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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999.
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
20, 1999, as quoted on the American Stock Exchange, was approximately
$40,000,000. Shares of Common Stock held by each officer, director and principal
shareholder have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 20, 1999, the Registrant had 18,027,982 issued and
outstanding shares of Common Stock.
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado corporation in
1983. The Company is involved in the research and development of certain drugs
and vaccines. The Company's first, and main, product, MULTIKINE(TM),
manufactured using the Company's proprietary cell culture technologies, is a
combination, or "cocktail", of natural human interleukin-2 ("IL-2") and certain
cytokines and cytokines. MULTIKINE is being tested to determine if it is
effective in improving the immune response of cancer patients. The Company's
second most advanced product, HGP-30W, 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. The Company intends to use this new technology to improve the cellular
immune response of persons vaccinated with HGP-30W 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 cytokines. Cytokines regulate and modify the various functions of both
T-cells and B-cells. There are many cytokines, each of which is thought to have
distinctive chemical and functional properties. IL-2 is but one of these
cytokines and it is on IL-2 and its synergy with other cytokines that the
Company has focused its attention. Scientific and medical investigation has
established that IL-2 enhances immune responses by causing activated T-cells to
proliferate. Without such proliferation no immune response can be mounted. Other
cytokines support T-cell and B-cell proliferation. However, IL-2 is the only
known cytokine which causes the proliferation of T-cells. IL-2 is also known to
activate B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized cytokines with
anticancer potential, the Company is of the opinion that to have optimum
therapeutic value, IL-2 should be administered not as a single substance but
rather as a mixture of IL-2 and certain cytokines, i.e. as a "cocktail". This
approach, which was pioneered by the Company, makes use of the synergism between
these cytokines. It should be noted, however, that neither the FDA nor any other
agency has determined that the Company's MULTIKINE product will be effective
against any form of cancer.
It has been reported by researchers in the field of cytokine research
that IL-2 can increase the number of killer T-cells produced by the body, which
improves the body's capacity to selectively destroy specific tumor cells.
Research and human clinical trials sponsored by the Company have indicated a
correlation between administration of MULTIKINE to cancer patients and
immunological responses. On the basis of these experimental results, the Company
believes that MULTIKINE may have application for the treatment of solid tumors
in humans.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using the Company's
MULTIKINE product. The focus of the trial was unresectable head and neck cancer.
In 1991, four patients with regionally advanced squamous cell cancer of
the head and neck were treated with the Company's MULTIKINE product. The
patients had previously received radical surgery followed by x-ray therapy but
developed recurrent tumors at multiple sites in the neck and were diagnosed with
terminal cancer. The patients had low levels of lymphocytes and evidence of
immune deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects were observed
and the patients were treated as outpatients. Notwithstanding the above, it
should be noted that these trials were only preliminary and were only conducted
on a small number of patients. It remains to be seen if MULTIKINE will be
effective in treating any form of cancer.
These results caused the Company to embark on a major manufacturing
program for MULTIKINE with the goal of being able to produce a 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 all 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 and three patients
showing tumor reductions of over 50%. 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 currently treating 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 last patient in this study completed
treatment in November 1999.
U.S.A. & CANADA: In this U.S. and Canadian multi-center study, sixteen
patients who have failed conventional treatments were treated experimentally
with MULTIKINE. The study was designed to evaluate the safety, tumor responses
and immune responses of MULTIKINE in late stage head and neck cancer patients.
The last patient in this study completed treatment in December 1999.
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 have begun a 20 patient dose
escalation study to test MULTIKINE as a therapy to be used prior to surgical
removal of the prostate gland.
In the fall of 1999 the Company announced the completion of a MULTIKINE
study with fourteen HIV-positive patients. The study showed that the repeated
administration of MULTIKINE to HIV infected persons over the course of two
months was safe and appeared to stimulate the patients' responses to recall
antigens, which is considered to be indicative of an improved immune response.
HUNGARY: In 1999, a 30 patient study using MULTIKINE in head and neck
cancer patients prior to surgery and/or radiation was started in Hungary. The
study is expected to be completed by June 2000.
POLAND/CZECH REPUBLIC: In the spring of 1999 the Company started
another 30 patient study in Poland and the Czech Republic. This study is similar
to the studies being conducted in Canada and Hungary.
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. The Company is currently in
negotiations with another corporation for the use of their facility for the
manufacture of the MULTIKINE product.
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 vaccine is primarily directed against HIV subtype C, the most
prevalent HIV subtype in third world countries.
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 2001. This date however, is
dependent on the Company raising funds which would be dedicated specifically for
this project.
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. 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, 29 healthy, HIV-negative volunteers received one of
the three different dosages of the vaccine. Preliminary results suggest that the
vaccine is safe and induces both cellular (i.e., T-cell) and humoral (i.e.,
antibody) immune responses.
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. The target population will be HIV-infected individuals who are
already taking anti-HIV medicines.
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. Two studies with different herpes simplex peptides 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.
In November 1999 the Company announced a collaborative study for the
treatment, and possible prevention, of autoimmune myorcarditis with researchers
at the Department of Pathology, the Johns Hopkins Medical Institutions,
Baltimore, Maryland.
Myocarditis, an autoimmune disease affecting the heart muscle, is
thought to be caused by an attack on the patient's heart muscle by his/her own
immune cells and antibodies. Myocarditis is a precursor to dilated
cardiomyopathy, which is an end stage cardiac disease usually requiring a heart
transplant. The incidence of dilated cardiomyopathy is about 200,000 people in
the United States alone. The current treatments are not curative.
The study will use L.E.A.P.S.(TM) technology, as well as a technology
recently developed at the Company and called AdapT (Antigen Directed Apoptosis).
The AdapT technology is designed to lead to the removal, in an antigen specific
(highly targeted) manner, of only those immune system cells that cause the
disease, thereby leaving the remainder of the immune response intact and
subsequently able to defend against other diseases.
The goal of the first phase of this animal study is to establish the
animal model of autoimmune myocarditis, using the L.E.A.P.S technology. In the
second phase, AdapT and L.E.A.P.S. derived peptides may be used, in the case of
the L.E.AP.S., to divert immune responses away from the disease-causing immune
system cells or, in the case of AdapT, to remove the disease-causing immune
system cells.
If the L.E.A.P.S. or AdapT technologies are shown to work in the animal
model for myocarditis, additional studies may be started to test this new
approach for the treatment of other autoimmune diseases as well.
In November 1999 the Company also announced that it has entered into a
research collaboration agreement with research scientists at the Max-Delbruck
Center for Molecular Medicine in Berlin, Germany. The goal of the collaboration
is to develop a therapeutic vaccine for breast and/or colon cancer.
The collaboration will make use of the L.E.A.P.S. technology, in
combination with the specialized cancer antigen and animal testing model
knowledge of the team in Berlin. The work is being conducted under the umbrella
of the Biological Therapeutic Development Group of the European Office for
Research and Treatment of Cancer.
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, 1999, approximately $27,263,000
has been expended on Company-sponsored research and development, including
approximately $4,461,000, $3,834,000 and $6,012,000, respectively during the
years ended September 30, 1999, 1998 and 1997. Research and development
expenditures prior to October 1995 do not include amounts spent by Viral
Technologies, Inc. on research and development.
The Company has established a Scientific Advisory Board ("SAB")
comprised of scientists distinguished in biomedical research in the field of
cytokines and related areas. From time to time, members of the SAB advise the
Company on its research activities. Institutions with which members of the SAB
are affiliated have in the past conducted and may in the future conduct
Company-sponsored research. The SAB has in the past and may in the future, at
its discretion, invite other scientists to opine in confidence on the merits of
the Company-sponsored research. 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 cytokines. Competition in the development of
therapeutic agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than the Company has to develop products.
The establishment by these large companies of in-house research groups and of
joint research ventures with other entities is already occurring in these areas
and will probably become even more prevalent. In addition, licensing and other
collaborative arrangements between governmental and other nonprofit institutions
and commercial enterprises, as well as the seeking of patent protection of
inventions by nonprofit institutions and researchers, could result in strong
competition for the Company. Any new developments made by such organizations may
render the Company's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. The
Company believes, however, that it is the only producer of a patented IL-2
product using a patented cell-culture technology with normal human cells. The
Company foresees that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is the Company's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore, the
Company's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2-rich
mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these
differences prove to be of importance, and if the therapeutic value of its
MULTIKINE product is conclusively established, the Company believes it will be
able to establish a strong competitive position in a future market.
The Company has not established a definitive plan for marketing nor has
it established a price structure for the Company's saleable products. However,
the Company intends, if the Company is in a position to begin commercialization
of its products, to enter into written marketing agreements with various major
pharmaceutical firms with established sales forces. The sales forces in turn
would probably target the Company's products to cancer centers, physicians and
clinics involved in immunotherapy.
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
The Company leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $7,600. The Company believes this
arrangement is adequate for the conduct of its present business.
The Company also has a fully equipped 11,000 square foot laboratory.
The laboratory is located in space which is leased by the Company for
approximately $5,200 per month. The laboratory lease expires in 2004, with
extensions available until 2014.
ITEM 3. LEGAL PROCEEDINGS
On November 24, 1999 F. Donald Hudson and Mark V. Soresi, two former
directors of the Company, filed a lawsuit in the United States District Court
for the District of Colorado against the Company. Also named in the lawsuit were
the Company's four present directors: Maximilian de Clara, Geert R. Kersten,
Alexander G. Esterhazy, and John M. Jacquemin. The complaint alleges that the
proxy statement filed in connection with the April 12, 1999 meeting of the
Company's Shareholders was false and misleading in that it failed to disclose,
among other things, (i) that Hudson and Soresi were concerned that the
compensation paid to the Company's President, Maximilian de Clara was excessive,
and (ii) that the proxy statement also did not disclose certain transactions
between the Company and Mr. de Clara which the plaintiffs contend were improper.
The complaint also alleges that Mr. de Clara and Mr. Kersten breached their
fiduciary duties to the Company by improperly calling and holding the April 12,
1999 shareholders' meeting and by engaging in transactions which were unfair to
the Company. Based upon the foregoing allegations the plaintiffs have requested
the court to declare the election of directors at the April 12, 1999
shareholders' meeting to be void, to order a new election of directors, to award
unspecified damages against the individual defendants named in the complaint and
for other relief. In their answer to the plaintiffs' complaint the Company and
the Company's directors intend to deny the allegations in the complaint. It is
the Company's position, as well as that of the Company directors, that (i) the
compensation paid to Mr. de Clara was approved by Hudson and Soresi when they
were directors of the Company, (ii) the proxy statement sent to the Company's
shareholders in connection with the April 12, 1999 shareholders' meeting was not
false and misleading, (iii) the April 12, 1999 shareholders' meeting was
properly called, (iv) the election of the Company's directors at the meeting was
valid, and (v) neither Mr. de Clara nor Mr. Kersten participated in any improper
transactions involving the Company.
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 20, 1999 there were approximately 2,680 record holders
of the Company's common stock. The Company's common stock is traded on the
American Stock Exchange. Set forth below are the range of high and low
quotations for the Company's common stock for the periods indicated as reported
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
12/31/97 $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
12/31/98 $ 3.50 $1.50
3/31/99 $ 2.75 $1.63
6/30/99 $ 3.38 $1.81
9/30/99 $ 3.81 $1.88
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,
1999 1998 1997 1996 1995
---- ---- ------ ------ ----
Investment Income and
Other Revenues $469,518 $792,994 $ 438,145 $ 322,370 $423,765
Expenses:
Research and
Development 4,461,051 3,833,854 6,011,670 3,471,477 1,824,661
Depreciation
and Amortization 268,210 295,331 313,547 290,829 262,705
General and
Administrative 3,230,982 3,106,492 2,302,386 2,882,958 1,713,912
Equity in loss of
joint venture -- -- -- 3,772 501,125
-----------------------------------------------------------
Net Loss $(7,490,725)$(6,442,683)$(8,189,458) $(6,326,666)$(3,878,638)
============ ========== ============ =========== ============
Loss per common share
(basic and diluted) $(0.52) $(0.74) $(1.00) $(1.16) $(0.89)
Weighted average common
Shares outstanding14,484,352 11,379,437 9,329,419 6,425,316 4,342,628
Balance Sheet Data:
September 30,
1999 1998 1997 1996 1995
---- ---- ----- ----- ----
Working Capital $6,152,715 $12,926,014 $4,581,247 $10,266,104 $3,983,699
Total Assets 7,559,772 14,431,813 6,334,397 11,878,370 6,359,011
Total Liabilities 461,586 456,529 508,617 294,048 1,516,978
Shareholders'
Equity 7,098,186 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 1999
Interest income during the year ending September 30, 1999 reflects
interest received and accrued on investments. Interest income decreased as the
Company used the proceeds of the sale of the Series D Preferred Stock. Research
and development expense in 1999 was higher than in 1998 because the Company is
running more and larger clinical trials. General and administrative expenses
have increased due to the addition of more employees needed for the increased
activity level.
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.
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, 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.
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 Convertible
Preferred Stock for $3,500,000 or $1,000 per share. 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 Convertible Preferred Stock for $5,000,000 or $1,000 per
share. 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 allowed 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. In October
1997 17,500 warrants were exercised at $4.25 per share. On December 15, 1999 the
remaining 82,250 warrants expired.
In December 1996, the Company authorized the issuance of 3,500 shares
of Series C Preferred Stock with a par value of $.01 per share. Subsequent to
the establishment of the Series C Preferred Stock the Company raised $2,850,000
from the sale of units consisting of 2,850 shares of the Company's Series C
Convertible Preferred Stock, 379,763 Series A Warrants and 379,763 Series B
Warrants. Each Series A Warrant entitled 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 entitled 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. By June 30, 1997 all Series C Preferred Shares had been converted into
915,271 shares of the Company's common stock and all Series A Warrants and
253,175 Series B Warrants had been exercised. The remaining Series B Warrants
expired in March 1999.
In December 1997, the Company sold 10,000 shares of its Series D
Convertible Preferred Stock, 550,000 Series A Warrants and 550,000 Series B
Warrants, to ten institutional investors for $10,000,000. 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 filed 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 December 15, 1999 all Series D
Preferred Shares had been converted into 5,201,460 shares of the Company's
common stock. None of the Series A or Series B warrants have been exercised.
In December 1999, the Company sold 1,025,641 shares of its common
stock, plus warrants for the purchase of an additional 358,974 shares of common
stock to a group of private investors for $2,500,000. The warrants are
exercisable at a price of $2.925 per share at any time prior to December 8,
2002. The investors in this private offering also received warrants which allow
the investors, under certain circumstances, to acquire additional shares of the
Company's common stock at a nominal price in the event (i) the price of the
Company's common stock falls below $2.44 per share or (ii) the Company raises in
excess of $1,000,000 at a price which is below either the then prevailing market
price of the Company's common stock or $2.44 per share.
During fiscal 2000, the Company expects that it will spend between
$3,500,000 and $4,500,000 on research, development, and clinical trials.
However, the Company's expenditures in this area are difficult to predict since
the Company, as of December 15, 1999, was preparing to begin a Phase III study
with respect to the use of Multikine in the treatment of head and neck cancer.
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, 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 has modified its computer hardware and software
systems to recognize the year 2000. These modifications did not have a
significant effect on the Company's operations and the costs of the
modifications were insignificant. The Company continues to evaluate 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 the research that is presently being conducted by the Company's
laboratory. Since the Company believes its computer systems are compliant with
the year 2000, 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 48 Senior Vice President of Operations
M. Douglas Winship 50 Senior Vice President of Regulatory Affairs
and Quality Assurance
Dr. Eyal Talor 43 Senior Vice President of Research and
Manufacturing
Dr. Prem S. Sarin 65 Senior Vice President of Research, Infectious
Diseases
Dr. Daniel H. Zimmerman 58 Senior Vice President of Research, Cellular
Immunology
Michael Luecke 57 Senior Vice President of Business Development
Alexander G. Esterhazy 55 Director
John M. Jacquemin 52 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.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
John M. Jacquemin has, since 1982, been the President of Mooring
Financial Corporation, a company specializing in the origination, purchase and
administration of commercial loan portfolios, equipment leases and real estate
mortgages. Between 1977 and 1982 Mr. Jacquemin was Vice President of CFC
Corporation, a company involved in title insurance, fire and casualty insurance,
equipment leasing and real estate development.
All of the Company's officers devote substantially all of their time on the
Company's business. Messrs. Esterhazy and Jacquemin, as directors, devote only a
minimal amount of time to the Company.
The Company has an audit committee and compensation committee. The
members of the audit committee are Geert Kersten, Alexander Esterhazy, and John
Jacquemin. The members of the compensation committee are Maximilian de Clara,
Alexander Esterhazy, and John Jacquemin.
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, 1999.
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 1999 $335,292 -- $72,945 $435,625 145,000 $ 63
de Clara, 1998 $315,021 -- $81,709 -- 164,000 $ 73
President 1997 $319,104 -- $76,290 -- 333,000 $ 88
Geert R. Kersten, 1999 $268,480 $15,154 $10,000 145,000 $4,113
Chief Executive 1998 $229,533 -- $15,180 $7,500 164,000 $5,310
Officer, Secretary 1997 $228,888 -- $12,314 -- 313,000 $8,888
and Treasurer
Patricia B. Prichep 1999 $107,936 -- $3,000 $6,476 79,500 $ 63
Senior Vice President
of Operations
M. Douglas Winship, 1999 $146,609 -- $2,400 $8,797 27,500 $ 63
Senior Vice Presi- 1998 $136,918 -- $2,400 $6,240 -- $1,060
dent of Regulatory 1997 $129,926 -- $2,400 -- 45,000 $3,152
Affairs and Quality
Assurance
Eyal Talor, Ph.D. 1999 $139,085 -- $3,000 $8,345 30,000$ 63
Senior Vice Presi- 1998 $130,845 -- $3,000 $5,769 27,000 $ 958
dent of Research 1997 $119,333 -- $3,000 -- 58,000 $3,668
and Manufacturing
Prem S. Sarin, Ph.D. 1999 $124,199 $7,452 42,000 $ 63
Senior Vice Presi- 1998 $117,035 -- -- $5,326 39,000 $ 929
Dent of Research, 1997 $113,385 -- -- -- 34,000 $3,473
Infectious Diseases
Daniel Zimmerman, 1999 $114,806 -- $3,000 $6,888 45,000 $ 63
Ph.D., 1998 $106,360 -- $3,000 $4,882 39,000 822
Senior Vice 1997 $104,000 -- -- -- 34,000 $3,208
President of
Cellular Immunology
Michael Luecke, 1999 $150,000 -- -- $8,875 -- $ 63
Senior Vice President
of Business Development
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
director's fees of $8,000.
(4) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of Mr. de Clara, the shares were issued in
consideration for past services rendered to the Company. In the case of all
other persons listed in the table, the shares were issued as the Company's
contribution on behalf of the named officer to the Company's 401(k)
retirement plan.
As of September 30, 1999, 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 100,000 $269,000
Geert R. Kersten 111,737 $300,573
Patricia B. Prichep 7,336 $ 19,734
M. Douglas Winship 5,867 $ 15,782
Eyal Talor, Ph.D. 7,038 $ 18,932
Prem S. Sarin, Ph.D. 4,993 $ 13,431
Daniel Zimmerman, Ph.D. 24,602 $ 66,179
Michael Luecke 5,074 $ 13,649
Dividends may be paid on shares of restricted stock owned by the Company's
officers and directors, although the Company has no plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the periods covered by the Table. Includes certain
options issued in connection with the Company's Salary Reduction Plans as
well as certain options purchased from the Company. See "Options Granted
During Fiscal Year Ending September 30, l999" below.
(6) All other compensation received that the Company could not properly report
in any other column of the Table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and the
dollar value of any insurance premiums paid by, or on behalf of, the Company
with respect to term life insurance for the benefit of the named executive
officer, and the full dollar value of the remainder of the premiums paid by,
or on behalf of, the Company. Amounts in the table represent life insurance
premiums.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 the Company implemented a defined contribution retirement
plan, qualifying under Section 401(k) of the Internal Revenue Code and covering
substantially all the Company's employees. Prior to January 1, 1998 the
Company's contribution was equal to the lesser of 3% of each employee's salary,
or 50% of the employee's contribution. Effective January 1, 1998 the plan was
amended such that the Company's contribution is now made in shares of the
Company's common stock as opposed to cash. Each participant's contribution is
matched by the Company with shares of common stock which have a value equal to
100% of the participant's contribution, not to exceed the lesser of $1,000 or 6%
of the participant's total compensation. The Company's contribution of common
stock is valued each quarter based upon the closing price of the Company's
common stock. The fiscal 1999 expenses for this plan were $86,954. Other than
the 401(k) Plan, the Company does not have a defined benefit, pension plan,
profit sharing or other retirement plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its directors $2,000
per quarter, plus expenses. The Company has no standard arrangement pursuant to
which directors of the Company are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. The Company has from time to time granted options
to its outside directors. See Stock Options below for additional information
concerning options granted to the Company's directors.
Employment Contracts Effective April 12, 1999, the Company entered into a
three-year employment agreement with Mr. de Clara. The employment agreement
provides that the Company will pay Mr. de Clara an annual salary of $363,000
during the term of the agreement. In the event that there is a material
reduction in Mr. de Clara's authority, duties or activities, or in the event
there is a change in the control of the Company, then the agreement allows Mr.
de Clara to resign from his position at the Company and receive a lump-sum
payment from the Company equal to 18 months salary. For purposes of the
employment agreement, a change in the control of the Company means the sale of
more than 50% of the outstanding shares of the Company's Common Stock, or a
change in a majority of the Company's directors.
Effective August 1, 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, 1999, Mr. de Clara was the only officer participating in deliberations of
the Company's compensation committee concerning executive officer compensation.
During the year ended September 30, 1999, 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, 1999, 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, l999
Individual Grants Potential
- --------------------------------------------------------------- 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 95,000 (1) $1.94 8/31/03 $38,950 $ 85,500
de Clara 50,000 $2.06 4/12/09 $65,000 $164,000
--------
145,000 21.4%
Geert R. 95,000 (1) $1.94 8/31/03 $38,950 $ 85,500
Kersten 50,000 $2.06 4/12/09 $65,000 $164,000
--------
145,000 21.4%
Patricia B. 47,500 (1) $1.94 8/31/03 $19,145 $42,750
Prichep 17,000 $2.31 12/01/08 $24,650 $62,560
15,000 $2.06 4/12/99 $19,500 $49,200
-------
79,500 11.8%
=======
M. Douglas 12,500 (1) $1.94 8/31/03 $ 5,125 $11,250
Winship 15,000 $2.06 4/12/09 $19,500 $49,200
-------
27,500 4%
========
Eyal 10,000 (1) $1.94 8/31/03 $ 4,100 $ 9,000
Talor, Ph.D. 20,000 $2.06 8/2/09 $26,000 $65,600
-------
30,000 4.4%
Prem S. 30,000 (1) $1.94 8/31/03 $12,300 $27,000
Sarin, Ph.D. 12,000 $2.50 5/3/09 $18,840 $47,812
-------
42,000 6.2%
Daniel 30,000 (1) $1.94 8/31/03 $12,300 $27,000
Zimmerman, 15,000 $2.06 4/12/09 $19,500 $49,200
-------
Ph.D. 45,000 6.6%
Michael -- -- -- -- -- --
Luecke -- -- -- -- -- --
(1) Options were granted in accordance with the Company's 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 (
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
- ---- --------- ---------- ------------ -------------
Maximilian de Clara -- -- 483,667/234,999 0/102,750
Geert R. Kersten -- -- 892,417/228,333 69,440/102,750
Patricia Prichep -- -- 137,334/92,166 6,200/51,535
M. Douglas Winship -- -- 52,000/42,500 0/18,825
Eyal Talor -- -- 73,834/6,666 0/20,100
Prem S. Sarin -- -- 94,167/55,333 6,200/24,780
Daniel Zimmerman -- -- 71,667/58,333 0/31,950
Michael Luecke -- -- 25,000/75,000 -/-
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 1999.
(2) With respect to options exercised during the Company's fiscal year ended
September 30, 1999, 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, 1999,
separated between those options that were exercisable and those options that
were not exercisable.
(4) For all unexercised options held as of September 30, 1999, the market value
of the stock underlying those options as of September 30, 1999.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified Stock
Option Plans and Stock Bonus Plans. A summary description of these Plans
follows. In some cases these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans
collectively authorize the issuance of up to 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 340,000 shares of Common Stock may be granted
under the Stock Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan,
the Company's employees, directors, officers, consultants and advisors are
eligible to receive a grant of the Company's shares, provided however that bona
fide services must be rendered by consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by
the Company's Compensation Committee ("the Committee"), each member of which is
a director of the Company. The members of the Committee were selected by the
Company's Board of Directors and serve for a one-year tenure and until their
successors are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the Committee
will be filled by the Board of Directors. The Committee is vested with the
authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is empowered to select
those persons to whom shares or options are to be granted, to determine the
number of shares subject to each grant of a stock bonus or an option and to
determine when, and upon what conditions, shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company. At the time an employee ceases working for the Company
(or at the time a non-employee ceases to perform services for the Company), any
shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Committee payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of the Company's Common Stock
having an aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner they
deem appropriate, provided that such amendment, termination or suspension will
not adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Summary. The following sets forth certain information, as of November
30, 1999, concerning the stock options and stock bonuses granted by the Company.
Each option represents the right to purchase one share of the Company's Common
Stock.
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
Incentive Stock Option Plans 1,100,000 929,350 N/A 152,483
Non-Qualified Stock Option
Plans 2,760,000 2,224,090 N/A 177,526
Stock Bonus Plans 340,000 N/A 261,804 78,196
Of the shares issued pursuant to the Company's Stock Bonus Plans 58,400
shares were issued 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, 1999, 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
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland 493,667 2.6%
Geert R. Kersten
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 1,004,154 5.3%
Patricia B. Prichep
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 151,337 *
M. Douglas Winship
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 57,867 *
Eyal Talor, Ph.D.
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 80,872 *
Prem Sarin, Ph.D.
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 99,160 *
Name and Address Number of Shares (1) Percent of Class (3)
- ---------------- ----------------- ----------------
Daniel H. Zimmerman, Ph.D.
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 102,269 *
Michael Luecke
8229 Boone Blvd.
Suite 802
Vienna, VA 22182 30,074 *
Alexander G. Esterhazy
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland 10,000 *
John M. Jacquemin
8614 Westwood Center Drive
Vienna, VA 22182 98,000 *
All Officers and Directorsas a Group (10 persons) 2,127,400 10.5% *Less than 1%
(1) Includes shares issuable prior to February 28, 2000 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2000
Maximilian de Clara 483,667
Geert R. Kersten 892,417
Patricia B. Prichep 144,001
M. Douglas Winship 52,000
Eyal Talor, Ph.D. 73,834
Prem Sarin, Ph.D. 94,167
Daniel H. Zimmerman, Ph.D. 77,667
Michael Luecke 25,000
Alexander G. Esterhazy 10,000
John M. Jacquemin 10,000
See Item 11 of this report for information concerning outstanding stock
options.
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount excludes shares which may be issued upon the exercise or conversion
of other options, warrants and other convertible securities previously
issued by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See the Financial Statements attached to this Report.
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1999.
(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 Exhibit3(a)
of the Company's Registration Statement
on Form S-1 Registration Nos. 2-85547-D
and 33-7531.
(c) Amended Articles Incorporated by
reference to Exhibit (Name change
only) 3(c) filed with Registration
Statement on Form S-1 (No. 33-34878).
(d) Bylaws Incorporated by reference to
Exhibit 3(b) of the Company's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and
33-7531.
4(a) Specimen copy of Stock Certificate Incorporated by reference to Exhibit
4(a) of the Company's Registration
Statement on Form S-1, Registration
Nos. 2-85547-D and 33-7531.
4(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 Exhibit
1983 to Licensing Agreement 10(e) of the Company's Registration
with Sittona Company, B.V. 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 Com-
George Washington University pany'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
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 1999, 1998, and 1997,
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, 1999, 1998, AND 1997:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9- F-24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation and subsidiaries (the Company) as of September 30, 1999 and 1998,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. 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 subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Deloitte & Touche
McLean, Virginia
December 6, 1999
F-1
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,746,531 $2,813,225
Investment securities available for sale 3,192,604 9,675,311
Interest and other receivables 62,825 69,809
Prepaid expenses 514,572 723,834
Advances to officer/shareholder and employees 69,448 70,982
-------------- -----------
Total current assets 6,585,980 13,353,161
RESEARCH AND OFFICE EQUIPMENT - Less accumulated
depreciation of $1,563,586 and $1,352,165 468,627 619,496
DEPOSITS 14,828 14,828
PATENT COSTS - Less accumulated amortization
of $511,118 and $454,328 490,337 444,328
-------------------------
$ 7,559,772 $14,431,813
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 433,265$ 427,147
------------------------
Total current liabilities 433,265 427,147
DEFERRED RENT 28,321 29,382
---------------------------
Total liabilities 461,586 456,529
-------------------------
STOCKHOLDERS' EQUITY:
Series D Preferred stock, $0.01 par value -
authorized, 10,000 shares; issued and out-
standing, 9,002 shares in 1998 -- 90
Common stock, $.01 par value - authorized,
100,000,000 shares; issued and outstanding,
17,002,341 and 11,972,695 shares 170,023 119,726
Additional paid-in capital 59,672,652 59,040,864
Accumulated other comprehensive loss (116,659) (48,291)
Accumulated deficit (52,627,830) (45,137,105)
------------ ------------
Total stockholders' equity 7,098,186 13,975,284
-------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,559,772 $14,431,813
============== ============
See notes to consolidated financial statements.
F-2
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
INVESTMENT INCOME $ 402,831 $ 728,421 $ 386,547
OTHER INCOME 66,687 64,573 51,598
------------ ------------ -------------
Total income 469,518 792,994 438,145
----------- ----------- ------------
OPERATING EXPENSES:
Research and development 4,461,051 3,833,854 6,011,670
Depreciation and amortization 268,210 295,331 313,547
General and administrative 3,230,982 3,106,492 2,302,386
----------- ----------- ------------
Total operating expenses 7,960,243 7,235,677 8,627,603
----------- --------- ------------
NET LOSS $7,490,725 $ 6,442,683 $ 8,189,458
========== =========== ============
ACCRETION OF PREFERRED STOCK -- 1,980,000 1,062,482
PREFERRED STOCK DIVIDENDS -- -- 108,957
------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 7,490,725 $8,422,683 $ 9,360,897
=========== ========== ============
LOSS PER COMMON SHARE (BASIC) $ 0.52 $ 0.74 $ 1.00
=========== ========== ===========
LOSS PER COMMON SHARE (DILUTED) $ 0.52 $ 0.74 $ 1.00
=========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,484,352 11,379,437 9,329,419
========== ========== ==========
See notes to consolidated financial statements.
F-3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
NET LOSS $7,490,725 $4,822,683 $9,360,897
OTHER COMPRENENSIVE LOSS - Unrealized
(gain) loss on investments 68,368 44,792 (12,579)
-------------------------- --------------
COMPREHENSIVE LOSS $7,559,093 $4,867,475 $9,348,318
========== ========== ==========
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
Preferred Preferred Preferred Preferred
Series A Stock Series B Stock Series C Stock Series D Stock Common Stock
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
BALANCE, OCTOBER 1, 1996 600 $ 6 5,000 $ 50 -- $ -- -- $ -- 7,831,481 $78,315
Exercise of stock options -- -- -- -- -- -- -- -- 127,500 1,275
Exercise of warrants -- -- -- -- -- -- -- -- 61,220 612
Stock issued for acquisition of
Multikine and Cell-Med's
Heteroconjugate rights -- -- -- -- -- -- -- -- 785,056 7,851
Stock options issued to non-
employees for services -- -- -- -- -- -- -- -- -- --
Issuance - Series C preferred stock -- -- -- -- 2,850 29 -- -- -- --
Repurchase of Preferred B shares -- -- (2,850) (29) -- -- -- -- -- --
Preferred Series A conversion (600) (6) -- -- -- -- -- 127,945 1,279
Preferred Series B conversion -- -- (2,150) (21) -- -- -- -- 597,218 5,972
Preferred Series C conversion -- -- -- -- (2,850) (29) -- -- 915,271 9,153
Cash dividends on Series A and B -- -- -- -- -- -- -- -- --
Change in market value of
marketable securities available
for sale -- -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 -- -- -- -- -- -- -- -- 10,445,691 104,457
Exercise of stock options -- -- -- -- -- -- -- -- 300,048 3,000
Exercise of warrants -- -- -- -- -- -- -- -- 768,243 7,682
Stock options issued to non-
employees for services -- -- -- -- -- -- -- -- -- --
Issuance - Series D preferred
stock, net of offering costs -- -- -- -- -- -- 10,000 100 -- --
Preferred Series D conversion -- -- -- -- -- -- (998) (10) 441,333 4,413
401(k) contributions -- -- -- -- -- -- -- -- 17,380 174
Change in market value of marketable
securities available for sale -- -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 -- -- -- -- -- -- 9,002 90 11,972,695 19,726
Exercise of stock options -- -- -- -- -- -- -- -- 28,500 285
Stock options issued to non-
employees for services -- -- -- -- -- -- -- -- -- --
Preferred Series D conversion -- -- -- -- -- -- (9,002) (90) 4,760,126 47,602
401(k) contributions -- -- -- -- -- -- -- -- 41,020 410
Stock bonus to officer -- -- -- -- -- -- -- -- 200,000 2,000
Change in market value of
marketable securities available
for sale -- -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $ -- -- $ -- -- $ -- -- $ -- 17,002,341 $170,023
================================================================================================
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 (cont'd)
Accumulated
Additional Other
Paid-In Comprehensive Accumulated
Capital Loss Deficit Total
BALANCE, OCTOBER 1, 1996 $41,918,036 $ (16,078) $(30,396,007) $11,584,322
Exercise of stock options 427,650 -- -- 428,925
Exercise of warrants 168,084 -- -- 168,696
Stock issued for acquisition of Multikine
and Cell-Med's Heteroconjugate rights 1,817,149 -- -- 1,825,000
Stock options issued to nonemployees for
services 104,673 -- -- 104,673
Issuance - Series C preferred stock 2,849,971 -- -- 2,850,000
Repurchase of Preferred B shares (2,849,971) -- -- (2,850,000)
Preferred Series A conversion (1,273) -- -- --
Preferred Series B conversion (5,951) -- -- --
Preferred Series C conversion (9,124) -- -- --
Cash dividends on Series A and B -- -- (108,957) (108,957)
Change in market value of marketable securities
available for sale -- 12,579 -- 12,579
Net loss -- -- (8,189,458 (8,189,458)
-------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 44,419,244 (3,499) (38,694,422) 5,825,780
Exercise of stock options 882,372 -- -- 885,372
Exercise of warrants 3,621,744 -- -- 3,629,426
Stock options issued to nonemployees for
services 564,031 -- -- 564,031
Issuance - Series D preferred stock, net
of offering costs 9,499,900 -- -- 9,500,000
Preferred Series D conversion (4,403) -- -- --
401(k) contributions 57,976 -- -- 58,150
Change in market value of marketable
securities available for sale -- (44,792) -- (44,792)
Net loss -- -- (6,442,683) (6,442,683)
---------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 59,040,864 (48,291) (45,137,105) 13,975,284
Exercise of stock options 70,965 -- -- 71,250
Stock options issued to nonemployees
for services 88,166 -- -- 88,166
Preferred Series D conversion (47,512) -- -- --
401(k) contributions 86,544 -- -- 86,954
Stock bonus to officer 433,625 -- -- 435,625
Change in market value of marketable
securities available for sale -- (68,368) -- (68,368)
Net loss -- -- (7,490,725) (7,490,725)
----------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $ 59,672,652 $(116,659) $(52,627,830) $7,098,186
============ ========== ============ ==========
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,490,725) $(6,442,683) $(8,189,458)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 268,210 295,331 313,547
Issuance of stock options for services 88,166 564,031 104,673
Stock bonus granted to officer 435,625 -- --
Stock contributed to 401(k) plan 86,954 58,150 --
Research and development expenses
related to stock purchase of
Cell-Med -- -- 75,000
Research and development expenses
related to stock purchase of
Multikine rights from Sittona -- -- 1,750,000
Amortization of investment premiums
and discounts -- -- (158,825)
Net realized loss on sale of
securities 151,349 9 --
Changes in assets and liabilities:
Decrease (increase) in interest
and other receivables 6,984 36,625 (29,928)
Decrease (increase) in prepaid
expenses 209,262 (313,046) (138,384)
(Increase) decrease in advances (69,275) 4,733 137,567
Decrease in deposits -- 3,350 --
Decrease (increase) in accounts
payable and accrued expenses 6,118 (54,440) 207,177
(Increase) decrease in deferred
rent (1,061) 2,352 7,392
Net cash used in operating
activities (6,308,393) (5,845,588)(5,921,239)
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of investments (236,811) (13,480,816)(1,700,000)
Sales and maturities of investments 6,499,801 4,501,828 7,625,000
Repayment on note receivable from
shareholder 70,809 216,066 13,625
Issuance of note receivable to shareholder -- -- (300,000)
Expenditures for property and equipment (60,552) (70,559) (184,543)
Expenditures for patents (102,798) (35,211) (62,762)
Net cash provided by (used in)
investing activities 6,170,449 (8,868,692) 5,391,320
(Continued)
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Cash proceeds from issuance of preferred
and common stock and warrant conversion
for cash 71,250 14,018,899 597,672
Dividends paid -- -- (108,957)
-------------- ----------- ---------
Net cash provided by financing
activities 71,250 14,018,899 488,715
NET DECREASE IN CASH (66,694) (695,381) (41,204)
CASH, BEGINNING OF YEAR 2,813,225 3,508,606 3,549,810
------------ ------------ ----------
CASH, END OF YEAR $ 2,746,531 $ 2,813,225 $3,508,606
=========== ============ ==========
SUPPLEMENTAL DISCLOSURES:
During 1999, 1998, and 1997, the net unrealized loss on investments
available-for-sale was $116,659 $48,291, and $3,499, respectively.
During the year ended September 30, 1997, 600 shares of Series A Preferred
Stock were converted into 127,945 shares of common stock, 2,150 shares of
Series B Preferred Stock were converted into 597,218 shares of common
stock, and 2,850 shares of Series B Preferred Stock were converted into
915,271 shares of common stock.
During the years ended September 30, 1999 and 1998, 9,002 and 998 shares of
Series D Preferred Stock were converted into 4,760,126 and 441,333 shares
of common stock, respectively.
In March 1997, CEL-SCI issued 751,678 shares of common stock as consideration
for the purchase of the rights to its Multikine technology. In addition,
the Company paid $500,000 in cash for the rights, included in research and
development expense.
In April 1997, CEL-SCI issued 33,378 shares of common stock to Cell-Med as a
payment for the company's heteroconjugate technology. CEL-SCI also paid
$50,000 in cash to Cell-Med, included in research and development expense.
(Concluded)
See notes to consolidated financial statements.
F-8
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22, 1983, in the
State of Colorado, to finance research and development in biomedical science
and ultimately to engage in marketing products.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial statements
include the accounts of CEL-SCI Corporation and its wholly owned
subsidiaries, Viral Technologies, Inc., and MaxPharma. 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.
Research and Development Grant Revenues - The Company's grant arrangements
are handled on a reimbursement basis. Costs incurred under the
arrangements are expensed as incurred. Subsequent reimbursements from the
granting agency are applied against such expenses.
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
F-9
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.
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.
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.
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.
Reclassifications - Certain reclassifications have been made to the 1998
and 1997 financial statements for comparative purposes with the 1999
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, 1999
-------------------------------------------------
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 1999
Fixed income mutual funds $3,309,263 $ -- $(116,659) $3,192,604
---------- ------ ---------- ----------
Total $3,309,263 $ -- $(116,659) $3,192,604
========== ====== ========== ==========
F-10
September 30, 1998
--------------------------------------------------
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 1999
Fixed income mutual funds $9,723,602 $2,036 $(50,327) $9,675,311
---------- ------ --------- ----------
Total $9,723,602 $2,036 $(50,327) $9,675,311
========== ====== ========= ==========
The gross realized gains and losses on sales of investments available-for-sale
for the years ended September 30, 1999, 1998, and 1997, are as follows:
1999 1998 1997
Realized gains $ -- $ 1,485$ --
Realized losses 151,349 1,494 --
---------- ------ --------
Net realized (loss) gain $(151,349) $ (9) $ --
========== ======= ========
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1999 and 1998, consist of the
following:
1999 1998
Research equipment $1,781,666 $1,728,968
Furniture and equipment 245,154 237,579
Leasehold improvements 5,393 5,114
------------- ------------
2,032,213 1,971,661
Less accumulated depreciation and amortization (1,563,586) (1,352,165)
Net research and office equipment $ 468,627 $ 619,496
=========== ===========
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.
F-11
5. 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.
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. The loan was subsequently extended, and the balance was due in full
on October 1, 1998. Payments were made on the note, and the balance
outstanding on September 30, 1998, was $70,809.
The loan was paid in full on October 1, 1998.
6. INCOME TAXES
The approximate tax effect of each type of temporary difference and carryforward
that gave rise to the Company's deferred tax assets and liabilities at September
30, 1999 and 1998, is as follows:
1999 1998
Depreciation $ (18,536) $ (17,089)
Prepaid expenses (101,769) (227,795)
Net operating loss carryforward 17,082,000 17,346,440
Other 10,751 8,347
Less: Valuation allowance (16,972,446) (17,109,902)
------------ ------------
Net deferred $ -- $ --
=============== ============
The Company has available for income tax purposes net operating loss
carryforwards of approximately $50,242,000, expiring from 2000 through 2019.
In the event of a significant change in the ownership of the Company, the
utilization of such carryforwards could be substantially limited.
The difference in the Company's U.S. Federal statutory income tax rate and
the Company's effective rate is primarily attributed to the recording of a
valuation allowance due to the uncertainty of the amount of future tax
benefits that is more likely than not that future taxable income will not be
sufficient to realize a tax benefit.
F-12
7. 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.
Subsequently the Company's Board of Directors amended the Stock Bonus Plan
such that the Plan now authorizes the issuance of up to 300,000 common shares
of Company stock.
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.
F-13
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, October 1, 1996 $16.50-19.70 7,000 $ 17.41 7,000 $17.41
Forfeitures $16.50-19.70 (7,000) 17.41 (7,000) 17.41
Balance, September 30, 1997 -- -- -- --
------ ----- ------ -----
1992 Incentive Stock Option Plan:
Balance, October 1, 1996 $2.87-3.87 83,216 3.16 46,018 3.12
Forfeitures $2.87 (500) 2.87 -- --
Exercised $2.87 (1,000) 2.87 (1,000) 2.87
Became exercisable $2.87-3.87 -- -- 19,516 3.12
Balance, September 30, 1997 81,716 3.16 64,534 3.13
Exercised $2.87 (3,166) 2.87 (3,166) 2.87
Became exercisable $2.94-3.87 -- -- 9,848 3.38
Balance, September 30, 1998 78,550 3.16 71,216 3.17
Forfeitures $3.87 (900) 3.87 (900) 3.87
Became exercisable $2.94-3.44 -- -- 7,334 3.21
--------- ----- ---- ----- ----
Balance, September 30, 1999 77,650 $3.16 77,650 $ 3.16
======= ===== ====== ======
1992 Nonqualified Stock Option Plan:
Balance, October 1, 1996 $2.87-15.60 34,500 6.44 34,500 6.44
Forfeitures $13.40 (2,500) 13.40 (2,500) 13.40
Exercised $2.87 (11,500) 2.87 (11,500) 2.87
Balance, September 30, 1997 $2.87-15.60 20,500 7.59 20,500 7.59
Forfeitures $13.80-15.60 (8,000) 14.96 (8,000) 14.96
Exercised $2.87 (9,000) 2.87 (9,000) 2.87
------ ----- ------ -----
Balance, September 30, 1998 $2.87 3,500 $ 2.87 3,500 $2.87
Forfeitures $2.87 (3,500) 2.87 (3,500) 2.87
Granted $1.63-2.50 13,500 2.12 -- --
------ ------ ---- -----
Balance, September 30, 1999 $1.63-2.50 13,500 $2.12 -- $ --
====== ===== ====== ======
(Continued)
F-14
Outstanding Exercisable
Range Weighted Weighted
of Average Average
Option Exercise Exercise
Prices Shares Prices Shares Prices
1994 Incentive Stock Option Plan:
Balance, October 1, 1996 $2.87 100,000 2.87 72,000 2.87
Became exercisable $2.87 -- -- 11,000 2.87
------- ---- ------ -----
Balance, September 30, 1997 $2.87 100,000 2.87 83,000 2.87
Became exercisable $2.87 -- -- 11,000 2.87
------- ----- ------ --------
Balance, September 30, 1998 $2.87 100,000 $ 2.87 94,000 $ 2.87
Became exercisable $2.87 -- -- 6,000 2.87
------- ----- ----- -----
Balance, September 30, 1999 $2.87 100,000 $ 2.87 100,000 $ 2.87
======== ======= ======= =======
1994 Nonqualified Stock Option Plan:
Balance, October 1, 1996 $2.87-3.87 50,583 2.92 25,584 2.90
Became exercisable $2.87-3.87 -- -- 24,166 2.90
------ ----- ------- -----
Balance, September 30, 1997 $2.87-3.87 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 $2.87-3.87 27,250 $ 2.96 27,250 $ 2.96
Granted $2.81 1,000 2.81 -- --
------- ---- ------ ---
Balance, September 30, 1999 $2.87-3.87 28,250 $ 2.96 27,250 $ 2.96
======== ====== ====== =====
1995 Nonqualified Stock Option Plan:
Balance, October 1, 1996 $2.38-5.62 650,751 2.97 131,253 2.75
Granted $5.25 20,000 5.50 -- 0.00
Exercised $2.38-3.87 (19,000) 3.56 (19,000) 3.56
Became exercisable $2.38-5.62 -- -- 449,501 2.74
------ ---- ------- ------
Balance, September 30, 1997 651,751 3.02 561,754 2.72
Forfeitures $5.62 (7,500) 5.62 (7,500) 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 522,917 3.01 512,917 2.92
Forfeitures $3.87 5.62 (75,250) 5.17 (65,250) 5.17
Granted $1.94 125,000 1.94 -- --
-------- ----- ------- -----
Balance, September 30, 1999 $1.94-3.87 572,667 $2.58 447,667 $2.76
===== ====== ======= =======
(Continued)
F-15
Outstanding Exercisable
Range Weighted Weighted
of Average Average
Option Exercise Exercise
Prices Shares Prices Shares Prices
1996 Incentive Stock Option Plan:
Balance, October 1, 1996 $5.62-11.00 65,700 5.70 -- --
Forfeitures $3.25-6.88 (5,500) 4.08 -- --
Granted $3.25-5.18 331,800 3.89 -- --
Became exercisable $5.62-11.00 -- -- 21,234 5.57
------ ----- ------- -----
Balance, September 30, 1997 392,000 4.19 21,234 5.57
Granted $3.31-5.12 205,500 4.76 -- --
Forfeitures $3.62-7.12 (3,666) 5.34 (3,666) 5.34
Became exercisable -- -- 128,838 4.19
-------- ---- ------- -----
Balance, September 30, 1998 $3.25-11.00 593,834 4.38 146,406 4.36
Forfeitures $3.25-3.94 (1,134) 3.57 (1,134) 3.57
Became exercisable $3.25-11.00 -- -- 192,766 4.36
------- --- ------ ----
Balance, September 30, 1999 $3.25-11.00 592,700 $4.38 338,038 $ 4.38
======== ==== ====== ======
1996 Nonqualified Stock Option Plan:
Balance, October 1, 1996 $5.62 70,000 5.62 -- --
Granted $3.12-5.25 880,000 3.52 -- --
Became exercisable $5.62 -- -- 23,334 5.62
------- ---- ------ -----
Balance, September 30, 1997 950,000 3.67 23,334 5.62
Granted $2.50-8.13 474,700 2.98 --
Exercised $3.25 (16,667) 3.25 (16,667) 3.25
Forfeitures (2,000) 3.12 -- --
Became exercisable $3.12-5.62 -- -- 764,668 3.13
-------- --- ------- -----
Balance, September 30, 1998 1,406,033 3.44 771,335 3.23
Forfeitures $2.94-8.13 (226,352) 4.56 --
Granted $1.94-2.69 297,000 1.98 (186,868) 4.56
Became exercisable $2.50 6.25 -- -- 489,384 3.17
------- ---- ------- ----
Balance, September 30, 1999 $1.94-6.25 1,476,681 $3.03 1,073,851 $3.26
========= ===== ========= ======
1998 Incentive Stock Option Plan:
Granted in 1999 $2.06-2.94 159,000 $ 2.20 - $ --
------- ------ ---- -----
Balance, September 30, 199 $2.06-2.94 159,000 $ 2.20 -- $ --
======= ===== ===== =====
1998 Nonqualified Stock Option Plan:
Granted in 1999 $1.94-2.06 83,000 $2.20 -- $ --
Became exercisable $2.06 -- -- 20,000 2.06
------ ------- ------ ----
Balance, September 30, 1999 $1.94-2.06 83,000 $2.20 20,000 $2.06
====== ==== ======= ======
F-16
The Company extended the expiration date on 35,334 options at $2.87 from the
1995 Nonqualified Stock Option Plan.
The options were to expire March 30, 1999, and were extended to March 30, 2000.
The options had originally been granted in December 1994.
The Company extended the expiration date on 23,000 options at $3.25 from the
1992 Incentive Stock Option Plan.
The options were to expire February 21, 1999, and were extended to February 21,
2000. The options had originally been granted in February 1996.
The Company extended the expiration date on 750 options at $2.87 from the 1994
Nonqualified Stock Option Plan.
The options were to expire March 31, 1999, and were extended to March 31, 2000.
The options had originally been granted in March 1988.
No compensation expense was recorded on any of the extensions as the exercise
price exceeded the fair market value at the new measurement date.
The weighted average remaining contractual life for options outstanding at
September 30, 1998, is as follows:
Weighted Average
Remaining Contractual
Plan Life (Years)
1992 Incentive Stock Option Plan 3.80
1992 Nonqualified stock Option Plan 9.41
1994 Incentive Stock Option Plan 3.46
1994 Nonqualified Stock Option Plan 2.31
1995 Nonqualified Stock Option Plan 2.57
1996 Incentive Stock Option Plan 7.86
1996 Nonqualified Stock Option Plan 3.57
1998 Incentive Stock Option Plan 7.58
1998 Nonqualified Stock Option Plan 6.82
Other Options and Warrants - In connection with the 1992 public offering,
5,175,000 common stock purchase warrants were issued and outstanding at
September 30, 1997. Every ten warrants entitled the holder to purchase one
share of common stock at a price of $15.00 per share. Subsequently, the
expiration date of the warrants was extended to February 1998. Effective June
1, 1997, the exercise price of warrants was lowered from $15 to $6 and only
five warrants rather than 10 warrants were required to purchase one share of
common stock. Subsequent to September 30, 1997, warrant holders who tendered
five warrants and $6.00 between January 9, 1998, and February 7, 1998, would
receive one share of the Company's
F-17
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 had 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, 1999, all 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 December 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 70,000 options
became exercisable on August 21, 1996, at $3.25. Of the 70,000 options,
24,000 shares were exercised in August 1996 and 46,000 were exercised in
February 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. The remaining 50,000 options
F-18
options became exercisable during 1998 at $5.00. 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. During 1999, 18,500 options were
exercised at prices ranging from $3.50 to $4.50. At September 30, 1999,
88,500 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 and were exercisable at prices ranging from
$3.50 to $7.31. During 1998, 22,000 options were exercised at prices ranging
from $3.50 to $4.50. During 1999, 75,000 options expired ranging in price
from $5.06 to $7.31, and 10,000 options were exercised at a price of $2.50.
At September 30, 1999, 175,000 options related to the consultants remain
outstanding.
During 1999, the Company granted one consultant options to purchase a total
of 50,000 shares of the Company's common stock. The fair value of the options
is expensed over the life of the consultant's contracts. All 50,000 options
became exercisable during 1999 at $2.50 per share. At September 30, 1999, all
50,000 options remained outstanding.
In January 1999, the Company revised the terms of 23,500 and 125,000 options
granted to consultants in 1997 and 1998, respectively. The original terms of
the agreements set the exercise price of the 148,500 options at $4.00 and set
the expiration date of the options at March 31, 1999. The terms were revised
so that the exercisable price is set at $2.50 and the options expire on
December 31, 1999. During 1999, 28,500 options to purchase shares were
exercised at $2.50 per share.
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, 1999, 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 1999, 1998, and 1997, 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:
F-19
Year Ended September 30,
199 1998 1997
(In thousands)
Net Loss:
As reported $(7,490,725) $(6,442,638) $(8,189,458)
Pro forma (8,124,159) (7,018,634) (9,687,999)
Loss per common share:
As reported 0.52 $ 0.74 $ 1.00
Pro forma $ 0.56 $ 0.79 $ 1.17
The weighted average fair value at the date of grant for options granted
during 1999, 1998, and 1997, was $1.21, $2.17, and $1.16 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:
1999 1998 1997
Expected stock price volatility 91% 79% 74%
Risk-free interest rate 5.48% 5.49% 5.36%
Expected life options 3.23 2 2
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.
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.
8. 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
F-20
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, 1999, 1998, and 1997, in connection
with this plan was approximately $86,954, $70,519, and $35,800, respectively.
9. LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30,
2000 $133,892
2001 139,175
2002 143,818
2003 112,390
2004 7,605
-----------
Total minimum lease payments $536,880
Rent expense for the years ended September 30, 1999, 1998, and 1997, was
approximately $214,205, $165,067, and $185,776, respectively.
10. STOCKHOLDERS' EQUITY
On December 17, 1996, the Company authorized 3,500 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. The issuance of the Series C
stock resulted in a beneficial conversion feature of $502,941 that was
accreted over 180 days from the sale of issuance.
Series C Stock was 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 could not be more than $4.00. Beginning 90 days after
December 17, 1996, one-half of the Series C Stock was 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. 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
F-21
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. The remaining Series
B warrants expired on March 15, 1999.
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 any
technology using the product plus 15% of any amounts for sublicensing are
contingent.
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.
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. The issuance of the Series A and Series B stock
resulted in beneficial conversion features of $716,857 and $882,353,
respectively, which were accreted over 90 days and 123 days, respectively,
from the dates of issuance. 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. All Series A Stock was
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. All Series B stock was 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
with the conversion price not less than $3.60 nor more than $14.75.
F-22
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. At September 30, 1999, 9,002 shares of Series D Preferred Stock had
been converted into 4,760,127 shares of common stock. There are no remaining
shares of Series D Preferred Stock. All Series A and Series B Warrants issued
remain outstanding at September 30, 1999. 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. The $1,980,000 allocated to the warrants was accredited immediately.
11. LOSS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants to purchase common stock and common
stock options using the treasury stock method) were exercised or converted
into common stock. 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
F-23
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. Loss per
common share for all periods have been computed in accordance with SFAS No.
128.
1999 1998 1997
Loss per common share (basic and diluted $ 0.52 $0.74 $1.00
======= ======= =======
12. RECENT ACCOUNTING PRONOUNCEMENTS
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 133 will have a
material effect on its financial position or results of operation
13. SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information (SFAS No.
131) in the fiscal year ended September 30, 1999. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision
maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision maker, as
defined under SFAS No. 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as principally one segment, the research
and development of certain drugs and vaccines. As a result, the financial
information disclosed herein, materially represents all of the financial
information related to the Company's principal operating segment.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. CEL-SCI CORPORATION
Dated: December 28, 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 December 28, 1999
MAXIMILIAN DE CLARA Executive Officer
/s/ Geert R. Kersten Director, Principal December 28, 1999
GEERT R. KERSTEN Financial Officer and
Chief Executive Officer
/s/ Alexander G. Esterhazy Director December 28, 1999
ALEXANDER G. ESTERHAZY
/s/ John M. Jacquemin Director December 28, 1999
JOHN M. JACQUEMIN
CEL-SCI CORPORATION
FORM 10-K
FISCAL YEAR ENDING SEPTEMBER 30, 1999
EXHIBITS