being tested as a presurgical treatment prior to
surgery or radiation in patients with head and neck cancer. The data from the
first ten patients, presented at a scientific conference by the clinical
investigator, Dr. Feinmesser, indicates that seven of the ten patients treated
with MULTIKINE for only two weeks experienced regression in tumor size, with one
of the patients showing a complete disappearance of the tumor. In addition,
patients had a resolution of tumor ulceration, increased tongue mobility and
reduction or elimination of local pain. There were no tumor progressions or
adverse local changes, nor evidence of toxicity from MULTIKINE. Recovery after
operation and wound healing were normal. Additionally, microscopic evaluation of
surgical specimens showed evidence of cellular immune reaction against the
tumors and destruction of tumor cells.
Dr. Feinmesser is planning to treat another ten patients at a higher
dosage as part of this study.
CANADA: A Phase I/II study in Canada is also testing MULTIKINE as a
presurgical treatment prior to surgery or radiation in patients with head and
neck cancer. Initially, the study was designed to treat fourteen patients, but
was subsequently increased to twenty-one patients, and recently increased
further to twenty-eight patients. The study is expected to be completed in the
second half of 1999.
U.S.A. & CANADA: In this U.S. and Canadian multi-center study,
twenty patients who have failed conventional treatments are being treated
experimentally with MULTI- KINE. The study is designed to evaluate the
safety, tumor responses and immune responses of MULTIKINE in late stage head
and neck cancer patients.
U.S.A.: In 1997, a prostate cancer study was conducted at Jefferson
Hospital in Philadelphia, Pennsylvania. The study 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 Company is also currently completing a MULTIKINE study with
fourteen HIV positive patients. The study, due to its size, will focus on the
safety of MULTIKINE in the patients participating in the study.
HUNGARY: In November 1998, the Company received notification from the
Hungarian National Institute of Pharmacy that a MULTIKINE study with thirty head
and neck patients was approved. The study, expected to last one year, will
involve the same kind of patients as are participating in the Israeli and
Canadian pre-surgical studies and will employ MULTIKINE as a pre-surgical
treatment.
OTHER STUDIES: In addition to the foregoing, the Company is in the
process of establishing other supporting human studies for MULTIKINE.
STRATEGY FOR MULTIKINE: At the present time the Company plans to seek
initial regulatory approval for the use of MULTIKINE in the treatment of head
and neck cancer patients prior to surgery or radiation with the intent of
increasing the success of subsequent surgery (and/or radiation). Success in this
area is measured by the reduction in the number of tumor recurrences since
recurrences usually lead to a poor prognosis for the patient. The Company
believes, based upon discussions with experts in the field, that a reduction in
recurrences is viewed by many clinicians as an indicator of increased survival.
Head and neck cancer is the sixth most frequently occurring cancer
worldwide, with an incidence of 500,000 annually. Recent statistics show no
reduction in head and neck cancer mortality, but rather a dramatic increase of
the disease in certain segments of the population. This cancer is most
frequently found in men in their 50's or early 60's with a history of smoking
and alcohol consumption. Conventional treatment calls for either surgery, which
can be extremely disfiguring, or radiation and chemotherapy, both of which are
associated with very unpleasant side-effects.
Proof of efficacy for anti-cancer drugs is a lengthy and complex
process. At this early stage of clinical investigation, it remains to be proven
that MULTIKINE will be effective against any form of cancer. Even if some form
of MULTIKINE is found to be effective in the treatment of cancer, commercial use
of MULTIKINE may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that the Company's research efforts, even if successful from a
medical standpoint, can be completed before those of its competitors.
The Company uses an unrelated corporation for certain aspects of the
production of MULTIKINE for research and testing purposes. The agreement with
this corporation expires during the summer of 2000. 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.
AIDS VACCINE
The Company, through its wholly-owned subsidiary Viral Technologies,
Inc. (VTI), is involved in the development of a preventive vaccine against HIV
infection. This vaccine is currently in Phase II human clinical trials in the
Netherlands.
The Company is also developing a therapeutic AIDS vaccine for people
already infected with HIV. The purpose of this vaccine is to activate a person's
immune system in such a way that the immune system will fight HIV more
effectively. This therapeutic vaccine is currently being readied for early
clinical trials which are projected to begin in the second half of 1999.
Both vaccines are derived from the Company's HGP-30 technology. HGP-30
is a thirty amino acid region of the p17 core protein of HIV. The Company has
decided to produce HGP-30 as a synthetic peptide because peptides are
inexpensive to manufacture and cannot infect a person with HIV. VTI holds
proprietary rights to certain synthesized components of the p17 core protein.
The HGP-30 vaccine differs from most other vaccine candidates in that
its active component, the HGP-30 peptide, is derived from the p17 core protein
particles of the virus. Since HGP-30 is a totally synthetic molecule containing
no live virus, it cannot cause infection. Unlike the envelope (i.e. outside)
proteins, the p17 region of the AIDS virus appears to be relatively
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.
The preventive HIV vaccine, HGP-30, was tested in London, England in
eighteen healthy HIV-negative volunteers at three different dosages.
Subsequently it was tested in twenty-one HIV-negative volunteers in San
Francisco and Los Angeles at four different dosages. Both tests showed the
vaccine to be safe and able to elicit cellular immune responses and antibody
responses in the majority of the volunteers.
In April 1995, eleven of the original twenty-one California volunteers
began another clinical trial. 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 by many 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 a study published in the September 1998 issue of AIDS Research and
Human Retroviruses, the Company revealed that the improved version (HPG-30W) of
the Company's HIV vaccine shows greater recognition of the most prevalent
subtypes of the virus, covering over 90% of the world's AIDS cases. In addition,
the article also provides additional evidence that the improved vaccine induces
a stronger cellular immune response, which many scientists believe to be very
important in fighting HIV infection.
In the AIDS Research and Human Retroviruses paper, Dr. Prem Sarin, the
Company's Senior Vice President of Research, Infectious Diseases, reported that
the evaluation of blood obtained from mice immunized with HGP-30 AIDS vaccine,
in the presence of the adjuvant alum, a material needed to stimulate immune
response to vaccines, showed recognition of the corresponding regions of the HIV
subtypes A, B, C and E. However, if alum was replaced with newer adjuvants, the
recognition of some HIV subtypes was improved and the levels of antibody
isotypes used as surrogate markers for cellular immune response were increased 2
to 4 fold.
One major problem facing researchers involved in developing a vaccine
against HIV is the virus' substantial variability and continued mutation among
the different subtypes found around the world. Subtype A is found in Africa
whereas the B subtype is the dominant strain in the U.S. and Europe. Subtype C
is dominant in parts of Africa and Asia. Subtype E is primarily found in
Thailand.
In September 1997, the Company also completed a Phase I safety study of
the HGP-30 preventive AIDS vaccine in 24 HIV-infected patients. The study showed
that immunizations with this vaccine were safe in AIDS patients.
In June 1998, the Institute for Clinical Pharmacology, Pharma
BioResearch, Netherlands, started inoculating the first volunteers with the
Company's HGP-30W AIDS vaccine in the only ongoing European Phase II AIDS
vaccine study. In the trial, 30 healthy, HIV-negative volunteers will receive
one of the three different dosages of the vaccine.
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 the Company'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.
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.
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, referred to as LEAPS (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, LEAPS combines T-cell binding ligands with small, disease associated,
peptide antigens and may provide a new method to treat and prevent certain
diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
The Company intends to use this new technology with the HGP-30
immunogen which is currently in Phase II clinical studies. To this end, the
Company recently entered into formulation studies with a HGP-30/LEAPS compound
called LEAPS 101. This product is likely to go into human testing in the second
half of 1999. The target population will be HIV-infected individuals.
In addition, the Company intends to use the LEAPS 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. Using this new technology, the Company is currently conducting in vitro
laboratory and in vivo animal studies.
In August 1996, the Company signed a Cooperative Research and
Development Agreement ("CRADA") with the Naval Medical Research Institute of the
U.S. Navy to jointly develop a potential malaria vaccine using the Company's
LEAPS technology. This agreement was extended in 1998. 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 LEAPS 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. A subsequent study with a different herpes simplex peptide
also showed protection, confirming the results from the prior study. Research
conducted pursuant to this study may lead to the future development of a herpes
simplex vaccine.
In May 1998, the Company announced the receipt of a Phase I $100,000
research grant to fund further animal studies with its herpes simplex vaccine.
This grant was given pursuant to the Small Business Innovation Research Program
of the National Institute of Allergy and Infectious Diseases.
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.
The LEAPS technology was acquired from Cell-Med, Incorporated
("CELL-MED") in consideration for the Company's payment of $56,000 plus the
issuance, during 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, 1998, approximately $22,802,000
has been expended on Company-sponsored research and development, including
approximately $3,834,000, $6,012,000 and $3,471,000, respectively during the
years ended September 30, 1998, 1997 and 1996. 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.
The members of the Company's SAB are:
Evan M. Hersh, M.D. - 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.
Michael J. Mastrangelo, M.D. - Director, Division of Medical
Oncology; Professor of Medicine, Jefferson Medical College, Philadelphia,
Pennsylvania; and Associate Clinical Director, Jefferson Cancer Center,
Philadelphia, Pennsylvania.
Alan B. Morris, Ph.D. - Professor, Department of Biological
Sciences, University of Warwick, Coventry, U.K.
Edmond C. Tramont, M.D. - Associate Director of The Institute of
Human Virology, University of Maryland Biotechnology Institute.
GOVERNMENT REGULATION
The investigational agents and future products of the Company are
regulated in the United States under the Federal Food, Drug and Cosmetic Act,
the Public Health Service Act, and the laws of certain states. The Federal Food
and Drug Administration (FDA) exercises significant regulatory control over the
clinical investigation, manufacture and marketing of pharmaceutical and
biological products.
Prior to the time a pharmaceutical product can be marketed in the
United States for therapeutic use, approval of the FDA must normally be
obtained. Certain states, however, have passed laws which allow a state agency
having functions similar to the FDA to approve the testing and use of
pharmaceutical products within the state. In the case of either FDA or state
regulation, preclinical testing programs on animals, followed by three phases of
clinical testing on humans, are typically required in order to establish product
safety and efficacy.
The first stage of evaluation, preclinical testing, must be conducted
in animals. After lack of toxicity has been demonstrated, the test results are
submitted to the FDA (or state regulatory agency) along with a request for
clearance to conduct clinical testing, which includes the protocol that will be
followed in the initial human clinical evaluation. If the applicable regulatory
authority does not object to the proposed study, the investigator can proceed
with Phase I trials. Phase I trials consist of pharmacological studies on a
relatively few number of humans under rigidly controlled conditions in order to
establish lack of toxicity and a safe dosage range.
After Phase I testing is completed, one or more Phase II trials are
conducted in a limited number of patients to test the product's ability to treat
or prevent a specific disease, and the results are analyzed for clinical
efficacy and safety. If the results appear to warrant confirmatory studies, the
data is submitted to the applicable regulatory authority along with the protocol
for a Phase III trial. Phase III trials consist of extensive studies in large
populations designed to assess the safety of the product and the most desirable
dosage in the treatment or prevention of a specific disease. The results of the
clinical trials for a new biological drug are submitted to the FDA as part of a
product license application ("PLA"), a New Drug Application ("NDA") or Biologics
License Application ("BLA"), depending on the type or derivation of the product
being studied.
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") may need to be filed in the case of
biological products derived from blood, or not considered to be sufficiently
well characterized, in order to obtain FDA approval of the testing and
manufacturing facilities in which the product is produced. To the extent all or
a portion of the manufacturing process for a product is handled by an entity
other than the Company, the Company must similarly receive FDA approval for the
other entity's participation in the manufacturing process. Domestic
manufacturing establishments are subject to inspections by the FDA and by other
Federal, state and local agencies and must comply with Good Manufacturing
Practices ("GMP") as appropriate for production. In complying with GMP
regulations, manufacturers must continue to expend time, money and effort in the
area of production, quality control and quality assurance to ensure full
technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. 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
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 or vaccines 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.
Notwithstanding the above, VTI's primary objective is to develop an AIDS vaccine
for use in Africa and Asia. As such, the Company does not consider the lack of
FDA approval to be important at this time.
ITEM 2. PROPERTIES
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 space which houses the
Company's fully equipped 11,000 square foot laboratory is rented by the Company
for approximately $4,700 per month pursuant to a lease which expires in 2004,
with extentions available until 2014.
The Company leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $7,400. 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 December 15, 1998 there were approximately 2,800 record holders
of the Company's common stock. Prior to June 5, 1997, the Company's Common Stock
was traded on the National Association of Securities Dealers Automatic Quotation
("NASDAQ") System. Since June 5, 1997 the Company's Common Stock has traded on
the American Stock Exchange. Set forth below are the range of high and low
quotations for the Company's common stock for the periods indicated as reported
the American Stock Exchange. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter
Ending High Low
12/31/96 $ 6.63 $3.50
3/31/97 $ 6.12 $4.19
6/30/97 $ 5.12 $2.75
9/30/97 $ 8.06 $3.12
12/31/97 $10.00 $5.87
3/31/98 $ 6.56 $4.00
6/30/98 $ 6.44 $4.44
9/30/98 $ 5.94 $1.94
Holders of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available therefor
and, in the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment of liabilities. The Board of Directors is not
obligated to declare a dividend. The Company has not paid any dividends on its
common stock and the Company does not have any current plans to pay any common
stock dividends.
The provisions in the Company's Articles of Incorporation relating to
the Company's Preferred Stock would allow the Company's directors to issue
Preferred Stock with rights to multiple votes per share and dividend rights
which would have priority over any dividends paid with respect to the Company's
Common Stock. The issuance of Preferred Stock with such rights may make more
difficult the removal of management even if such removal would be considered
beneficial to shareholders generally, and will have the effect of limiting
shareholder participation in certain transactions such as mergers or tender
offers if such transactions are not favored by incumbent management.
The market price of the Company's common stock, as well as the
securities of other biopharmaceutical and biotechnology companies, have
historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
the Company's operating results, announcements of technological innovations or
new therapeutic products by the Company or its competitors, governmental
regulation, developments in patent or other proprietary rights, public concern
as to the safety of products developed by the Company or other biotechnology and
pharmaceutical companies, and general market conditions may have a significant
effect on the market price of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the more detailed financial statements, related notes and other financial
information included herein.
For the Years Ended September 30,
1998 1997 1996 1995
---- ------ ------ -----
Investment Income and
Other Revenues $792,994 $ 438,145 $ 322,370 $ 423,765
Expenses:
Research and
Development 3,833,854 6,011,670 3,471,477 1,824,661
Depreciation
and Amortization 295,331 313,547 290,829 262,705
General and
Administrative 3,106,492 2,302,386 2,882,958 1,713,912
Equity in loss of
joint venture -- -- 3,772 501,125
--------------------------------- ----- -----------
Net Loss $(6,442,683)$(8,189,458)$(6,326,666) $(3,878,638)
============ ======================= ============
Loss per common share
(basic and diluted) $(0.74) $(1.00) $(1.16) $(0. 89)
Weighted average
common shares
outstanding 11,379,437 9,329,419 6,425,316 4,342,628
Balance Sheet Data:
September 30,
1998 1997 1996 1995
---- ------ ------ -----
Working Capital $12,926,014 $4,581,247 $10,266,104 $3,983,699
Total Assets 14,431,813 6,334,397 11,878,370 6,359,011
Total Liabilities 456,529 508,617 294,048 1,516,978
Shareholders'
Equity 13,975,284 5,825,780 11,584,322 4,842,033
No dividends have been declared on the Company's common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal 1998
Interest income during the year ending September 30, 1998 reflects
interest accrued on investments. Interest income increased from fiscal 1997 due
to the investment of the proceeds of the sale of the Series D Preferred Stock.
Research and development expenses in 1998 are substantially less then the prior
period since the costs of acquiring the MULTIKINE license and the LEAPS
technology were expensed in fiscal 1997. General and administrative expenses
increased due to additional employees needed for the Company's increased
activity level and charges ($587,377) for options granted to persons other than
employees with exercise prices equal to prevailing market prices at the time of
grant.
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 to Cell-Med
($125,000) to retain ownership of the LEAPS 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.
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 Companysponsored
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 May 1996, the Company sold 3,500 shares of its Series A Preferred
Stock (the "Preferred Shares") for $3,500,000 or $1,000 per share. At the
purchasers' option, up to 1,750 Preferred Shares were convertible, on or after
60 days from the closing date of the purchase of such shares (the "Closing"),
into shares of the Company's Common Stock on the basis of one share of Preferred
Stock for shares of Common Stock equal in number to the amount determined by
dividing $1,000 by 85% of the Closing Price of the Company's Common Stock. All
Preferred Shares were convertible, on or after 90 days from the Closing, on the
basis of one share of Preferred Stock for shares of the Company's Common Stock
equal in number to the amount determined by dividing $1,000 by 83% of the
Closing Price of the Company's Common Stock. The term "Closing Price" was
defined as the average closing bid price of the Company's Common Stock over the
five-day trading period ending on the day prior to the conversion of the
Preferred Stock. All outstanding shares of the Series A Preferred Stock have
since been converted into 632,041 shares of the Company's Common Stock.
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 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, 1998 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,
1998 all shares of the Series C Preferred Stock have been converted into 915,271
shares of the Company's common stock, all 379,763 Series A Warrants had been
exercised and 253,175 Series B Warrants had been exercised.
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, the Company determined that the application of a technical
accounting treatment required the 1997 and 1996 loss per share calculations to
include the impact of $1,062,482 and $1,039,679 respectively, for the accretion
of the assumed beneficial conversion features, and $108,957 and $58,794,
respectively, for preferred stock dividends, with respect to the issuance of the
Series A, Series B and Series C Preferred Stock during fiscal 1997 and 1996. The
effect of the accretion is a non-cash charge to additional paid-in capital and
does not impact the previously reported net loss for the years ended September
30, 1997 and 1996, nor does it result in a net change to stockholders' equity at
September 30, 1997 and 1996. The effect of the restatement was to increase net
loss per share by $0.12 to $1.00 for the year ended September 30, 1997, and
$0.18 to $1.16 for the year ended September 30, 1996.
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 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. As of November 30, 1998 2,786 Series D Preferred Shares
had been converted into 1,167,812 shares of the Company's common stock.
During fiscal l999, the Company expects that it will spend between
$3,500,000 and $4,000,000 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.
Year 2000. The Company is in the process of modifying its computer
hardware and software systems to recognize the year 2000. The Company expects
these modifications to be substantially complete by early 1999. The Company does
not expect these modifications to have a significant effect on its operations
and the costs of modification are expected to be insignificant. In addition, the
Company is evaluating significant vendors and other third parties which could
have an effect on the Company's operations to ensure year 2000 compliance. If
the Company's computer systems fail during the year 2000, the Company may need
to have independent laboratories perform some of research that is presently
being conducted by the Company's laboratory. Since the Company expects its
computer systems to be compliant with the year 2000 by early 1999, the Company
has not developed any contingency plans in the event the Company's computer
systems fail to be year 2000 compliant.
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. 40 Director, Chief Executive Officer,
Secretary and Treasurer
Patricia B. Prichep 46 Senior Vice President of Operations
M. Douglas Winship 49 Senior Vice President of
Regulatory Affairs and Quality
Assurance
Dr. Eyal Talor 43 Senior Vice President of Research
and Manufacturing Dr. Prem
S. Sarin 64 Senior Vice President of Research
Infectious Diseases Dr.
Daniel H. Zimmerman 57 Senior Vice President of Research,
Cellular Immunology
Michael Luecke 56 Senior Vice President of Business
Development
Mark V. Soresi 44 Director F. Donald Hudson
65 Director
The directors of the Company serve in such capacity until the next
annual meeting of the Company's shareholders and until their successors have
been duly elected and qualified. The officers of the Company serve at the
discretion of the Company's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of the Company, may be deemed to be the "parent" and "founder" of the
Company as those terms are defined under applicable rules and regulations of the
Securities and Exchange Commission.
The principal occupations of the Company's officers and directors,
during the past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a director of the Company
since its inception in March l983, and has been president of the Company since
July l983. Prior to his affiliation with the Company, and since at least l978,
Mr. de Clara was involved in the management of his personal investments and
personally funding research in the fields of biotechnology and biomedicine. Mr.
de Clara attended the medical school of the University of Munich from l949 to
l955, but left before he received a medical degree. During the summers of l954
and l955, he worked as a research assistant at the University of Istanbul in the
field of cancer research. For his efforts and dedication to research and
development in the fight against cancer and AIDS, Mr. de Clara was awarded the
"Pour le Merit" honorary medal of the Austrian Military Order "Merito Navale" as
well as the honor cross of the Austrian Albert Schweitzer Society.
Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and
Investment Relations for the Company between February 1987 and October 1987.
In October of 1987, he was appointed Vice President of Operations. In
December 1988, Mr. Kersten was appointed director of the Company. Mr.
Kersten also became the Company's secretary and treasurer in 1989. In May
1992, Mr. Kersten was appointed Chief Operating Officer and in February 1995,
Mr. Kersten became the Company's Chief Executive Officer. In previous years,
Mr. Kersten worked as a financial analyst with Source Capital, Ltd., an
investment advising firm in McLean, Virginia. Mr. Kersten is a stepson of
Maximilian de Clara, who is the President and a Director of the Company. Mr.
Kersten attended George Washington University in Washington, D.C. where he
earned a B.A. in Accounting and an M.B.A. with emphasis on International
Finance. He also attended law school at American University in Washington,
D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Senior 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 Senior Vice President of
Regulatory Affairs and Quality Assurance since April 1994. Between 1988 and
April 1994, Mr. Winship held various positions with Curative Technologies, Inc.,
including Vice President of Regulatory Affairs and Quality Assurance
(1991-1994).
Eyal Talor, Ph.D. has been the Company's Senior Vice President of
Research and Manufacturing since March 1994. From October 1993 until March 1994,
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 Company's Senior Vice President of
Research, Infectious Diseases since October 1995. From May 1993 to September
1995 Dr. Sarin was the Vice President of Research for Viral Technologies,
Inc. (the Company's wholly-owned subsidiary). 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 Senior Vice
President of Cellular Immunology since January 1996. Dr. Zimmerman founded
CELL-MED, Inc. and was its president from 1987-1995. From 1973 to 1987 Dr.
Zimmerman served in various positions at Electronucleonics, Inc. including
Scientist, Senior Scientist, Technical Director and Program Manager. From
1969-1973 Dr. Zimmerman was a Senior Staff Fellow at NIH.
Michael Luecke joined the Company as Senior Vice President of Business
Development in June 1998. Mr. Luecke has over 20 years of business experience in
pharmaceutical and biotechnology companies. He has held senior-level business
development/licensing positions with Bristol-Myers, SmithKline and Ciba-Geigy,
as well as several small biopharmaceutical companies.
Mark V. Soresi. Mr. Soresi became a director of the Company in July
1989. Between 1989 and 1997, Mr. Soresi was the president and Chief
Executive Officer of REMAC U.S.A., Inc. a corporation is involved in the
clean-up of hazardous and toxic waste dump sites. Since 1997 Mr. Soresi has
been the president and chief executive officer of Millennium Solutions &
Beyond, Inc. and the senior vice president of Xecute ND, Inc. both of which
are involved in the computer consulting business. Mr. Soresi attended George
Washington University in Washington, D.C. where he earned a Bachelor of
Science in Chemistry.
F. Donald Hudson. F. Donald Hudson has been a director of the Company
since May 1992. From December 1994 to October 1995 Mr. Hudson was President and
Chief Executive Officer of VIMRx Pharmaceuticals, Inc. Between 1990 and 1993,
Mr. Hudson was President and Chief Executive Officer of Neuromedica, Inc., a
development stage company engaged in neurological research. Until January 1989,
Mr. Hudson served as Chairman and Chief Executive Officer of Transgenic
Sciences, Inc. (now TSI Corporation), a publicly held biotechnology corporation
which he founded in January 1987. From October 1985 until January 1987, Mr.
Hudson was a director of 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, 1998.
Annual Compensation Long Term Compensation
Re- All
Other stric- Other
Annual ted Com-
Compen- Stock Options pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted tion
pal Position Year (1) (2) (3) (4) (5) (6)
Maximilian 1998 $315,021 - $81,709 - 164,000 $73
de Clara, 1997 $319,104 - $76,290 - 333,000 $88
President 1996 $225,000 $75,000$85,016 - 70,000 $88
Geert R. Kersten, 1998 $229,533 - $15,180 2,081 164,000 $5,310
Chief Executive 1997 $228,888 - $12,314 - 313,000 $8,888
Officer, Secretary1996 $172,531 $75,000 $9,420 - 294,000 $8,869
and Treasurer
M. Douglas Winship,1998 $136,918 - $2,400 1,740 - $1,060
Senior Vice
President 1997 $129,926 - $2,400 - 45,000 $3,152
of Regulatory
Affairs 1996 $119,100 - $2,400 - - $2,488
and Quality Assurance
Prem S. Sarin, 1998 $117,035 - - 1,488 39,000 $929
Ph.D. 1997 $113,385 - - - 34,000 $3,473
Senior Vice President
of Research, Infectious
Diseases
Eyal Talor, Ph.D.1998 $130,845 - $3,000 1,616 27,000 $958
Senior Vice
President 1997 $119,333 - $3,000 - 58,000 $3,668
of Research and
Manufacturing
Daniel Zimmerman,1998 $106,360 - $3,000 1,353 39,000 $822
Ph.D., 1997 $104,000 - - - 34,000 $3,208
Senior 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 periods covered by the table, the shares of restricted stock
issued as compensation for services to the persons listed in the table. As
of September 30, 1998, 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 107,021 $280,395
M. Douglas Winship 1,740 $4,559
Prem S. Sarin, Ph.D. 1,488 $3,899
Eyal Talor, Ph.D. 3,116 $8,164
Daniel Zimmerman, Ph.D. 21,383 $56,023
* Includes 401(k) shares that were issued prior to September 30, 1998.
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 l998 Salary Reduction Plan
as well as certain options purchased from the Company. See "Options Granted
During Fiscal Year Ending September 30, l998" below.
(6) All other compensation received that the Company could not properly report
in any other column of the Table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and the
dollar value of any insurance premiums paid by, or on behalf of, the Company
with respect to term life insurance for the benefit of the named executive
officer, and the full dollar value of the remainder of the premiums paid by,
or on behalf of, the Company. Amounts in the table represent life insurance
premiums 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. Prior to January 1, 1998 the
Company's contribution was equal to the lesser of 3% of each employee's salary,
or 50% of the employee's contribution. Effective January 1, 1998 the plan was
amended such that the Company's contribution is now made in shares of the
Company's common stock as opposed to cash. Each participant's contribution is
matched by the Company with shares of common stock which have a value equal to
100% of the participant's contribution, not to exceed the lesser of $1,000 or 6%
of the participant's total compensation. The Company's contribution of common
stock is valued each quarter based upon the closing price of the Company's
common stock. The fiscal 1998 expenses for this plan were $70,519. 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.
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, 1998, 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, 1998, 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, 1998, to the persons named
below, and the fiscal year-end value of all unexercised options (regardless of
when granted) held by these persons.
Options Granted During Fiscal Year Ending September 30, l998
Potential
Individual Grants Realizable
Value at
% of Total Assumed Annual
Options Rates 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 114,000 (1) $2.94 1/10/02 $60,420 $128,820
de Clara 50,000 $4.68 5/01/08 $147,000 $372,000
------
164,000
Geert R. 114,000 (1) $2.94 1/10/02 $60,420 $128,820
Kersten 50,000 $4.68 5/01/08 $147,000 $372,000
------
164,000
M. Douglas - -- -- -- --
Winship -
Prem S. 24,000 (1) $2.94 1/10/02 $12,700 $27,100
Sarin, Ph.D.15,000 $4.68 5/01/08 $435,00 $111,600
------
39,000
Eyal 12,000 (1) $2.94 1/10/02 $6,360 $13,600
Talor, Ph.D. 15,000 $3.31 8/03/08 $30,800 $78,900
------
27,000
Daniel 24,000 (1) $2.94 1/10/02 $12,700 $27,100
Zimmerman, 15,000 $5.06 2/19/08 $47,000 $120,700
------
Ph.D. 39,000
(1) Options were granted in accordance with the Company's 1998 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 Clara52,715 170,607 289,667/300,666 -/-
Geert R. Kersten 20,000 113,800 689,084/286,666 -/-
M. Douglas Winship -- -- 37,000/30,000 -/-
Prem S. Sarin -- -- 57,834/49,666 -/-
Eyal Talor 11,166 61,202 40,167/60,333 -/-
Daniel Zimmerman -- -- 40,334/44,666 -/-
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 1998.
(2) With respect to options exercised during the Company's fiscal year ended
September 30, 1998, 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, 1998,
separated between those options that were exercisable and those options that
were not exercisable.
(4) For all unexercised options held as of September 30, 1998, the market value
of the stock underlying those options (as of September 30, 1998) was less
than the exercise price of the options.
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 1,100,000 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, within three months
following the date of his death, the option as to any of the shares not
previously exercised;
The total fair market value of the shares of Common Stock (determined
at the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years from
the date of grant. Any other option granted pursuant to the Plan may not be
exercisable by its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an
option is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110% of the
fair market value in the case of a person owning more than 10% of the Company's
outstanding shares).
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plans
collectively authorize the issuance of up to 2,760,000 shares of the Company's
Common Stock to persons that exercise options granted pursuant to the Plans. The
Company's employees, directors, officers, consultants and advisors are eligible
to be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
Stock Bonus Plan. Up to 40,000 shares of Common Stock may be granted
under the Stock Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan,
the Company's employees, directors, officers, consultants and advisors are
eligible to receive a grant of the Company's shares, provided however that bona
fide services must be rendered by consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by
the Company's Compensation Committee ("the Committee"), each member of which is
a director of the Company. The members of the Committee were selected by the
Company's Board of Directors and serve for a one-year tenure and until their
successors are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the Committee
will be filled by the Board of Directors. The Committee is vested with the
authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is empowered to select
those persons to whom shares or options are to be granted, to determine the
number of shares subject to each grant of a stock bonus or an option and to
determine when, and upon what conditions, shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company. At the time an employee ceases working for the Company
(or at the time a non-employee ceases to perform services for the Company), any
shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Committee payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of the Company's Common Stock
having an aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner they
deem appropriate, provided that such amendment, termination or suspension will
not adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Option Summary. The following sets forth certain information, as of
November 30, 1998, 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
Incentive Stock Option Plans 1,100,000 772,384 309,449
Non-Qualified Stock Option Plans 2,760,000 1,959,700 441,924
As of November 30, 1998, 18,880 shares had been issued pursuant to the
Company's Stock Bonus Plan as part of the Company's contribution to its 401(k)
plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1998, 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 289,667 2.2%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 802,105 (2) 6%
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Patricia B. Prichep 97,972 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
M. Douglas Winship 38,740 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 43,283 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 66,717 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Prem Sarin, Ph.D. 59,322 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Michael Luecke 900 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
Mark Soresi 100,000 *
8229 Boone Blvd.
Suite 802
Vienna, VA 22182
F. Donald Hudson 117,000 *
53 Mt. Vernon Street
Boston, MA 02108
All Officers and Directors
as a Group (10 persons) 1,615,706 11.4%
========== =====
*Less than 1%
(1) Includes shares issuable prior to February 28, 1999 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 1999
Maximilian de Clara 289,667
Geert R. Kersten 695,084
Patricia B. Prichep 93,667
M. Douglas Winship 37,000
Eyal Talor, Ph.D. 40,167
Daniel H. Zimmerman, Ph.D. 45,334
Prem Sarin, Ph.D. 57,834
Michael Luecke --
Mark Soresi 85,000
F. Donald Hudson 117,000
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
Prior to January 1997 the Company's MULTIKINE technology was owned by
Hooper Trading Company, N.V., ("Hooper"), and Shanksville Corporation,
("Shanksville") and licensed to Sittona Company, B.V., ("Sittona"). In 1983,
Sittona licensed the MULTIKINE Technology to the Company and received from the
Company a $1,400,000 advance royalty payment. The Company also agreed to (i) pay
royalties to Sittona equal to l0% of net sales and l5% of the licensing
royalties received from third parties (ii) bear the expense of preparing, filing
and processing patent applications and (iii) 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.
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.
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years Ended
September 30, 1998, 1997 (Restated), and 1996 (Restated),
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, 1998, 1997
(RESTATED), AND 1996 (RESTATED):
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-7 - F-21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation and subsidiary (the Company) as of September 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1998.
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
and its subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 14, the 1997 and 1996 consolidated financial statements
have been restated.
DELOITTE & TOUCHE LLP
Washington, DC
December 11, 1998
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents
$2,813,225 $3,508,606
Investment securities available
for sale 9,675,311 745,216
Interest and other receivables 69,809 106,443
Prepaid expenses 723,834 410,788
Advances to officer/shareholder 70,982 291,781
and employees
----------------------------
Total current assets 13,353,161 5,062,834
RESEARCH AND OFFICE EQUIPMENT - Less
accumulated depreciation of $1,352,165
and $1,128,410 619,496 791,964
DEPOSITS 14,828 18,178
PATENT COSTS - Less accumulated
amortization
of $454,328 and $402,025 444,328 461,421
------------- ---------------
$14,431,813 $6,334,397
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses $427,147 $481,587
--------------- ------------
Total current liabilities 427,147 481,587
DEFERRED RENT 29,382 27,030
------------ ----------------
Total liabilities 456,529 508,617
------------- ---------------
STOCKHOLDERS' EQUITY:
Series D Preferred stock, $0.01 90 -
par value - authorized, 10,000
shares; issued and
outstanding, 9,002 shares
Common stock, $.01 par value -
authorized, 100,000,000 shares;
issued and outstanding,
11,972,695 and 10,445,691 shares 119,726 104,457
Additional paid-in capital
59,040,864 44,419,244
Net unrealized loss on marketable (48,291) (3,499)
equity securities
Accumulated deficit
(45,137,105) (38,694,422)
------------- ---------------
Total stockholders' equity 13,975,284 5,825,780
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $14,431,813 $6,334,397
============= ===============
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
- -------------------------------------------------------------------------------
1998 1997 1996
(As restated, (As restated,
see Note 14) see Note 14)
INVESTMENT INCOME $728,421 $386,547 $255,053
OTHER INCOME 64,573 51,598 67,317
----------------------------------------
Total income 792,994 438,145 322,370
----------------------------------------
OPERATING EXPENSES:
Research and development 3,833,854 6,011,670 3,471,477
Depreciation and amortization 295,331 313,547 290,829
General and administrative 3,106,492 2,302,386 2,882,958
------------------------------------------
Total operating expenses 7,235,677 8,627,603 6,645,264
-----------------------------------------
EQUITY IN LOSS OF
JOINT VENTURE - - (3,772)
---------------------------------------
NET LOSS $6,442,683.00 $8,189,458.0 $6,326,666.00
===============================================
ACCRETION OF PREFERRED 1,980,000.00 1,062,482.00 1,039,679.00
STOCK
PREFERRED STOCK DIVIDENDS - 108,957.00 58,794.00
-------------------------------------------
NET LOSS ATTRIBUTABLE TO
COMMON
STOCKHOLDERS $8,422,683.00 $9,360,897.0 $7,425,139.00
=========================================
LOSS PER COMMON SHARE $0.74 $1.00 $1.16
(BASIC) =============================================
LOSS PER COMMON SHARE $0.74 $1.00 $1.16
(DILUTED)
============================================
Weighted average common 11,379,437 9,329,419 6,425,316
shares outstanding ========== ========= =========
See notes to
consolidated financial
statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------------------------------------------------------
Preferred Preferred Preferred
Series Series B Series C Series D Stock
A Stock Stock
Stock
-------------- -------------------- -------------------- ------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
BALANCE, OCTOBER 1, - - -
1995 - $- $- $- $-
Common stock - - -
issued for cash - - - - -
Exercise of - - -
stock options - - - - -
Exercise of - - -
warrants - - - - -
Conversion of - - -
convertible - - - - -
debentures
Stock issued
for acquisition of
VTI
and - - -
Nippon-Zeon rights - - - - -
Issuance - - - -
Series A preferred 3,500 35 - - -
stock
Issuance - 5,000 - -
Series B preferred - - 50 - -
stock
Preferred - - -
Series A conversion (2,900) (29) - - -
Cash dividends
on Series A and
Series B - - -
preferred stock - - - - -
Change in
market value of
marketable
securities - - -
available for sale - - - - - - -
Net loss - - -
- - - - -
-------------- -------------------- -------------------- ------------------------
BALANCE, SEPTEMBER 5,000 - -
30, 1996 600 6 50 - -
Exercise of - - -
stock options - - - - - - -
Exercise of - - -
warrants - - - - - - -
Stock issued
for acquisition of
Multikine
and - - -
Cell-Med's - - - - - - -
Heteroconjugate
rights
Stock options
issued to
nonemployees
for services - - -
- - - - -
Issuance - - 2,850 -
Series C preferred - - - 29 -
stock
Repurchase of (2,850) - -
Preferred B shares - - (29) - -
Preferred - -
Series A conversion (600) (6) - - - -
Preferred (2,150) - -
Series B conversion - - (21) - -
Preferred - (2,850) -
Series C conversion - - - (29) -
Cash dividends - - -
on Series A and B - - - - - -
Change in -
market value of
marketable
securities - - -
available for sale - - - - - -
Net loss - - -
- - - - - - -
---------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER - - - -
30, 1997 - - - -
============== ==================== ==================== ================
Exercise of - - - -
stock options - - - -
Exercise of - - - -
warrants - - - -
Stock options
issued to
nonemployees
for services - - - -
- - - -
Issuance -
Series D preferred
stock, net of
offering - - -
costs - - - 10,000.100.00
Preferred - - -
Series D conversion - - - (998.00(10.00)
401(k) - - - -
contributions - - - -
Change in
market value of
marketable
securities - - -
available for sale - - - - -
Net loss - -
- - - - - -
-------------- -------------------- -------------------- -------------- ----------------
BALANCE, SEPTEMBER - - $
30, 1998 - $- $- - 9,002.0$90.00
============== ==================== ==================== ============== ================
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in
----------------------
Shares Amount Capital Other Deficit Total
BALANCE, OCTOBER 1, $(24,010,547 $4,842,033
1995 5,338,244 $53,382 $28,799,198 $-
Common stock 230 57,270 - 57,500
issued for cash 23,000 -
Exercise of - 492,830
stock options 195,711 1,957 491,113 -
Exercise of - 2,343,554
warrants 1,308,780 13,088 2,330,226 -
Conversion of - 1,287,400
convertible 257,480 2,575 1,284,825 -
debentures
Stock issued
for acquisition of
VTI
and - 836,159
Nippon-Zeon rights 204,170 2,042 834,117 -
Issuance - - 3,326,384
Series A preferred - - 3,326,349 -
stock
Issuance - - 4,800,000
Series B preferred - - 4,799,950 -
stock
Preferred (5,012) - -
Series A conversion 504,096 5,041 -
Cash dividends
on Series A and
Series B - (58,794) (58,794)
preferred stock - - -
Change in
market value of
marketable
securities - - (16,078)
available for sale - - - (16,078)
Net loss - (6,326,666) (6,326,666)
- - -
---------------------------------------------------------------------------------
BALANCE, SEPTEMBER (30,396,007)11,584,322
30, 1996 7,831,481 78,315 41,918,036 (16,078)
Exercise of - 428,925
stock options - 127,500 1,275 427,650 -
Exercise of 612 - 168,696
warrants - 61,220 168,084 -
Stock issued
for acquisition of
Multikine
and - 1,825,000
Cell-Med's - 785,056 7,851 1,817,149 -
Heteroconjugate
rights
Stock options
issued to
nonemployees
for services - 104,673
- - 104,673 -
Issuance - - 2,850,000
Series C preferred - - 2,849,971 -
stock
Repurchase of - (2,850,000)
Preferred B shares - - (2,849,971) -
Preferred (1,273) - -
Series A conversion 127,945 1,279 -
Preferred (5,951) - -
Series B conversion 597,218 5,972 -
Preferred (9,124) - -
Series C conversion 915,271 9,153 -
Cash dividends - (108,957) (108,957)
on Series A and B - - - -
Change in - - -
market value of - - -
marketable
securities - - 12,579
available for sale - - - 12,579
Net loss - (8,189,458) (8,189,458)
- - - -
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER (3,499.00) (38,694,422) 5,825,780
30, 1997 10,445,691 104,457.00 44,419,244.00
=================================================================================
Exercise of 3,000.00 882,372.00 - - 885,372
stock options 300,048.00
Exercise of 7,682.00 - - 3,629,426
warrants 768,243.00 3,621,744.00
Stock options
issued to
nonemployees
for services - - 564,031.00 - - 564,031
Issuance -
Series D preferred
stock, net of
offering - - - - 9,500,000
costs 9,499,900.00
Preferred 4,413.00 (4,403.00) - - -
Series D conversion 441,333.00
401(k) 174.00 57,976.00 - - 58,150
contributions 17,380.00
Change in
market value of
marketable
securities - - - - (44,792)
available for sale (44,792.00)
Net loss - (6,442,683) (6,442,683)
- - -
---------------------------------------------------------------------------------
BALANCE, SEPTEMBER $(45,137,105$13,975,284
30, 1998 11,972,695 $119,726 $59,040,864 $(48,291)
=================================================================================
See notes to consolidated financial statements.
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997,
AND 1996
- --------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Issuance of convertible debentures
- - 1,250,000
Issuance of preferred and common
stock and
warrant conversion for cash
14,077,049 597,672 10,927,075
Repayment of note receivable for 86,100
stock option exercise - -
Repayment of note payable
- - (811,263)
Dividends paid (58,794)
- (108,957)
----------------------------------
Net cash
provided by financing activities 14,077,049 488,715 11,393,118
----------------------------------
NET DECREASE IN CASH
(695,381) (41,204) (337,140)
CASH, BEGINNING OF YEAR
3,508,606 3,549,810 3,886,950
----------------------------------
CASH, END OF YEAR
$2,813,225$3,508,606 $3,549,810
==================================
SUPPLEMENTAL DISCLOSURES:
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 1998, 1997, and 1996, the
net unrealized loss on investments
available-for-sale was $48,291,
$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.
See notes to consolidated financial (Concluded)
statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
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. The Company has an agreement with an unrelated
corporation for the production of MULTIKINE, for research and testing
purposes, which is the Company's only product source.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology
or other circumstances impair the value or life of the patent,
appropriate adjustment in the asset value and period of amortization is
made.
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 1996, 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 1996, the Company purchased
the remaining 50% interest in the joint venture, and as of October 15,
1996, the operations of the joint venture are consolidated in the financial
statements of the Company.
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, and
the cost of options for nonemployee services.
Income Taxes - Income taxes are accounted for using the liability method
under which deferred tax liabilities or assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities (i.e., temporary differences) and are measured at the enacted
tax rates. Deferred tax expense is determined by the change in the
liability or asset for deferred taxes.
Reclassifications - Certain reclassifications have been made to the 1997
and 1996 financial statements for comparative purposes with the 1998
financial statements.
2. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 1998 and 1997, are as follows:
September 30, 1998
Gross Gross Market Value
Amortized Unrealized Unrealized at
September
30, 1998
Cost Gains Losses
Fixed Income Mutual $ $ $
-- -- -
Funds $9,723,602 2,036 (50,327) 9,675,221
------------- ------- -------- ---------
Total $9,723,602 $ 2,036 $ $
(50,327) 9,675,221
======================================================================-------
September 30, 1997
Gross Gross Market Value
Amortized Unrealized Unrealized at September
30, 1997
Cost Gains Losses
U. S. Government
Securities $249,713 $- $(213) $249,500
Corporate Debt 499,002
Securities Total - (3,286) 495,716
-------------- --------- ----------- ------------
$-
$(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.
The gross realized gains and losses of sales of investments
available-for-sale for the years ended September 30, 1998, 1997, and 1996
are as follows:
1998 1997 1996
Realized gains
$1,485 $- $-
Realized losses 1,494
- -
-----------------------------------------------
Net realized (loss) $(9)
gain $- $-
===============================================
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1998 and 1997, consist of
the following:
1998 1997
Research equipment
$1,728,968 $1,700,173
Furniture and equipment 237,579
200,929
Leasehold improvements 5,114 19,272
--------------------------------------
1,920,374
1,971,661
Less accumulated (1,128,410.00)
depreciation and (1,352,165)
amortization
--------------------------------------
Net research and office
equipment $619,496 $791,964
============ ========
===================================
4. JOINT VENTURE
In October 1996, 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, 1997, as the
acquisition represents primarily research and development costs. Effective
October 31, 1995, the Company 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.
In July 1996, VTI purchased all of the remaining rights to HGP-30 from a
former Japanese partner in return for 45,000 shares of the Company's common
stock which was charged to expense as purchased research and development.
5. CREDIT ARRANGEMENTS
As of September 30, 1998, the Company had a line of credit outstanding with
a bank in the total amount of $500,000, 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, 1998 and 1997.
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).
Maximilian 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 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 was due in full as of March
31, 1998. Payments have been made on the note, and the balance outstanding
on September 30, 1998, was $70,809.
7. INCOME TAXES
The approximate tax effect of each type of temporary differences and carry
forward that gave rise to the Company's deferred tax assets and liabilities
at September 30, 1998 and 1997, is as follows:
1998 1997
Depreciation $(17,089) $(18,258)
Prepaid expenses (227,795) (91,186.00)
Net operating loss carry 17,346,440 14,811,399.00
forward
Other 8,347 10,261.00
Less: Valuation allowance (17,109,902) (14,712,216)
---------------------------------------
Net deferred $- $-
========================================
The Company has available for income tax purposes net operating loss carry
forwards of approximately $45,589,000, expiring from 1998 through 2013.
In the event of a significant change in the ownership of the Company, the
utilization of such carry forwards 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 due to the uncertainty of the amount of future tax
benefits that is more likely than not to be realized.
8. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
1998 Plans: During the year ended September 30, 1998, the shareholders of
the Company approved the adoption of three new Plans, the 1998 Incentive
Stock Option Plan (1998 Incentive Plan), the 1998 Non-Qualified Stock Option
Plan (1998 Non-Qualified Plan), and the 1998 Stock Bonus Plan. Shares are
reserved under each plan and total 300,000, 300,000 and 100,000 shares,
respectively.
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.
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 in 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 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 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.
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 $16.50 -
30, 1995 and 1996 19.70 7,000.00 $17.41 7,000.00$17.41
Forfeitures $16.50 -
19.70 7,000.00 17.41 7,000.00 17.41
---------------- ---------------
Balance, September
30, 1997 - - - -
======================================
======================================
1992 Incentive Stock
Option Plan:
======================================
Balance, October 1, $2.87 - 3.87
1995 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 $2.87 - 3.87 - - 39,102 3.13
exercisable
--------------------------------------
Balance, September $2.87 -
30, 1996 3.87 83,216.00 3.16 46,018 3.12
Forfeitures $2.87 (500) 2.87 - -
Exercised $2.87
(1,000) 2.87 (1,000) 2.87
Became $2.87 -
exercisable 3.87 - - 19,516 3.12
--------------------------------------
Balance, September
30, 1997 81,716.00 3.16 64,534.00 3.13
Exercised $2.87
(3,166.00) 2.87 (3,166.00)2.87
Became exercisable $2.94-3.87 - - 9,848.00 3.38
--------------------------------------
Balance, September
30, 1998 78,550.00 $3.17 71,216.00$3.17
======================================
1992 Nonqualified Stock
Option Plan:
Balance, October 1, $2.87 -
1995 15.60 60,000 $4.92 60,000 60,000 $4.92
Granted
- - - -
Exercised $2.87
(25,500) 2.87 (25,500) 2.87
--------------------------------------
Balance, September $2.87 -
30, 1996 15.60 34,500.00 6.44 34,500.00 6.44
Forfeitures $13.40
(2,500.00)13.40 (2,500.0013.40
Exercised $2.87
(11,500.00)2.87 (11,500.002.87
--------------------------------------
Balance, September $2.87 -
30, 1997 15.60 20,500.00 7.59 20,500.00 7.59
Forfeitures $13.80 -
15.60 (8,000.00)14.96 (8,000.0014.96
Exercised $2.87
(9,000.00) 2.87 (9,000.00)2.87
--------------------------------------
Balance, September
30, 1998 3,500.00 $2.88 3,500.00 $2.88
======================================
======================================
1994 Incentive Stock
Option Plan:
=======================================
Balance, October 1, $2.87 -
1995 3.87 100,000 $2.87 61,000 $2.87
Became exercisable $2.87
- - 11,000 2.87
---------------------------------------
Balance, September $2.87
30, 1996 100,000.00 2.87 72,000 2.87
Became exercisable $2.87
- - 11,000 2.87
---------------------------------------
Balance, September
30, 1997 100,000.00 2.87 83,000.00 2.87
---------------------------------------
Became exercisable $2.87
- - 11,000 2.87
--------------------------------------
Balance, September
30, 1998 100,000 $2.87 94,000.00 $2.87
=======================================
1994 Nonqualified Stock
Option Plan:
Balance, October 1, $2.87 -
1995 3.87 97,250.00 $2.90 48,084.00 $2.94
Exercised $2.87
(46,667) 2.87 (46,667) 2.87
Became exercisable $2.87
- - 24,167 2.87
---------------------------------------
Balance, September $2.87 -
30, 1996 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
Exercised $2.87
(23,333) 2.87 (23,333) 2.87
Became exercisable - - 833 2.87
---------------------------------------
---------------------------------------
Balance, September
30, 1998 27,250 $2.96 27,250 $2.92
=======================================
1995 Nonqualified Stock
Option:
Balance, October 1, $2.87 -
1995 3.87 329,251.00 $3.26 70,000.00 $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 $2.38 -
30, 1996 5.62 650,751 2.97 131,253 2.75
Granted $5.25
20,000 5.50 - -
Exercised $2.38 -
3.87 (19,000) 3.56 (19,000) 3.56
Became exerciable $2.38 -
5.62 - - 449,501 2.74
------------------ ---------------
Balance, September
30, 1997 651,751 3.02 561,754 2.72
Forfeitures $5.62
(7,500.00) 5.62 (7,500.00) 5.62
Exercised $2.38 -
3.87 (121,334) 2.89 (121,334) 2.88
Became exercisable $3.87 -
5.62 - - 79,997 4.48
---------------------------------------
Balance, September
30, 1998 521,917 $3.01 82,416 $2.92
=======================================
1996 Incentive Stock Option
Plan:
Granted in 1996 $5.62 -
11.00 65,700 $5.70 - $-
-------------------------------------
Balance, September 30, $5.62 -
1996 11.00 65,700 5.70 - -
Forfeitures $3.25
- 6.88 (5,500.00) 4.08 - -
Granted $3.25
- 5.18 331,800.00 3.89 - -
Became exercisable $5.62 -
11.00 - - 21,234.00 5.57
-------------------------------------
Balance, September 30,
1997 392,000.00 4.19 21,234.00 5.57
Granted $3.31 -
5.12 205,000.00 4.76 - -
Forfeitures $3.62 -
7.12 (3,666.00) 5.34 (3,666.00) 5.34
Became exercisable
- - 128,838.00 4.19
----------------- -----------------
Balance, September 30,
1998 593,334.00 $4.38 146,406.00 $4.36
=====================================
=====================================
1996 Nonqualified Stock
Option Plan:
Granted in 1996 $5.62
70,000 $5.62 - $-
-------------------------------------
Balance, September 30, $5.62
1996 70,000.00 5.62 - -
Granted $3.12 -
5.25 880,000 3.52 - -
Became exercisable $5.62
- - 23,334.00 5.62
-------------------------------------
Balance, September 30,
1997 950,000.00 3.67 23,334.00 5.62
Granted $2.50 -
8.13 474,700.00 2.98 -
Exercised $3.25
(16,667.00) 3.25 (16,667.00) 3.25
Forfeitures
(2,000.00) 3.12 - -
Became exercisable $3.12 -
5.62 - - 528,000.00 3.13
----------------- ----------------
Balance, September 30,
1998 1,406,033.0$3.44 534,667.00 $3.23
================= =================
(Concluded)
No options have been granted as of September 31, 1998, under Incentive Plan,
the 1998 Non-Qualified Plan, or the 1998 Stock Bonus Plan.
The weighted average remaining contractual life for options outstanding at
September 30, 1998, is as follows:
Plan Weighted Average
Remaining Contractual
Life (Years)
1992 Incentive Stock Option Plan 4.35
1992 Nonqualified Stock Option Plan 5.75
1994 Incentive Stock Option Plan 4.33
1994 Nonqualified Stock Option Plan 2.85
1995 Nonqualified Stock Option Plan 3.20
1996 Incentive Stock Option Plan 8.96
1996 Nonqualified Stock Option Plan 4.32
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
was extended to February 1998. Effective June 1, 1997, the exercise price of
warrants was lowered from $15 to $6 and only five warrants rather than 10
warrants were required to purchase one share of common stock. Subsequent to
September 30, 1997, warrant holders who tendered five warrants and $6.00
between January 9, 1998, and February 7, 1998, would receive one share of
the Company's common stock and one new warrant. The new warrants would
permit the holder to purchase one share of the Company's common stock at a
price of $10.00 per share prior to February 7, 2000. During 1998, the
expiration date of the original warrants was extended to July 31, 1998, and
582,025 original warrants were tendered for 116,405 common shares. As of
September 30, 1998, the remaining 4,592,975 original warrants had expired.
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, 1998, 17,858 options
remain outstanding.
In June and September 1995, the Company completed private offerings whereby
it sold a total of 1,150,000 units at $2.00 per unit. Each unit consisted of
one share of Common Stock and one Warrant. Each Warrant 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. All Warrants sold in this Offering
were exercised during 1996. Additionally, the Company issued to the
underwriter warrants to purchase 230,000 equity units. Each unit consisted
of one share of the Company's common stock. For the June 1995 private
placement, 57,500 equity units were issued at $2.00 per unit and another
57,500 equity units were issued at $3.25 per unit. All units issued in the
June 1995 private placement were exercised at September 30, 1996. For the
September 1995 private placement, 57,500 equity units were issued at $2.40
per unit and another 57,500 equity units were issued at $3.25 per unit. As
of September 30, 1996, 21,890 equity units had been exercised at $3.25 per
unit and 21,890 equity units had been exercised at $2.40 per unit. As of
September 30, 1997, 35,610 equity units had been exercised at $2.40 per unit
and 25,610 equity units were exercised at $3.25 per unit. All remaining
10,000 equity units will expire on March 31, 1999.
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, 1997, at $3.25 and were exercised in February of
1997.
During 1997, the Company granted four consultants options to purchase a
total of 268,000 shares of the Company's common stock. The fair value of the
options is expensed over the life of the consultants' contracts. Of the
268,000 options, 218,000 options became exercisable during 1997 at prices
ranging from $3.50 to $4.50. During 1997, 50,000 options were exercised at
$3.50. During 1998, 114,500 options were exercised at prices ranging from
$3.50 to $4.50. At September 30, 1998, 103,500 options related to the four
consultants remained outstanding.
During 1998, the Company granted seven consultants options to purchase a
total of 282,000 shares of the Company's common stock. The fair value of the
options is expensed over the life of the consultants' contracts. All options
became exercisable during 1998 that were exercisable at prices ranging from
$3.50 to $7.31. During 1998, 10,048 options were exercised at prices ranging
from $3.50 to $4.50. At September 30, 1998, 271,952 options related to the
consultants remain outstanding.
In connection with the December 1997 private offering, the Company issued to
the underwriters warrants to purchase 50,000 shares of common stock at $8.63
per share. The warrants are exercisable at any time prior to December 22,
2000. At September 30, 1998, all warrants remained 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 1998, 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,
-----------------------------------------------
1998 1997 1996
(In thousands)
Net loss
As reported $(6,442,638.00) $(8,189,458.00) $(6,326,666.00)
Pro forma
(7,018,634) (9,687,999.00) (7,032,936.00)
Loss per common share:
As reported $0.74 $1.00 $1.16
Pro forma 0.79 1.17 1.27
The weighted average fair value at the date of grant for options granted
during 1998, 1997, and 1996, was $2.17, $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:
1998 1997 1996
Expected stock price volatility 79 % 74 % 91 %
Risk-free interest rate 5.49 % 5.36% 5.82%
Expected life options 2.00 2.00 2.00
Expected dividend yield 0 0 0
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. Prior to January 1, 1998, the employer
contributed an amount equal to 50% of each employee's contribution not to
exceed 3% of the participant's salary. Effective January 1, 1998, the plan
was amended such that the Company's contribution is now made in shares of
the Company's common stock as opposed to cash. Each participant's
contribution is matched by the Company with shares of common stock that have
a value equal to 100% of the participant's contribution, not to exceed the
lesser of $10,000 or 6% of the participant's total compensation. The
Company's contribution of common stock is valued each quarter based upon the
closing price of the Company's common stock. The expense for the years ended
September 30, 1998, 1997, and 1996, in connection with this plan was
approximately $70,519, $35,800, and $29,800, 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,
1999
$131,196.00
2000 133,892.00
2001 139,175.00
2002 143,818
2003 112,390
Thereafter 7,605
-----------------
Total minimum lease payments $668,076
=================
Rent expense for the years ended September 30, 1998, 1997, and 1996, was
approximately $165,067, $185,776, and $177,858, 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 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
the year ended September 30, 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. During 1998,
all 379,765 Series A warrants were exercised and 272,073 Series B warrants
were exercised.
In April 1997, the Company purchased the rights to Cell-Med's LEAPS
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. Additional payments to Cell-Med for such
rights of up to $600,000 are contingent upon the development and viability
of the technology. In addition, royalty payments of 5% of the sales price of
technology using the product plus 15% of any amounts for sublicensing are.
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 257,480 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 was 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 30, 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.
During December 1997, the Company issued 10,000 shares of Series D Preferred
Stock for $10,000,000. The issuance included 550,000 Series A Warrants and
550,000 Series B Warrants. The number of common shares issuable upon
conversion of the Preferred Shares is determinable by dividing $1,000 by
$8.28 prior to September 19, 1998, or at any time at which the Company's
common stock is $3.45 or less for five consecutive days. On or after
September 19, 1998, the number of common shares to be issued upon conversion
is determined by dividing $1,000 by the lesser of (1) $8.28 or (2) the
average price of the stock for any two trading days during the ten trading
days preceding the conversion date. The Series A Warrants are exercisable at
any time for $8.62 prior to December 22, 2001, and the Series B Warrants are
exercisable at any time for $9.31 prior to December 22, 2001. Each warrant
converts into one share of common stock. At September 30, 1998, 998 shares
of Series D Preferred Stock had been converted into 441,333 shares of common
stock. All Series A and Series B Warrants issued remain outstanding at
September 30, 1998. In connection with the Company's December 1997
$10,000,000 Series D Preferred Stock offering, the Series A and Series B
warrants were assigned a relative fair value of $1,980,000 in accordance
with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, and have been recorded as additional paid-in capital.
12. LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" (EPS), which simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion (APB) No. 15 and
makes them comparable to international EPS standards. Basic EPS excludes
dilution and is computed by dividing net income or loss attributable to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (convertible preferred
stock, warrants to purchase common stock and common stock options using the
treasury stock method) were exercised or converted into common stock.
Potential common shares in the diluted EPS computation are excluded in net
loss periods as their effect would be antidilutive. The loss attributable to
common stockholders includes the impact of the accretion of Series A, Series
B and Series C Preferred Stock beneficial conversion features, the accretion
of Series D Preferred Stock warrants and preferred stock dividends. The
statement is effective for financial statements issued for periods ending
after December 15, 1997. The Company adopted this statement during the year
ended September 30, 1998. EPS for all periods have been computed in
accordance with SFAS No. 128.
1998 1997 1996
Loss per common share (basic and diluted)$0.74 $1.00 $1.16
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Boards issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. These standards are effective for the Company beginning in fiscal
1999.
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. SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders.
In February 1998, FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, an Amendment of SFAS Nos. 87, 88,
and 106. SFAS No. 132 revises employers' disclosure about pension and other
postretirement benefit plans.
In June 1998, FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities.
The Company does not believe that the adoption of SFAS 130, SFAS 131, SFAS
132, and SFAS 133 will have a material effect on its financial position or
results of operation.
14. RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, the Company determined that the application of a technical
accounting treatment required the 1997 and 1996 loss per share calculations
to include the impact of $1,062,482 and $1,039,679, respectively, for the
accretion of the assumed beneficial conversion features, and $108,957 and
$58,794, respectively, for preferred stock dividends, of the Series A,
Series B and Series C Preferred Stock issued during fiscal 1997 and 1996.
The effect of the accretion is a non-cash charge to additional paid-in
capital and does not impact the previously reported net loss for the years
ended September 30, 1997 and 1996, nor does it result in a net change to
stockholders' equity at September 30, 1997 and 1996. The effect of the
restatement was to increase net loss per share by $0.12 to $1.00 for the
year ended September 30, 1997, and $0.18 to $1.16 for the year ended
September 30, 1996.
A summary of the significant effects of the restatement is as follows (in
thousands, except net income (loss) per share amounts):
1997 1996
---------------------- ----------------------
As As
Previously As Previously As
Reported Restated Reported Restated
FOR THE YEAR ENDED
SEPTEMBER 30:
Net loss attributable to
common stockholders $8,189,458 $9,360,897 $6,326,666 $7,425,139
Loss per common share (basic) $ 0.88 $ 1.00 $ 0.98 $ 1.16
Loss per common share (diluted)$0.88 $ 1.00 $ 0.98 $ 1.16
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, 1998.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to
Exhibit 3(a) of the Company's
combined Registration Statement on
Form S-1 and Post-Effective
Amendment ("Registration
Statement"), Registration Nos.
2-85547-D and 33-7531.
(b) Amended Articles Incorporated by reference to
Exhibit 3(a) of the Company's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and
33-7531.
(c) Amended Articles Incorporated by
reference to Exhibit (Name change
only) 3(c) filed with Registration
Statement on Form S-1 (No. 33-34878).
(d) Bylaws Incorporated by reference to
Exhibit 3(b) of the Company's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and
33-7531.
4(a) Specimen copy of 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
Company'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 of Form S-
1, Registration Nos. 2-85547-D
and 33-7531.
(d) Addendum effective October Incorporated by reference to Exhibit
13, 1989 to Licensing Agree- 10(d) of Company's Annual Report
ment with Sittona Company, on Form 10-K for the year ended
B.V. September 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 Exhibit
Viral Technologies, Inc. and the 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 Com-
Nippon Zeon Co., Ltd. pany'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
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: January 11, 1999 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/ Maximillian de Clara Director and Principal January 11, 1999
MAXIMILIAN DE CLARA Executive Officer
/s/ Geert R. Kersten Director, Principal January 11, 1999
GEERT R. KERSTEN Financial Officer
and Chief Executive
Officer
/s/ Mark V. Soresi Director January 11,1999
MARK V. SORESI
/s/ F. Donald Hudson Director January 11, 1999
F. DONALD HUDSON
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-55966 of Cel-Sci Corporation on Form S-8 of our report dated December 11,
1998, appearing in this Annual Report on Form 10-K of Cel-Sci Corporation for
the year ended September 30, 1998.
/s/ Deloitte & Touche LLP
- --------------------------
Washington, D.C.
January 12, 1999
EXHIBIT 27